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Rupert Hargreaves
Rupert Hargreaves
Articles (259)  | Author's Website |

Berkshire Adds to Airline Holdings, but Should You?

Warren Buffett is betting on airline industry growth

Over the past few days, hedge funds have been filing first-quarter 13Fs, and some notable trends are showing in the reports.

One of the trends is the new buying by Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), well not new buying exactly, but continued buying of airline stocks after initiating positions last year.

Specifically, during the quarter, Warren Buffett (Trades, Portfolio) increased his position in Southwest Airlines Co. (NYSE:LUV) by 10.3% to 47.7 million shares, 1.58% of Berkshire Hathaway’s equity portfolio. The "Oracle of Omaha" also increased his position in American Airlines Group Inc. (NASDAQ:AAL) by 8.2% or 49.3 million shares, 1.3% of Berkshire Hathaway’s investment portfolio. The holding in United Continental Holdings Inc. (NYSE:UAL) was maintained at its previous level, but Berkshire’s Delta Air Lines (NYSE:DAL) holding was reduced by 8.3%. The position still accounts for 1.56% of the overall equity portfolio.

Of these four airline plays, Southwest was the only stock that saw its shares appreciate in value throughout the first three months of the year.

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During the quarter, shares in American Airlines ended down around 9.4%, Delta ended down 6.6% and United declined 3%. All of these figures exclude dividends. With the shares falling, it makes sense Buffett would increase his position in these equities. And after the Berkshire Hathaway annual meeting, we have some more insight into what Buffett believes is in store for the sector over the next few years and why he has decided to initiate his airline positions now.

Time to buy airline stocks?

Buffett has said that his airline bet is not just limited to one carrier. As his investments are spread across the industry, specifically the four largest carriers, it is a bet on industry growth as a whole, not the performance of one particular company.

Buffett believes that since carriers are now filling more of their seats than before and labor relations have improved, the sector’s economics are now far superior to what they have been in the past. Buffet said:

“It has been operating for some time now at 80% or better of capacity – meaning available seat miles – and you can see what delivery is going to be.”

Still, the one problem that has plagued airlines in the past is their tendency to get involved in cutthroat price wars, which often end in tears for all involved. Buffett believes that while there is still a risk of the industry descending into yet another price war, the operating conditions for such a fight over customer loyalty have significantly improved. At the Berkshire annual meeting, Buffett said:

"It is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last 100 years, but the conditions have improved for that.”

Charlie Munger (Trades, Portfolio) compared what is happening in the airline industry to what occurred in the railroad industry toward the end of the last century:

"It [the railroad industry] was a terrible business for 80 years...but they finally got down to four big railroads, and it was a better business. And something similar is happening in the airline business."

Time to buy an airline?

Does that mean Berkshire will look to buy an airline soon? The answer to that question is, “who knows?” Over the past 12 months with the acquisition of Apple (NASDAQ:AAPL), the sale of IBM (NYSE:IBM) and the purchase of four airline stocks, Buffett has shown he is not fixed to the comments he has made in the past and is willing to adapt his investment strategy to change with the times.

Just because Berkshire is not considering the acquisition of an airline today does not mean that in four years it will hold the same opinion.

If you are looking to follow Buffett to this trade, it is best to follow him exactly and buy holdings in all of the carriers, rather than just selecting the one which you believe could be the winner.

If another price war kicks off, it is impossible to tell today which company will win. Or, if you are not able to buy all four carriers mentioned above, maybe it would just be easier to buy Berkshire stock and let Buffett do the work for you.

Disclosure: The author owns no stock mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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