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Through his 50+ years of investing, Warren Buffett has put his money into quite a variety of businesses and industries. However no sector in which he has dabbled has seemed to draw the Oracle of Omaha’s ire as does airlines.
Buffett and his Berkshire Hathaway Inc. (NYSE:BRK.B) had one previous dalliance with airline investing and it wasn’t a total disaster. In 1989 Berkshire put $358 million into USAir via a 9.25% preferred stock investment. By 1994 that investment dropped to just 25% of its value, but eventually by 1996 Berkshire got back to above break-even on the stock and exited the investment.
Nevertheless, Buffett has saved some of his most famous sarcastic quotes and quips for airlines, such as:
When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: “There’s really nothing to it. Start as a billionaire and then buy an airline.” (1996 Berkshire shareholder letter)
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. (2008 Berkshire shareholder letter)
Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results. It’s been a death trap for investors. (2013 Berkshire annual meeting quote)
I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down. (2002 Telegraph interview)
So what has Mr. Buffett, 86, now done?
In filings made yesterday with US regulatory authorities, Berkshire unveiled that it bought shares in the four biggest U.S. based airlines: American Airlines Group Inc (NASDAQ:AAL), Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co (NYSE:LUV) and United Continental Holdings Inc (NYSE:UAL).
While no exact figures were given, the airline stakes acquired were estimated to total about $2 billion.
To make things clear, Buffett made it clear to CNBC that it wasn’t one of his younger portfolio managers who decided to make the move to airlines, but Buffett himself along with his own long-term advisers who made the call.
So what gives? Has Buffett forgotten some of his own sayings and sage advice?
Well, maybe. However the investment seems to be a bet by Buffett and Berkshire on a steadily improving US economy, and on continued low oil and energy costs.
Berskshire has made large bets lately in the transportation sector generally. Berkshire already owns BNSF railroad and the NetJets luxury jet sharing business. In January Berkshire paid $32 billion for aircraft parts maker Precision Castparts.
Does Mr. Buffett believe that the airline sector has reformed itself and will continue to operate profitably? Or, will he be kicking himself once again and setting up a few new choice sayings?