Home Value Investing Berkshire Hathaway Invests In Airlines During Third Quarter 2016

Berkshire Hathaway Invests In Airlines During Third Quarter 2016

In an SEC 13F filing after the market closed today, Berkshire Hathaway reported initial investments in three airlines, American Airlines Group (NYSE:AAL) ($800 million), Delta Airlines (NYSE:DAL) ($250 million) , and United Continental Holdings (NYSE:UAL) ($250 million) as of September 30, 2016.  On CNBC today, Warren Buffett also revealed an additional Berkshire investment in Southwest Airlines (NYSE:LUV) that was made after September 30.

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Berkshire substantially cut its holdings in Wal Mart (NYSE:WMT) (Warren Buffett) by about $2 billion, or about 2/3, during the third quarter.  It also eliminated its stake in Suncor Energy (NYSE:SU) ($500 million) (Ted Weschler – Fortune Magazine October 27, 2014).

Since Warren Buffett in the past has promised to never again invest in airlines after an unpleasant earlier experience investing in USAir Preferred stock, it is likely that the current airline investments were made by one or both of Mr. Buffett’s portfolio managers, Todd Combs and/or Ted Weschler.  Also, the relatively  small size (less than $1 billion) of each of these investments would indicate that Mr. Buffett’s deputies had made them.

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Consolidation in the airline industry, along with lower energy prices, would appear to make this industry attractive for long term investment.

I was quoted in a Bloomberg article on this topic:

“The move evokes Berkshire’s disclosure in 2007 that it invested in several railroads, David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, said in an interview. Buffett decided later to buy BNSF and exit holdings in its rivals.

Similar to Railroads

The airline industry “has pretty much rationalized itself, similar to railroads,” Kass said, citing consolidation that reduced competition. “They have their sort of monopoly routes, they can price as they choose to maximize profits, and there are huge barriers to entry.

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David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.

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