A few weeks ago, I commented on Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) airline position, which seems strange considering the billionaire’s past stance toward the industry.
At the time, I’ll admit I was skeptical that Buffett purchased these holdings with a long-term intention. I was skeptical that Buffett was instrumental in the transactions at all.
It is more than a month later and not only has it become clear that Buffett was behind the purchases but based on Berkshire’s 13F for the fourth quarter filed with the SEC Tuesday, Buffett seems to have totally changed his view on airlines.
A change of view
Berkshire’s fourth-quarter 13F revealed a substantial increase in all of the conglomerate's airline positions during the fourth quarter. The holding in Delta Air Lines (DAL, Financial) was increased by 850% to 60 million. Shares in this one position now account for 2% of Berkshire’s stock portfolio making it the ninth-largest position. Alongside Delta, Buffett acquired a new position in Southwest Airlines (LUV, Financial) of 43 million shares, the holding in American Airlines was increased by 110% to 46 million shares, and the holding in United Continental (UAL, Financial) was upped 540% to 29 million shares.
Together these holdings are worth around $9.4 billion and come in at 6.3% of the overall Berkshire stock portfolio making airlines the conglomerate's sixth-largest position after American Express (AXP, Financial). IBM (IBM, Financial), Coca-Cola (KO, Financial), Wells Fargo (WFC, Financial) and Kraft Heinz (KHC, Financial) sit ahead.
What's with airlines?
There’s no denying that airlines have now become a substantial position for Buffett and Berkshire Hathaway. Such large positions are generally reserved for Buffett’s highest conviction holdings, which he intends to hold for many years.
The big question is then, what has changed in the airline sector that has suddenly inspired Buffett to change his opinion about the industry?
There is some evidence to suggest that this could be a traditional value play. Following terrorist attacks, a price war, falling jet fuel prices and several high-profile tech glitches, airline shares fell last year after years of impressive performances. Buffett could have bought sensing opportunity as over the past few months these fears have subsided. Oil prices and fuel prices have stabilized, removing the threat of a price war, and industry growth is stabilizing. If the U.S. economy continues to grow, it is also likely consumers will fly more so this could be a bet on U.S. economic growth as well.
A long debate
In my last article on Buffett and airline stocks, comments from other readers seemed to support this thesis that Buffett is playing a cyclical upswing in the U.S. economy. Other theories include President Donald Trump’s protectionist rhetoric which will increase the number of domestic flights made by U.S. consumers; consolidation of the airline industry as the U.S.’s top four carriers now own 84% of the airline market versus 65% in 2015; deregulation, another potential Trump play that will make life much easier and profitable for carriers; and a change in the dynamic between worker unions, airlines’ biggest problem, and the businesses themselves.
Buffett himself has kept relatively quiet on why he decided to make these airline purchases now. But actions speak louder than words and the fact that the airline basket is now Berkshire Hathaway’s sixth-largest position after American Express implies that Buffett is highly optimistic on the outlook for the sector.
A key advantage
Buffett has a huge advantage over other investors because the Berkshire conglomerate is so wide ranging, and he can gauge economic sentiment via conversations with his managers. It may be the case that IBM is registering a spike in demand from airlines for its data centers as they anticipate exceptional growth.
Or it could be that Phillips 66 (PSX, Financial) believes the price of jet fuel will collapse during the next 12 months leading to increased profitability for the sector. Both of these scenarios are just two possible guesses but based on the size and conviction of Buffett’s airline bet and the way he has spoken about the sector past, he either knows something others don’t, or it is a cyclical play.
Disclosure: The author owns shares in IBM.
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