At the end of 2016, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) revealed that Warren Buffett (Trades, Portfolio) and his team had been buying airline stocks for the first time in decades.
This took the market by surprise. The "Oracle of Omaha" had criticized the airline industry on numerous occasions in the past, saying he'd never buy airlines again (after the U.S. Air disaster). No one expected this about-face.
Buffett on airlines
Over the past several years, Buffett has tried to explain why he decided to make this decision. In February 2017, he told CNBC, "It's true that the airlines had a bad 20th century. They're like the Chicago Cubs. And they got that bad century out of the way, I hope."
He went on to add, "I think there have been almost 100 airline bankruptcies. I mean, that is a lot. It's been a disaster for capital."
Since then, the CEO of Berkshire Hathaway has only increased his ownership of these businesses.
Delta Air Lines (DAL, Financial) seems to be Buffett's favorite airline by far. Berkshire initially acquired just 6.3 million shares of the company during the third quarter of 2016. It has since increased its holding to 71 million shares as of the end of second-quarter 2019, an ownership stake worth just over $4 billion. In fact, Buffett likes Delta so much, he breached his 10% ownership rule to buy more.
According to CNBC, Buffet responded to this revelation:
"What I didn't realize was that that purchase had taken us over 10 percent. I was already in territory I didn't plan to get, so I just decided to buy a whole lot more stock."
A sector bet
Delta isn't the only airline Berkshire owns. Southwest Airlines (LUV, Financial) was one of the largest holdings to begin with.
At the end of 2016, the conglomerate owned 43.2 million shares of this business, giving it 1.5% portfolio weight with a total investment of $2.7 billion.
American Airlines Group Inc. (AAL, Financial) also made it into the portfolio. Buffett started buying this company in the third quarter of 2016 and doubled his stake in the fourth quarter. From an initial holding of around 22 million shares, he increased his ownership to nearly 50 million shares in the first quarter of 2017. After peaking at this level, Buffett has reduced the position slightly. At the end of the second quarter of 2019, Berkshire owned 44 million shares of American.
Last but not least is United Airlines Holdings Inc. (UAL, Financial). This is another airline where Buffett built a position slowly and then decided to pare back the holding in the years following. After acquiring an initial position of 4.5 million shares during the third quarter of 2016, he increased his stake by more than 500% in the fourth quarter to just under 29 million shares. Since then, a steady stream of sales has reduced the holding to around 22 million shares.
Airline performance
Buffett has historically avoided airline stocks because they have been terrible investments. However, this seems to have changed over the past three years.
Shares in Delta have achieved a particularly impressive performance. The stock has produced a total return of 17.9% per annum over the past three years, outperforming the broader airline industry by 11.1%. It has also outperformed the U.S. Market total return index by around 5.5% per annum.
United has also outperformed. Shares of the airline have returned nearly 18% per annum over the past three years, including dividends.
Southwest Airlines has produced the second-worst performance of the group, which may explain why Buffett has been reducing his position. The stock has produced a total return of 13.4% per annum over the past three years.
American Airlines has produced, by far, the worst return. Investors in this business have seen a total return of -8.3% per annum. This performance also seems to explain why the guru has been reducing his position here.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
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