The Strategist

Warren Buffett invested $ 1.2 billion in aviation

11/15/2016 - 13:12

As it became known on Monday, investment company Berkshire Hathaway, belongs to billionaire Warren Buffett, invested $ 1.2 billion in three US airlines. As the company reported to the SEC, $ 797 million was invested in American Airlines’ papers, $ 249 million - in securities of Delta Air Lines, and $ 237 million - in the United Continental Holdings. According to CNBC television, Mr. Buffett has additionally invested in Southwest Airlines.

USA International Trade Administration
USA International Trade Administration
The news became sensational, not only because of the deposited amount, but also due to the fact that the investments indicate a sudden change in Mr. Buffett's sentiments in relation to airline business. His purchase of US Air airline’s preferred shares in 1989 is still considered one of the biggest mistakes of the investor. The company was unable to pay dividends, and Warren Buffett sold (at a profit) shares of the carrier. At the same time, he commented that airlines are a "death trap" for investors, and nearly vowed to never invest in this sector. Later, the story with the US Air has repeatedly been cited as an example of how a simple and whimsical earnings growth (US Air showed profit growth before 1989) can easily be confused with a successful business. 

Sentiments of investors in respect of US airlines has improved somewhat in recent years. Representatives of the sector have made it clear that protracted decline in airlines’ value, which had a negative impact on financial statements, will weaken next year, writes The Wall Street Journal.

Since the beginning of this year, Dow Jones U.S. Airlines rose by 0.7%, despite decline in the first half.

Berkshire owns other assets linked to aviation, including companies NetJets Inc. and FlightSafety International Inc. Earlier this year, the investment company bought Precision Castparts Corp., a manufacturer for aerospace industry equipment, for $ 32.7 billion, which was the company’s largest acquisition.

For decades, Mr. Buffett has avoided investments in shares of airlines because of negative experience in this field. 
"I entered the business almost at the very moment when it began to have serious problems", - wrote U.Baffet in 1990 in his address to the shareholders.

Investor sold shares USAir in 1998, registering a large profit, yet later has repeatedly said that he was sorry about this investment.

"The worst kind of business is the one that grows rapidly, requires significant capital investment and, at the same time, brings a small income. This applies to airlines." - Said Mr. Buffet.

 Current investment in the airlines has probably been made by one of Buffet’s Deputies - Todd Combs or Ted Weschler, said Thomas Russo of Gardner Russo & Gardner, writes the WSJ.

In the III quarter of 2016, net profit (attributable to shareholders) of Warren Buffett’s Berkshire Hathaway decreased by 24% compared to the same period last year - to $ 7.2 billion, the company said. The company's share capital rose since the beginning of the year to $ 13.7 billion. As of 30 September, Berkshire Hathaway has had $ 85 billion in disposable cash and cash equivalents.