Buffett's big airline stakes spark acquisition speculation despite past misgivings

In 1998, Warren Buffett called Berkshire's US Airways just-concluded investment a "terrible mistake," even though it generated a modest profit. He said the airline industry is "not a business that intrigues us," at least when it came to buying common stock. 

In his 2007 letter to shareholders, he wrote about the difficulty of establishing a durable competitive advantage given aggressive price competition among the carriers and the "significant" capital needed for airline companies to keep growing.

At the 2013 annual meeting he repeated one of his favorite lines, joking that "if there had been a capitalist at Kitty Hawk he should have shot down Orville and done us all a favor." 

All that changed in 2016 when Berkshire bought big stakes in American, United Continental, Delta, and Southwest.

As Bloomberg's Joe Nocera points out, there were 20 major U.S. airlines in 1989 when Buffett first invested in US Airways. Now, after a lot of consolidation, there are only four, decreasing competition and allowing airlines to charge more and still have full flights. 

Buffett, however, didn't sound all that enthusiastic at the 2017 meeting when he remembered all the airline bankruptcies. But he also noted that the industry had been operating at 80 percent or more of capacity "for some time now."

His big question: even if the airlines are filling more of their seats in the air, will "they do suicidal things in terms of pricing?" That, he said, "remains to be seen."

But this year, with more than $9 billion of airline stocks in Berkshire's portfolio, he's been sounding more optimistic. In his live CNBC interview last month, he said he "wouldn't rule out owning an entire airline," as he continues to have trouble finding a big acquisition at a good price.

The extent of the speculation was demonstrated recently when Southwest's stock jumped 4 percent on just an unconfirmed rumor of Buffett's interest.

And as we reported in last week's newsletter, a flurry of buying, along with the airline's own buybacks, pushed Berkshire's stake in Delta above 10 percent, a level he has said he didn't expect to breach. 

Bloomberg's Katherine Chiglinsky writes that while airline stocks are "cheaper than they used to be,"  Buffett would need a "willing seller" because he doesn't do hostile takeovers.

She also quotes CFRA analyst Cathy Seifert as saying Buffett's hands-off approach to the management of Berkshire subsidiaries could be a problem if the airline runs into trouble, as Kraft Heinz did. Seifert suggests Berkshire may have been "blindsided" by Kraft's problems, and that experience "may give them pause with the companies that they bring into the fold."

What do you think? Will Buffett buy an entire airline? Email your thoughts to buffett@cnbc.com and we'll share them in next week's newsletter.

BERKSHIRE STOCK WATCH

Berkshire Hathaway Class A shares closed at $301,225 Friday, down 0.3% over the previous four weeks, and up 1.4% from one year ago.

Berkshire Hathaway Class B shares closed at $200.55, down 0.7% over the previous four weeks, and up 1.5% from one year ago.

The benchmark S&P 500 index closed at 2800.71, up 0.3% over the previous four weeks, and up 5.9% from one year ago.

BERKSHIRE'S TOP STOCK HOLDINGS 

Berkshire's top stock holdings by market value, based on today's closing prices. The number of shares held is as of December 31, 2018, as disclosed in the company's February 14 13-F SEC filing, except for Delta Air Lines, which is as of March 11, 2019.

The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.

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