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Thursday, 25 January 2018

Warren Buffett's bet on airlines lost more than $700 million in sector selloff

Airline stocks plunged following the announcement of an aggressive expansion plan by United.
Warren Buffett's Berkshire Hathaway is among the largest shareholders in the four biggest U.S. airlines.

United fell more than 11 percent.

A bet on airline stocks by Warren Buffett's Berkshire Hathaway lost more than $700 million in value in a sector-wide rout, fueled by worries of an upcoming fare war between carriers.

The value of the Berkshire's stakes in United, Delta, Southwest and American was worth more than $11 billion as of Tuesday's close, but fell by about $727 million in Wednesday's sharp selloff, based on Berkshire's latest disclosure of its holdings in November.

Berkshire was not immediately available for comment.

The sharp decline in the airline sector started after United Airlines executives outlined an aggressive expansion plan that outpaced economic growth and that of some competitors. The plan aimed to gain the confidence of investors that the airline could expand its profit margin and increase revenue, but instead stoked fears of low fares and higher costs.

United shares fell more than 11 percent on Wednesday, while American lost 6 percent and Southwest and Delta each shed around 5 percent.

In late 2016, Berkshire revealed a surprise bet on the sector, which Buffett had previously shunned. Years of post-bankruptcy consolidation among carriers and a decline in fuel prices has helped airlines rake in record profits in recent years.

The Berkshire CEO told CNBC in February that airlines "had a bad first century." They're kind of like the Chicago Cubs," he said. "And they got that century out of the way, I hope."

Now airlines are facing more competition from low-cost rivals as well as rising fuel prices, but strong economic growth and strong business travel demand is expected to be a tailwind for the sector.

Investors will next focus on American Airlines and several of its competitors, including JetBlue and Southwest, which are scheduled to report their quarterly profits on Thursday morning.


1 comment:

  1. Hoho ... I think Berkshire's investment into airlines was initiated by Buffett's 2 successors. ;)

    Buffett all along is usually not keen on buying capital-intensive businesses that require frequent large capital expenditures. (Except maybe railways ... but that's coz some US railways enjoy almost monopolistic moats & pricing power)

    Anyway gotta take the good with the bad ... if Berkshire bought all 4 airlines in 4Q 2016, then they're still in the black by 10+% to 20+%. Not including dividends too.

    The cheap jet fuel as free tailwind for airlines since 2015 is over. Now it's back to dog-eat-dog competition. Can only rely on improving economy for more passenger / cargo loads. Hedging for future fuel price movements will also be critical for the airlines.

    Won't be surprise if Berkshire lightens its airlines in the next couple of 13F filings.

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