Berkshire Hathaway Chairman Warren Buffett, photographed in August 2016, has boosted his company’s holdings in the parent companies of several major airlines, including United and American.
Wall Street and Main Street perk up and take notice when superinvestor Warren Buffett buys a bunch of stock in a major company.
This week, the Oracle of Omaha’s investment vehicle, Berkshire Hathaway, generated attention by boosting its stake in two major airlines with deep Chicago-area roots, United and American.
My question: What’s up here?
This is not a gratuitous slap at Buffett or the airlines. Rather, it reflects a genuine sense of wonder, especially when you consider that in 2013 Buffett seethed at the thought of plowing hard-earned cash into the airline industry and called it a "death trap for investors" because it was volatile and loved to eat up capital.
Past hyperbole aside, Buffett’s U-turn is an encouraging sign for Chicago-based United and Texas-based American, the biggest airlines flying out of O’Hare International Airport. A renowned long-term investor, Buffett is saying these carriers are heading in a money-making direction despite an expected slowdown in air travel this year and the specter of labor and passenger unease.
In November, Berkshire disclosed purchasing shares in the parent companies of United, American, Delta Air Lines and Southwest Airlines. This week, Berkshire boosted its position in United, American and Delta.
Right now, Berkshire’s total airline stock investment hovers around $8 billion, according to industry reports.
That’s a lot of dough to put into an investor "death trap." But times have changed since Buffett’s cheeky pronouncement and that appears to be the motivation behind his turnaround.
It starts with the cost of jet fuel, a make-or-break metric for the industry, being down around 50 percent since 2013.
Moreover, airline merger mania, which in the last decade saw the number of major U.S. airlines drop from nine to four, is about done. So is much of the rocky and often disruptive operational blending of United with Continental Airlines and American with US Airways.
Industry consolidation also is bringing the curtain down on major fare wars that, in earlier times, would often cripple an air carrier’s bottom line.
Throw in the tail winds of a better economy and maybe even a corporate tax break or two courtesy of the Trump administration, and large air carriers are poised to rack up good earnings and share prices for a while.
For its part, United’s management is trying to capitalize on this new era.
CEO Oscar Munoz is intent on improving profitability of United’s domestic flights by doing things like charging more for legroom or sitting upfront while introducing new bare-bones budget tickets to compete with discount carriers.
American is doing the same.
Nonetheless, the airlines and Buffett are heading for some turbulence.
This year, air travel is expected to slow down from 2016’s strong run and those low jet fuel prices will creep up in 2017.
Moreover, labor unrest looms. At American, for example, the pilots and flight attendants have been publicly at odds with management over various workplace issues.
"Challenging times lie ahead, particularly for legacy airlines," according to Deloitte’s 2017 travel and hospitality industry outlook report.
One more wrinkle: Upgrading technology. This month, United’s passengers suffered a spate of delays and hundreds of flights had to be rescheduled because of a computer meltdown.
American, Delta and Southwest’s customers have endured similar tech shutdowns in recent years.
Despite these potential headaches, Buffett’s purchase represents a turning point for the airlines.
United and American join Buffett’s exclusive blue-chip club that includes: Apple (also a new purchase), American Express, Kraft Heinz, Coca-Cola, Procter & Gamble and IBM.
His influence on some of the country’s biggest brand-name corporations can’t be overstated.
Buffett brings with him an avowed long-haul investment philosophy that gives companies an underlying financial stability (and insulation from Wall Street petulance and impatience). That attitude empowers top executives to pursue their business plans.
Then there’s image.
Buffett’s involvement aligns companies with his public persona of the folksy billionaire next door.
You see, Warren Buffett is just a homespun, regular guy who isn’t afraid to speak out or change his mind — even when it means pouring billions of dollars into the once-scorned airline industry.