Tuesday, November 15, 2016

What the Heck? "Warren Buffett is bullish on airline stocks" (BRK; AAL; DAL; UAL; LUV)

First a bit of history to explain the headline.

In 1999 Mr. Buffett told Fortune magazine;
...Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country’s airline companies was zero.

Absolutely zero.

I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
Mr. Buffett repeated the sentiment on the 2003 centenary of Orville's first flight.

Then in the 2007 Chairman's letter to the shareholders of Berkshire Hathaway he wrote (pp 8):
...Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk , he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.

And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.

 To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns....
And now this, Yahoo Finance, Nov. 14:

Warren Buffett is bullish on airline stocks
Warren Buffett’s Berkshire Hathaway top purchases in the third quarter were airline stocks, according to a 13-F filing.

Berkshire Hathaway snapped up a new stake in American Airlines (AAL) of more than 21.7 million shares. Berkshire also initiated a new positions in Delta (DAL) of over 6.3 million shares and United Continental Holdings (UAL) of 4.53 million shares, the filing shows.

Buffett told CNBC’s Becky Quick that he also bought a stake in Southwest Airlines (LUV) in the fourth quarter....
Talk about 'things that make you say hmmm'.