24/7 Wall St.

Warren Buffett has been considered one of the greatest investors of the modern era. Berkshire Hathaway Inc. (NYSE: BRK-A) is one of the greatest growth stories of the 20th and 21st centuries combined, and Buffett and his team have been aggressive investors in many companies and sectors over the years. After his portfolio managers made a big airline sector bet in 2016, the stakes saw some changes from 2017 through 2018. Team Buffett has accumulated a substantial weight in the airline industry, and his rationale for owning airline shares was that the industry finally had gotten an entire century of poor performance out of the way. There also might have been some valuation metrics and future earnings power that were just too good to pass up.

While the airlines have seen some pullbacks in the wake of trade war uncertainty and amid the grounding of the entire Boeing 737 Max fleet, Buffett and portfolio managers Ted Weschler and Todd Combs are currently in a race with Primecap Management to be the largest owner of airline stocks in the world. After last week’s holdings release for the second quarter of 2019, Berkshire Hathaway’s $10 billion work of airline stocks was almost 5% of its $208 billion in total equity holdings.

It turns out that the airlines have seen their share of ups and downs over the past three years since Buffett, Combs and Weschler decided to get involved. Airlines have dirt-cheap price-to-earnings ratios, they have pricing power and they now pay dividends and are buyers of their own shares.

Back in early 2017, 24/7 Wall St. showed how Buffett was making a dandy profit off the industry. That has seen some turbulence since, but all in it seems that Weschler, Combs and even Buffett himself are sitting on a pretty firm cushion, compared to when they bought their airline stocks.

American Airlines Group Inc. (NASDAQ: AAL) was kept unchanged at a stake of 43.7 million shares, and while this was the same as the prior two filings, it was a tad lower than the 44.7 million share stake that had been counted last in September.

The end of June value was $1.425 billion in American Air, but the $32.50 share price at that time (adjusted for dividend) is well above the $26.50 level seen on August 22. Adjusted for dividends, American’s closing price at the end of 2016 was $45.43. Berkshire Hathaway is a 9.81% stakeholder in this airline, and while that is above the number three holder Vanguard’s stake of 42.09 million shares (9.45%), it is still handily under the 68.56 million shares (15.4% stake) held by Primecap Management.

The Delta Air Lines Inc. (NYSE: DAL) stake was listed as 70.91 million shares at the end of June, the same as the prior quarterly filing but higher than the 65.54 million shares listed earlier, and the stake had been raised previously.

Buffett’s stake in Delta was worth about $4.02 billion at the end of June, but the $57.75 share price on August 22 is actually above the dividend-adjusted closing price of $56.39 at the end of June. Its dividend-adjusted price at the end of 2016 was $46.10. Berkshire Hathaway is the largest stakeholder in Delta, with a 10.91% stake, handily above Vanguard’s 7.04% stake and Blackrock’s 5.26% stake. Primecap is next in line there, with a 4.36% stake.

Southwest Airlines Co. (NYSE: LUV) was unchanged at a 53.65 million share stake. While that looks steady, it previously saw a small decrease from the 54.85 million share stake at the end of 2018 (and down from 56.05 million shares held at the end last September and the 56.54 million share stake held at the end of June 2018).

Buffett’s stake in Southwest was worth $2.72 billion at the end of June, and the dividend-adjusted share price of $50.60 at that time has not fluctuated much and was last seen at $50.90. Southwest’s adjusted closing price at the end of 2016 was $48.42. Berkshire Hathaway is listed as the second-largest stakeholder here, with a 9.98% stake, still handily shy of Primecap Management’s 73.13 million shares at a 13.6% stake.

United Airlines Holdings Inc. (NYSE: UAL), which has formally removed Continental from its name, was the same 21.94 million shares in June as it had been in March, but this was down from the 25.98 million share stake held last September (and down from 26.684 million shares held last June and 27.7 million held last March).

The United Air stake was worth $1.92 billion at the end of June, and the dividend-adjusted close of $87.55 was above the current $85.25 share price. Adjusted for dividends, the closing share price on the last day of 2016 was $72.8. Berkshire Hathaway was an 8.54% stakeholder in United, above Vanguard at 20.91 million (8.14%) but below Primecap Management’s 38.2 million shares (14.87% stake).

What remains to be seen is whether Buffett and his team will want to own airline stakes of this magnitude whenever that next recession arrives. Airlines are highly cyclical, and their shares have been crushed during economic slowdowns in the past. It was not even two decades ago that the airlines were effectively rescued with government funds after the 9/11 terrorist attacks and the poor economy in the wake of those attacks created an environment in which very few people wanted to or were willing to fly again.

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A chart from StockCharts.com shows the one-year performance of American, Delta, Southwest and United versus the S&P 500 and Berkshire Hathaway itself.

Source: StockCharts.com