Berkshire Hathaway the company run by investing legend Warren Buffett has announced in its regulatory filing that as at September 30, Berkshire owned $US797 million of American, $US249.3 million of Delta and $US237.8 million of United shares. He has also recently gone on record to owning Southwest Air as well.
Lets not forget this is the same Warren Buffett who wrote in a letter to Berkshire Hathaway:
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive 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.”
While it is customary for Warren Buffett to not comment on why Berkshire has started to invest in a company what we see from Australian airlines is that profits are very much aligned with the oil price. Australia’s own airline Qantas Airways Limited (ASX:QAN) which had been struggling for many years posted record profits over the last 12 months on the low oil price.
In my opinion a bet on the airlines by Buffett means he believes lower oil prices are here to stay for the medium term and that the US economy is picking up to afford extra income for travelers to spend.
What concerns me is the increased competition in pricing, which we have seen in Australia which no doubt will have also infiltrated the American market. While cheap flights are great for travelers they are the reverse for airline margins. Any rise in the oil price will in my opinion cause some serious issues for the airline’s bottom line and that is why I wont be following Warren into the airline industry investments anytime soon.
Tip for New Investors
It is important to only enter positions because you understand the reasons for investing not because another investor is holding the company. Firstly the well known investor may have held the company for a long time before you became aware he holding and it may no longer represent value at its current price. You also need to be aware to the possibility that some investors may make their holdings public in an effort to inflate the price before selling. (Note I am not suggesting Warren Buffett would engage in such practices I believe he is one of the most upfront and honest investors in any market)
Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.
