Will Warren Buffett buy American Airlines? Or Southwest?
Warren Buffett’s decision to take stakes in the four largest U.S. airlines could be a first step to eventually taking over one of the companies, analysts said, citing his history in the railroad industry.
“We view a full-scale acquisition of an airline by Berkshire as a possibility and not worth dismissing, particularly if the stocks weaken,” Morgan Stanley analysts led by Rajeev Lalwani said in a note to clients Wednesday.
Buffett’s Berkshire Hathaway jumped into airline stocks in the second half of 2016, becoming one of the top two investors in Delta Air Lines, United Continental Holdings, Fort Worth-based American Airlines Group and Dallas-based Southwest Airlines. According to the filing, Buffett owned 8.79 percent of American as of Dec. 31 and 7 percent of Southwest.
While the investments surprised observers who were accustomed to the billionaire’s skepticism about the business, Berkshire Vice Chairman Charles Munger has likened his company’s new stance to its shift on railroads a decade ago.
“It was a terrible business for about 80 years,” Munger said at an event last week in Los Angeles. “But finally they got down to four big railroads and it was a better business. And something similar is happening in the airline business.”
Berkshire paid more than $26 billion in the 2010 buyout of Fort Worth-based Burlington Northern Santa Fe, acquiring the 77.5 percent of the railroad that it didn’t already own. Buffett had previously purchased minority stakes in BNSF, Union Pacific and Norfolk Southern. After the BNSF deal, he sold the stocks of its rivals.
The six biggest U.S. carriers — bolstered by lower jet-fuel prices and years of dealmaking that left fewer major competitors — posted their fifth straight year of profits in 2016, earning about $14 billion on an adjusted basis, according to data compiled by Bloomberg. That followed more than $50 billion of losses in the previous decade.
Lalwani wrote that Southwest could be a “plausible candidate,” given its free cash flow, cost structure and management. Buffett has publicly expressed his admiration for Southwest and Herb Kelleher, its co-founder.
Southwest has no response to “rumors and speculation,” the company said in an emailed statement. Representatives for the other airlines also declined to comment.
Cowen & Co. told investors as well not to rule out the chance of Buffett buying an airline, and also raised the possibility of a leveraged buyout.
“Every year there is a surprise in the industry,” Cowen’s Helane Becker said in a note this week. “This year, we believe a surprise may be that a major airline gets acquired, potentially by Berkshire, or goes private on its own. Airlines are labor intensive and capital intensive, so they don’t make the best LBO candidates, but stranger things have happened.”
This story was originally published February 22, 2017 at 11:29 AM with the headline "Will Warren Buffett buy American Airlines? Or Southwest?."