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Does Warren Buffett think oil is gonna stay down for a While? Otherwise why are there reports of him potentially buying shares of Airlines?

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May 24, 2010 – Comments (1) | RELATED TICKERS: LUV , LCC , UAUA.DL

Although Warren Buffett buying Airline shares is nothing new. In the Past he bought huge stakes in US air group, now called US Airways group.

 

Southwest Airlines?

A shareholder at Southwest Airlines' annual meeting in Dallas last week asked about speculation that Buffett might be interested in the airline, according to the Associated Press.

Southwest CEO Gary Kelly said he hadn't heard that, but it's a public company in which people buy and sell shares all the time.

Berkshire Hathaway invested $358 million in USAir Group in 1989 and by 1994 faced substantial losses. In a conversation with Columbia University students at the time, one asked Buffett what he was thinking when he invested in the airline.

“This is my psychiatrist asking this,” Buffett said, prompting the students to laugh. “Actually, I have an 800 number now which I call if I ever get an urge to buy an airline stock. I say, ‘My name is Warren, I'm an air-aholic,' and then they talk me down.

“It's a terrible business. There's no worse business of size that I can think of than the airline business. You're selling a commodity product with no variable costs. Huge fixed costs. It's a terrible business.

“As you know, since Kitty Hawk (N.C., where Orville and Wilbur Wright flew their first airplane), the commercial airline business in the United States has shown a net loss. Actually, there should have been some capitalist down there shooting Orville.”

USAir had lost $2.5 billion over five years, and its stock price was down nearly 90 percent.

But by 1997 the airline had a “miraculous” recovery, Buffett wrote to his shareholders, while apologizing for making the investment in the first place and also for “repeatedly trying to unload our holdings at 50 cents on the dollar” while the stock price was down.

The price was back up to $73 a share, and the airline had made up its past missed dividends, Buffett wrote, praising then-CEO Stephen Wolf.

“It is now almost certain that our US Airways shares will produce a decent profit — that is, if my cost for Maalox is excluded — and the gain could even prove indecent,” he wrote.

 

1 Comments – Post Your Own

#1) On May 24, 2010 at 3:01 PM, cbshort (92.15) wrote:

True.  Airlines historically produce negative returns.  However, they are highly leveraged and therefore make great trading vehicles for those who undestand economic cycles.  (I am not such a person.)  You can read about some of these peeps in the news.  David Bonderman is probably one of the more famous/successful airline investors. 

 I don't know where airlines go from here.  If we head into stagflation, they will be choked by rising fuel costs, and limited increases, if any, in unit revenue.  Add to that union unrest.

 On the other hand, when economic recovery happens (I will know after the fact like most), airlines will benefit as much as any industry. 

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