According to recent filings with the Securities and Exchange Commission, Warren Buffett’s Berkshire Hathaway holds a big chunk in several airlines: more than 50 million shares of Southwest , 42 million shares of American Airlines Group, 21.9 million shares of United Airlines, and 71.8 million shares of Delta Air Lines after buying almost a million new shares four weeks ago.
Why he bought those shares? Delta stock dropped about 20% four weeks ago as markets plummeted. Berkshire Hathaway acquired more than 976,000 shares for about $45.3 million, or an average price of $46.40, bringing Buffett’s ownership of Delta Airlines up to more than 11 percent and making him the largest shareholder in Delta Air Lines and the second-largest in United Airlines.
The question arises, why would airlines need a bailout when Warren Buffett has $128 billion in cash to burn? He (his company) invested money to make a profit, and now that the profit is not going to come into their pockets- airlines scream “bailout”.
Maybe he would like to loan these 4 airlines 10 billion each at an appropriate interest rate based on the risk premium structured as a (PIPE) Private Investment in a Public Enterprise like he did with his loan to Occidental and Goldman Sachs during the 2008 financial crisis.
But even back then (in 2008) Warren was not ready to invest in Goldman Sachs without a bailout. “If I didn’t think the government was going to act, I would not be doing anything this week. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal (bank bailout of 2008).”-Buffet said.
And according to Forbes Warren Buffett has lost almost $10 billion in seven days due to stock market selloff. But the 90-year-old investor stands to benefit if the airline industry’s plea for a $50-$60 billion bailout from the American government is successful.
Starting in 2014, major U.S. airlines have bought back shares using free cash instead of saving that cash for the rainy days. Why did they do it? Because CEOs are evaluated on Stock performance and they get ESOP (stock-based compensation scheme). Now why they want a bailout? Privatize profits and socialize losses?
As an example American Airlines Group, (AAL) spent more than $12 billion on buybacks, and all together (DELTA, AMERICAN,SOUTHWEST and UNITED) spent $42 billion in 6 years. So, they made a wrong choice, right? The CEOs of those 4 airlines received $430 million in stock-based compensation over this period, separate from their cash compensation, deferred benefits, etc.
Back to Buffett.
“One of those airlines would certainly be affordable and doable” for a Berkshire purchase, David Kass, a University of Maryland finance professor, told the Dallas News. “But then the question is, would Buffett really want to do that?”. Of course not, because according to Buffett airline industry is a “death trap” for investors . Looks like he wasn’t listening to his own advice and invested heavily over the last few years.