Airlines rise to a record as Buffett’s Berkshire deepens bet

(Bloomberg photo by Mark Elias)

Airlines climbed to a record after Warren Buffett’s Berkshire Hathaway Inc. increased its stakes in the four biggest U.S. carriers, adding to a bet that industry consolidation will end the boom-and-bust cycles the billionaire long shunned.

Berkshire’s latest purchases made it the largest shareholder in Delta Air Lines and United Continental Holdings, and No. 2 in American Airlines and Southwest Airlines. The holdings represent one of the biggest common-stock investments in years for the company controlled by Buffett, who once called airlines “a death trap for investors.”

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 helped soften memories of the previous decade, in which losses surpassed $50 billion.

“While some longer-term investors have recognized the positive structural and behavioral industry changes for years now, these investments provide further validation,” Duane Pfennigwerth, an analyst at Evercore ISI, said in a note to clients Wednesday. He called Berkshire’s change of heart on airlines “one of the biggest pivots in the history of investing.”

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The Bloomberg U.S. Airlines Index rose 2 percent at 1:20 p.m. in New York after advancing as much as 3.4 percent to the highest level on record. Southwest led major carriers, rising 3.1 percent to $57.06. All 11 members of the index posted gains.

Berkshire’s stakes in American, Delta and United increased to more than $2 billion each, according to a U.S. regulatory filing Tuesday. Buffett’s Omaha, Nebraska-based investment company also disclosed a holding in Southwest valued at about $2.2 billion as of Dec. 31.

American’s chief executive officer, Doug Parker, helped win over Buffett lieutenant Ted Weschler last year with his argument that a transformed airline industry was poised for steady returns, Bloomberg News reported this month.

By controlling expansion and better matching the supply of seats and flights with demand, airlines “are behaving in a way that is positive for shareholders,” said Jim Corridore, a CFRA Research analyst.

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“They do not look to expand at any cost, they’re not each looking to be thebiggest carrier,” he said in an interview. “They’re looking to be the most profitable, and this has changed their strategy.”