Warren Buffett once quipped that a "farsighted capitalist" should have shot down Orville Wright at Kitty Hawk to spare investors all the losses they would suffer on airlines in the decades after the birth of flight.
That's why it was a surprise when, in November, the billionaire's Berkshire Hathaway Inc. disclosed investments in the four largest U.S. carriers: American Airlines, Delta Air Lines, Southwest and United Continental.
So why the change of heart? It stemmed, in part, from a presentation that American Airlines Chief Executive Officer Doug Parker gave at an investor conference in March, according to people familiar with the matter who asked not to be identified discussing Berkshire's strategy.
Parker told attendees that he was urging his team to take a "leap of faith" on the airline business. Consolidation, he argued, had ended the boom-and-bust cycle that had plagued his company and competitors for decades, and it was time to manage the business for that new reality.
"The industry has been restructured. It was fragmented. It was inefficient. It was unfocused," he said during the presentation. "Now, it's efficient. It's focused on demand. We have networks that can actually deliver what people want."
The analysis prompted Ted Weschler, one of Buffett's investing deputies, to take a closer look at airlines, the people said. Before joining Berkshire, Weschler's hedge fund had backed Parker in his successful 2005 bid to combine America West with US Airways. Through that process, the two men built a rapport.
Back then, Parker was an early proponent of consolidation to heal an industry plagued by bankruptcies, thousands of employee furloughs and compensation cuts. He went on to play a key role in an era of mergers, ultimately engineering the combination of US Airways with the much-larger American to create the world's biggest carrier.
In his presentation, Parker put labor relations at the center of his strategy, saying that happy employees take care of passengers, turning them into loyal customers who are best for shareholders. American has promised to pay more than rivals during contract negotiations and begin sharing profits with employees to help stay competitive.
Those efforts have put pressure on American's bottom line and been stymied by disputes with unions. But the airline was able to reverse a slide in unit revenue, a key metric that investors use to gauge pricing power, in the fourth quarter. It was the first major U.S. carrier to do so since a price war erupted in early 2015. Other airlines have also said fares are firming. Buffett has often talked about the importance of pricing power in evaluating a business.
The billionaire didn't respond to a message seeking comment. American said it was working hard to deliver value to all shareholders including Berkshire.
"The Berkshire investment is strong evidence that our company and industry have fundamentally and structurally changed in a profound and lasting way," said Matt Miller, a spokesman for the Fort Worth-based carrier. "Delivering long-term financial success will provide continued evidence of this fact."
Buffett declined to discuss the rationale for the airline investments during an interview with Charlie Rose on Jan. 27, but he did say that the decision to buy was "in large part" his.
That was a more equivocal answer than he's typically given when asked whether he or one of his deputies made a particular investment. After Berkshire added a stake in General Motors Co., for instance, the billionaire said it wasn't his pick. And he took ownership immediately of the decision to invest in IBM Corp.
Weschler and his counterpart, Todd Combs, each oversee a fraction of Berkshire's roughly $100 billion in equities. While the two work autonomously from Buffett, they sometimes collaborate or have overlaps in strategy. Both deputies had stakes in DirecTV before the company agreed in 2014 to be purchased by AT&T Inc.
The deputies have also influenced Buffett. In 2015, the billionaire agreed to buy Precision Castparts Corp. for about $37 billion, after Combs put the company on his radar screen by taking an equity stake.
In general, Weschler and Combs make smaller investments than their boss. Buffett's portfolio includes more than $26 billion of Wells Fargo & Co. stock and about $17 billion of Coca-Cola Co.
The stake in American, by contrast, was valued at about $800 million at the end of September, while the holdings in United and Delta were worth less than $250 million each, according to a November regulatory filing. The Southwest investment was made subsequent to Sept. 30, Buffett told CNBC, without specifying the size.
U.S. airlines have rallied since Berkshire made its investments, but the industry hasn't proven to be immune from market swings. Just last month, President Donald Trump's ban on travel from seven predominantly Muslim nations caused the largest U.S. airlines to lose $4.9 billion in market value over two days.
Business on 02/07/2017