Buffett sticks with big airline bet, even as value drops

Key Points
  • Buffett revealed big stakes in large U.S. airlines in 2016.
  • Airlines have been challenged by high costs and low fares.
  • Buffett had once shunned airlines after losing money.
Warren Buffett
David A. Grogan | CNBC

Warren Buffett's Berkshire Hathaway stood by U.S. airlines in the third quarter, even as carriers were hit by three massive hurricanes, a spike in fuel prices and heavy selling of airline shares by other investors.

But the value of Berkshire's stakes in Delta, American, United and Southwest fell $1.13 billion in the quarter, according to a filing.

A year ago, Berkshire revealed a surprise bet on the sector that Buffett had previously shunned. But years of consolidation through post-bankruptcy mega-mergers and a decline in fuel prices has helped airlines rake in record profits.

The Berkshire CEO told CNBC in February that airlines "had a bad first century." They're kind of like the Chicago Cubs, he said. "And they got that century out of the way, I hope."

According to the filing, as of Sept. 30, Berkshire had 47 million shares in American, worth $2.23 billion; 53.1 million shares in Delta, worth $2.56 billion; 28.2 million shares in United, worth $1.72 billion, and 47.7 million shares in Southwest, worth $2.67 billion.

While still profitable, U.S. airlines have seen profits slump amid fare wars and increasing costs. Some investors sold airline shares amid worries over executives' ability to both forecast and navigate higher costs, even though record numbers of travelers are taking to the skies.

Shares of the carriers have declined sharply, even as the broader stock market rallied. Delta and Southwest shares fell about 10 percent apiece in the third quarter, while American and United lost 5.6 percent and 19 percent, respectively. Share prices fell further in the weeks after earnings reports. Only Southwest had a year-to-date gain as of Tuesday's close. The carriers' shares are still up sharply from when Berkshire disclosed its first investments in them a year ago.

Airlines posted lower profits on the year in the past quarter, but both profits and margins will likely stabilize in 2018, said Jonathan Root, a senior credit officer at Moody's.

"The wild card is oil," he said.

U.S. jet fuel prices are up more than 36 percent over the past 12 months, according to S&P Global Platts.

Buffett had been so opposed to investing in airlines in the past that he told shareholders in a 2007 note that "if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."