Is Warren Buffett About To Buy Southwest Airlines? 0

A Southwest B737 departing Chicago Midway.

Southwest Airlines is known for its cheap fares across America. It has been reported that Warren Buffett could be about to purchase the airline.

Southwest Airlines is the largest domestic airline in the United States. First of all, the airline’s revenue in 2017 was $21.171 billion. With a fleet of over 700 Boeing 737 aircraft, the airline operates over 4,000 flights a day during peak travel seasons. Southwest also have a further 300 B737 aircraft on order from Boeing. In fact, the airline has ordered 40 B737 aircraft in the first six months of 2018 alone.

Southwest aircraft on the ramp at Palm Beach airport.
Southwest aircraft on the ramp at Palm Beach airport.

Southwest’s busiest airport is Chicago Midway. Here the airline operates 242 flights a day from 32 gates. In total the airline serves 99 destinations. The airline is currently looking to add services from California to Hawaii. In fact, Southwest has been so successful that both Ryanair and EasyJet have based their business models on the American airline. As a result of this success, southwest is currently valued at around $34 billion.

Who is Warren Buffett?

Aged 87, Warren Buffett has a net worth of $84 billion and is the chairman and largest stakeholder in Berkshire Hathaway. Berkshire Hathaway is an investment firm who recently announced that they have around $116 billion in cash. In several books Buffett has been referred to as “the world’s greatest investor”. Furthermore, Mr Buffett was mentioned as a potential Secretary of the US Treasury by Barack Obama during the 2008 presidential elections.

Warren Buffett at a 2015 summit.
Warren Buffett at a 2015 summit.

Why Southwest?

As part of his investment portfolio, Warren Buffett currently owns about $2.8 billion worth of shares in Southwest Airlines. Recently Morgan Stanley, an American investment bank, released an analysis about why Southwest would be a good purchase for the investor. Whilst it is pure speculation whether Mr Buffett will buy Southwest at this point, it would certainly seem to make sense. Several years ago he is reported as saying:

The single most important decision in evaluating a business is pricing power.  If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.

What could this mean for customers?

A Buffett acquisition of Southwest could potentially be bad for customers with the above quote in mind. Seeing as Southwest offers some of the cheapest fares in North America, there would be potential to raise them. There is also the possibility that some of the benefits offered by the airline, such as reward points, could be reduced. Mr Buffett would have to carefully weigh this up if he was to acquire the remaining portion of the airline. This is due to the airline being so popular because of their low fares. Maybe higher fares would decrease the airline’s popularity.

A southwest B737 on finals
A Southwest B737 lands at Los Angeles International.

Overall there is very little to worry about. Currently a Warren Buffett acquisition of the airline is purely a supposition. If Mr Buffett was to purchase the airline, there is also a very strong possibility that very little would change in the airline’s day to day operations. As it stands the airline is very profitable, and therefore there is little need to change its proven business model.

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