Warren Buffett is considering buying Southwest Airlines.
The CEO of investment firm Berkshire Hathaway might be looking to raise his stake in the airline, of which he currently owns around 8.7%.
What are the details?
At this point, further investment into the airline by Warren Buffett is unconfirmed. But this has not stopped traders jumping onboard, raising the stock up 4% on yesterdays trading.
Southwest has answered the rumors with this statement:
“There has been speculation circulating that Warren Buffett might be looking to acquire an airline for some time and that Southwest might be a good fit, as a policy, we do not comment on speculation, but appreciate Berkshire’s continued support of Southwest Airlines.”
Is Southwest a good investment?
Now, we do need to clarify that Simple Flying is in no way an investment journal and the following is to be taken as entertainment, not investment advice.
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 has 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. – Tom Boon back in 2018
On one hand, Southwest is experiencing rapid growth. They are moving into the Hawaiian marketplace (they just got approval from the FAA and will be running flights soon), utilizing a new fleet on 737 MAX Aircraft, and seeing around 15% returns on their share price in the last year (beating the market average).
However, they do have a maintenance backlog and brewing issues with their staff unions that will need to be dealt with swiftly.
Will it actually happen?
This is a bit of a surprise, as Warren Buffett has famously said that he is not interested in investing in airlines (any more than 10%). His firm also has shares in Delta, United, and American. If he was to do a takeover purchase then he would also have to divest in those companies (which, as they perform would not be the best play for the investor).
“You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.” – Warren Buffett
That being said, Southwest fits the bill for Warren, who looks for domestic companies that perform well and have excellent cash flow. He is rumored to have around $112 Billion to invest so it would be well within his means.
Berkshire Hathaway has been contacted for comment.
What do you think? Is it a good move?