The company’s latest 13F filing reported a $2.6bn investment in Delta Air Lines (NYSE:DAL). And I’ve an idea why.

Buffett on airlines

Warren Buffett has repeatedly identified the airline industry as a bad one for investors. It’s capital-intensive and extremely competitive.

That’s a bad combination. But it hasn’t stopped Buffett from buying stocks in the sector in the past.

Those haven’t worked out well. The most recent was just before Covid-19 and Berkshire ultimately lost money.

The pandemic was impossible to foresee, but exogenous shocks can and do happen. And they can have a big impact on airlines.

Fast forward to today and Berkshire Hathaway now owns 39,809,456 shares in Delta. But I don’t think this is history repeating itself.

What’s different this time?

Berkshire’s latest venture into airlines differs from its previous one in a couple of key ways. One is that it’s more specific.

Before the pandemic, the company bought shares in all the major US carriers. This time, it’s focused on one in particular.

Another difference is the state of the industry. Back in 2016, things were actually going reasonably well for airlines. 

Right now, things are much tougher. Jet fuel prices – one of the main costs for any airline – are high due to the conflict in the Middle East.

Put those two points together and what do we have? I think it’s an investment that looks very different to the previous one.

Refining margins

Fuel is one of the major costs for any airline. But Delta has an asset other US carriers don’t – it owns an oil refinery.

In 2012, the firm bought the Trainer Refinery near Philadelphia. And it uses this to produce jet fuel for its own operations. 

Owning a refinery doesn’t mean Delta gets free fuel. It still has to buy in crude oil – and rising costs here remain a risk.

What it does mean, however, is that it doesn’t pay the refining margin between crude oil and jet fuel. And that can be a big advantage.

Right now, that margin is close to five-year highs. And that puts Delta in a better position than its rivals in a tough environment.

Being greedy when others are fearful

The idea of looking for opportunities in a downturn isn’t new to Warren Buffett followers. But it needs to be done carefully.

When things get tough in a cyclical industry, the impact is real. It isn’t, however, the same across every business.

Stronger companies tend to be more resilient. And that means they emerge in a better competitive position afterwards.

This happened post-Covid-19 in the UK. While some airlines struggled to cope with the return to travel, others surged.

Could this be what Berkshire Hathaway is seeing in Delta at the moment? It’s impossible to know for sure, but I think it might well be.

What to do?

I’m a Berkshire Hathaway shareholder. And that means I don’t need to buy Delta shares myself to follow the firm’s strategy.

That said, I do like the idea of finding opportunities in industries that are under pressure. So I’m looking at other airlines for stocks to buy.

Should you invest £5,000 in Delta Air Lines right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Delta Air Lines made the list?

Stephen Wright has no position in any of the companies mentioned.

The post Warren Buffett’s firm bought 39,809,456 shares in an airline. Here’s why that could be a smart move appeared first on The Twelfth Magpie.