Warren Buffett’s sale of airline shares

Following Warren Buffett’s announcement that he had sold all the shares in the four American airlines owned by Berkshire Hathaway there was a very negative market reaction, with their prices falling by yet another 10% or so on Monday 4th May. He explained that the economics of the airline industry had changed so much for the worse that the shares were not worth the $7bn -$8bn he had paid for them. He managed to clawback around $6bn

A rational decision
“We thought we were getting an attractive amount for our money when we were investing across the airlines business and so we bought roughly 10% of the four largest airlines. We probably paid between $7bn and $8bn.
We felt that we were getting a billion, roughly, of earnings in a year (not $1bn of dividends) – our share of underlying earnings was about $1bn. We thought that number was more likely to go up than down over a period of time, but it would be cyclically, obviously.
We treated it, mentally, as if we were buying [the whole] business.”
Mistake
“I was wrong about that business because of something that was not in any way the fault of the four excellent CEOs. It’s a very difficult business.
The airline business – I hope I’m wrong – changed in a very major way. It’s obviously changed in the fact that the four companies are each going to borrow perhaps an average of at least $10 - $12bn.
Well you have to pay that back out of earnings over some period of time. I mean, you are $10 - $12bn worse off if that happens.
They are having to sell stock, and that takes away fr………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1