Last week, analysts from Morgan Stanley—Rajeev Lalwani and Kai Pan—released a note listing the compelling reasons Berkshire Hathaway (NYSE: BRK.A) should consider buying Southwest Airlines (NYSE: LUV). The joint note, entitled “Should BRK show more LUV?” is not associated with any insider knowledge, according to the analysts. Instead, it’s a result of their screening of potential airline acquisitions that meet Berkshire Hathaway’s acquisition criteria, as quoted by CNBC.
Throughout the course of their research, Pan and Lalwani noticed that "Berkshire focuses on quality of business and management in acquisition, which could make for an obvious pairing [with Southwest].” They also found that Berkshire Hathaway tends to acquire larger businesses with “consistent earnings power,” minimal debt, and simpler business models, according to CNBC.
"While we recognize that other factors could come under consideration, our screen suggests Southwest as a hypothetical candidate for a more permanent relationship with Berkshire," the note states.
Investing in transportation is nothing new for Berkshire Hathaway. In October 2017, the Omaha-based holdings firm acquired a 38.6% stake in Pilot Flying J, announcing plans to acquire an additional 41.1% stake by 2023. Buffett’s Berkshire Hathaway is already the owner of Fort Worth, TX-based BNSF Railways as well as NetJets.
This also isn’t the first time rumors surrounding Berkshire Hathaway and Southwest Airlines have swirled.
Buffett made headlines in March when, in an interview with CNBC, he stated that he “wouldn’t rule out owning an entire airline” or investing more in the airlines that Berkshire Hathaway already owns shares in. This followed Buffett’s 2018 letter to his investors, in which he writes that “Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we will need to make one or more huge acquisitions. We certainly have the resources to do so.”
Berkshire Hathaway has invested in four major US airlines since 2016: American Airlines, United Continental, Delta Airlines, and Southwest Airlines. The company’s share in Southwest Airlines amounts to $2.8 billion, as reported by CNBC. For years, Buffett steered clear of investments in the airline industry. “It can turn into a fierce competitive battle that wipes out earnings, or it can be a business that’s more decent but still subject to lots of competition...it’s really hard to know,” Buffett commented.
If Berkshire Hathaway does indeed acquire Southwest Airlines, Pan and Lalwani believe that shares for Southwest Airlines could reach $70 to $80 per share, according to the Dallas Business Journal. As of Monday, August 13th, Southwest’s shares are at $58.83 each.
Upon publication, Southwest Airlines declined to comment and a representative from Berkshire Hathaway did not immediately respond to FreightWaves’ request for comment.