Buffett Takes Hit on Airline Investment : Billionaire Reports Loss of Nearly $269 Million on Struggling USAir

By JAMES F. PELTZ

March 14, 1995 12 AM PT

TIMES STAFF WRITER

Billionaire investor Warren E. Buffett, suffering a rare defeat, Monday announced a loss of nearly $269 million on his 5 1/2-year-old investment in struggling USAir Group Inc., the nation’s sixth-largest airline.

Buffett also said he would not stand for reelection to USAir’s board, because the airline hasn’t sufficiently cut costs to turn a profit.

The loss, recorded by Berkshire Hathaway Inc., an Omaha, Neb.-based conglomerate controlled by Buffett, was not a surprise. USAir’s problems have been mounting for years, and Berkshire warned in November that it might write down its $358-million investment, which represents a 10.3% voting stake in the airline.

The loss, which amounted to $173 million on an after-tax basis and knocked the value of Berkshire’s stake down to $89.5 million, also pales against Buffett’s net worth of more than $9.2 billion, as estimated by Forbes magazine. Buffett’s office said he was not available for comment.

Nonetheless, the ill-fated bet by the 64-year-old Buffett--known as the “Oracle of Omaha” for his hugely profitable investments over the years in such companies as Coca-Cola Co. and Capital Cities/ABC Inc.--stands out as one of his unusual setbacks.

The USAir loss also underscores how treacherous the airline business can be for investors, even for famous stock-pickers and those familiar with the industry. Indeed, British Airways likewise has been mulling whether to write down its $400-million investment in USAir.

“When Buffett made his investment in 1989, it was a very different industry,” said James M. Higgins, airline analyst at Donaldson, Lufkin & Jenrette in New York.

Higgins noted that the industry then was entering a four-year period in which an economic recession, massive cutbacks in business travel, fare wars and bloated operating costs at the airlines would saddle U.S. carriers with more than $10 billion in losses.

Even Buffett--known for his low profile, an affection for cherry Cokes and for writing homespun homilies in Berkshire’s annual reports--could see trouble ahead.

In Berkshire’s 1989 report, he wrote with self-deprecation that “your chairman displayed exquisite timing: I plunged into the business at almost the exact moment that it ran into severe problems.”

He said he chose USAir anyway because the airline’s chairman at the time, Edwin I. Colodny, was among those “we like, admire and trust.”

But by the time Colodny retired in 1992, many of the airlines had moved ahead of USAir in slashing their costs to cope with the downturn. USAir--whose routes are concentrated east of the Rocky Mountains--has particularly struggled to gain sizable cost savings from its unions.

As a result, the Arlington, Va.-based carrier posted its sixth straight yearly loss in 1994: $685 million on revenue of $7 billion.

USAir’s common stock, in turn, has plunged. The stock closed Monday at $5.875 a share in New York Stock Exchange composite trading, unchanged on the day but down from $30 in late 1989.

Buffett, as is often his practice, bought preferred stock of USAir that carried a rich dividend and is convertible into common shares but does not trade publicly.

But the tactic backfired last September, when cash-starved USAir deferred dividends on all of its preferred shares, which so far has deprived Berkshire of nearly $17 million in payouts.

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Still a Winning Portfolio

Warren Buffett may have lost money on USAir, but the hardly dents his fortune estimated at $9.2 billion by Forbes magazine. His key investments are administered by his holding company. Berkshire Hathaway Inc.

Berkshire Hathaway stock (quarterly closes except latest):

1995: $22,450

Major Holdings:

American Express

Capital Cities/ABC

Coca-Cola Co.

Geico Corp.

Gillette Co.

PNC Bank Corp.

Salomon Inc.

USAir Group Inc.

Wells Fargo & Co.