Cactus73 said:
There never seems to be a shortage of stupid investors that are willing to give money to the airlines. Just because they are giving money doesn't mean it's a good deal. I think Warren Buffett said that the dumbest investment he ever made was in USAir.
Here's what Warren Buffet had to say in his letter to shareholders in 1997:
USAir
When Richard Branson, the wealthy owner of Virgin Atlantic Airways,
was asked how to become a millionaire, he had a quick answer: "There's
really nothing to it. Start as a billionaire and then buy an airline."
Unwilling to accept Branson's proposition on faith, your Chairman decided
in 1989 to test it by investing $358 million in a 9.25% preferred stock of
USAir.
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I liked and admired Ed Colodny, the company's then-CEO, and I still
do. But my analysis of USAir's business was both superficial and wrong.
I was so beguiled by the company's long history of profitable
operations, and by the protection that ownership of a senior security
seemingly offered me, that I overlooked the crucial point: USAir's
revenues would increasingly feel the effects of an unregulated, fiercely-
competitive market whereas its cost structure was a holdover from the
days when regulation protected profits. These costs, if left unchecked,
portended disaster, however reassuring the airline's past record might
be. (If history supplied all of the answers, the Forbes 400 would
consist of librarians.)[/font]
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To rationalize its costs, however, USAir needed major improvements
in its labor contracts - and that's something most airlines have found it
extraordinarily difficult to get, short of credibly threatening, or
actually entering, bankruptcy. USAir was to be no exception.
Immediately after we purchased our preferred stock, the imbalance between
the company's costs and revenues began to grow explosively. In the 1990-
1994 period, USAir lost an aggregate of $2.4 billion, a performance that
totally wiped out the book equity of its common stock.[/font]
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For much of this period, the company paid us our preferred
dividends, but in 1994 payment was suspended. A bit later, with the
situation looking particularly gloomy, we wrote down our investment by
75%, to $89.5 million. Thereafter, during much of 1995, I offered to
sell our shares at 50% of face value. Fortunately, I was unsuccessful.[/font]
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Mixed in with my many mistakes at USAir was one thing I got right:
Making our investment, we wrote into the preferred contract a somewhat
unusual provision stipulating that "penalty dividends" - to run five
percentage points over the prime rate - would be accrued on any
arrearages. This meant that when our 9.25% dividend was omitted for two
years, the unpaid amounts compounded at rates ranging between 13.25% and
14%.[/font]
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Facing this penalty provision, USAir had every incentive to pay
arrearages just as promptly as it could. And in the second half of 1996,
when USAir turned profitable, it indeed began to pay, giving us $47.9
million. We owe Stephen Wolf, the company's CEO, a huge thank-you for
extracting a performance from the airline that permitted this payment.
Even so, USAir's performance has recently been helped significantly by an
industry tailwind that may be cyclical in nature. The company still has
basic cost problems that must be solved.[/font]
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In any event, the prices of USAir's publicly-traded securities tell
us that our preferred stock is now probably worth its par value of $358
million, give or take a little. In addition, we have over the years
collected an aggregate of $240.5 million in dividends (including $30
million received in 1997).[/font]
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Early in 1996, before any accrued dividends had been paid, I tried
once more to unload our holdings - this time for about $335 million.
You're lucky: I again failed in my attempt to snatch defeat from the
jaws of victory.[/font]
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In another context, a friend once asked me: "If you're so rich, why
aren't you smart?" After reviewing my sorry performance with USAir, you
may conclude he had a point."[/font]
http://www.ifa.com/Library/Buffet.html
