USAir

1. Origin of Relationship

Berkshire Hathaway's disastrous relationship with USAir began in 1989 with a $358 million investment in Convertible Preferred Stock, an attempt to provide "supportive capital" to a company in a capital-intensive industry.

2. Major Milestones

• 1989: Berkshire invests $358 million in USAir Group, Inc. preferred stock.
• 1990: Buffett characterizes the investment as an "unforced error" following Piedmont integration issues and industry price wars, noting that in commodity businesses, "it's impossible to be a lot smarter than your dumbest competitor."
• 1994: Buffett formally declares the USAir investment his "Mistake Du Jour" and an "unforced error" as industry deregulation mercilessly exposes the airline's high cost structure.
• 1995: Berkshire writes the investment down to 25 cents on the dollar ($89.5 million). Buffett and Munger resign from USAir's board.
• 1997: The airline experiences a miraculous rebound under the leadership of Stephen Wolf. USAir makes up the dividend arrearages and the common stock soars, making Berkshire's conversion rights highly valuable and producing a profit on the original preferred stock investment.

3. Strategic Importance

USAir is one of Berkshire's most instructive failures. The investment proved that a "good horse" (a capable manager like Seth Schofield) cannot overcome a fundamentally broken economic model (a commodity industry with high, inflexible labor costs suddenly facing low-cost, deregulated competitors). More importantly, the aftermath of the investment generated a critical psychological mental model for Berkshire. As Buffett noted in 1995 upon writing down the asset: "You don't have to make it back the way you lost it." The USAir saga is the definitive Berkshire case study on avoiding the sunk cost fallacy and realizing that a stock does not know you own it. The 1997 recovery reinforced that competent management (Stephen Wolf) can sometimes save a structurally poor business, but it's not a reliable investment thesis.

🔗 Connections

• Company / People: Warren Buffett, Charlie Munger, Stephen Wolf
• Concepts: Errors of Commission, Making It Back The Way You Lost It, Consumer Franchise, Convertible Preferred Stock
• Sources: 1989 Letter, 1994 Letter, 1994 Meeting, 1995 Letter, 1995 Meeting, 1997 Letter

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