Buffet Offloads Airlines

With airlines industry crashing, Warren Buffet admits his wrong decision and offloads stakes

Berkshire Hathaway Association With Airline Industry

Post the era of losses, bankruptcies, and mergers that the airlines industry faced until in 2016 when they tasted profitability and attracted Warren Buffet owned Berkshire Hathaway Inc. (NYSE: BRK.A) to buy airline company stocks. The company owns almost 10% of each of the four major U.S. airlines – American Airlines Group Inc (NASDAQ: AAL), Southwest Airlines Co (NYSE: LUV), Delta Air Lines, Inc. (NYSE: DAL) and United Airlines Holdings Inc (NASDAQ: UAL)

As of November 2019 (three years of holding the stock), these companies generated significant profits for Buffett and his company. Southwest Airlines and Delta added $428 million gain and $398 million while United Airlines led to $741 million gain since initial investments in the third quarter of 2016.

Airlines, Post COVID-19 Impact On Economies

As March closed down with travel restrictions across the world, airline stocks faced massive downturns amid the rapid widespread of COVID-19. Buffet’s ten largest equity investments suffered a massive blow of almost 43% across its top 10 stocks between the period Feb 20 to Mar 23 (calculations based on portfolio disclosure at the end of December)

Delta Airlines stock plunged 63% during the period while Southwest was down 25% since the beginning of 2020. Stock prices of American and United narrowed by more than half.

However, Warren Buffet abiding by his philosophy stated that leaving fears aside investors should cheer quality investment at lower prices. Berkshire invested additional $45 million in Delta stock in February despite a 20% dip amid the coronavirus outburst. 

Read: Warren Buffet says “We Don’t Find Anything Attractive”

Government Aid For Airlines

As April arrived and world economies scenario worsened at the peak of the pandemic, there were strong possibilities of the U.S. government joining Warren Buffet as a shareholder in the four major airlines in which it holds 8% to 11% stocks.

They had plans of doing this through demanding warrants equivalent to 10% of the loan portion of the grants ($4 billion to $6 billion) that the government would later convert to shares at a fixed price. If the warrants are exercised, the government will own 3% of American, 2% of United, and 1% of both Delta and Southwest thereby diluting Berkshire stakes in the airlines.

Bleak Outlook For Airlines

With stock markets crashing across the world, the airline stocks also did not appear as strong as they were in the past. With planes being parked on account of travelling dents, Buffet said that the airline industry outlook is shaken.

In April, Berkshire offloaded a net $6.1 billion in stock sales which majorly included positions in the big four U.S. airlines. Buffet said that even if 70% or 80% of the airline business returns carriers would still have too many planes.

He said “We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss. We will not fund a company … where we think that it is going to chew up money in the future.”

Buffet believes that with the current fleet size of airlines and the ongoing maintenance costs, airlines would not able to return to pre-coronavirus levels until mid-2021. Also, reducing fleet sizes and reducing long-term costs will help airlines sustain and match future flight capacity.

In the annual shareholder meet, Buffet said that the airline business will be completely changed even after there are travel relaxation measures taken across the globe. On the consumer side, changing and cautious travel habits could leave airlines with lesser long haul flights thereby increasing fixed costs.

Domestic airlines within the U.S. would recover earlier than the big names in the industry as internal travel would open sooner. Also, aircraft manufacturer Boeing has uncertainty revolving around its business of airlines ordering new planes.

Not blaming the airline executives, Buffet said that they have performed their job well of raising money from the government in order to sail through the crisis.

Current status – American, Southwest, Delta and United

  • American Airlines reported a $2.2 billion first quarter 2020 loss or $5.26 per diluted share compared to $185 million earnings in first quarter of 2019. Recently, the company made known that beside its already parked 900-plane fleet it is now grounding its remaining Airbus A330-200 aircrafts for the next two years.
  • Southwest Airlines posted its first ever quarterly operating loss of $77 million excluding special items since 2011. Revenue was down 18% to $915 million. The airline plans to sell and lease back 20 planes for gross proceeds of about $815 million in order to strengthen its cash base. Being one of the first, Southwest and American are planning to return slowly to international travel from June 7. American Airlines has already re-launched its first international flight to Spain on May 7.
  • Delta Airlines reported $326 million net loss excluding special items in first quarter for the first time in five years compared to $639 million profit in year ago period. Meanwhile revenue dipped 18% to $1.9 billion. The airline CEO said that the industry will take almost 2-3 years to recover from the crisis.
  • United Airlines recorded net loss of $1.7 billion for the first quarter while revenues dropped 16.7% to $7.9 billion. The company has planned to layoff at least 30% of its management and administrative jobs in the coming year as it seeks to cut costs
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