Warren Buffett Dumps Airline Stocks

This weekend’s Berkshire Hathaway annual meeting was full of its usual fireworks. Investors now have a better idea of how Warren Buffett is investing during this pandemic. As a follow up on my article last week, one of the most newsworthy revelations is that Buffett is no longer investing in airline stocks.

Warren Buffett sold his entire position in these major US airlines:

• American Airlines
• Delta Air Lines
• Southwest Airlines
• United Airlines

Buffett’s Berkshire Hathaway held a stake above 10% in both Delta Air Lines and Southwest Airlines before selling. Completely exiting the commercial airline industry casts a sense of short-term uncertainty as other investors may follow suit.

While Warren Buffett isn’t a perfect investor, his decisions and opinions influence many investment strategies.

Why Buffett No Longer Invests In Airlines

Many investors were surprised a few years ago when Warren Buffett began investing in airline stocks. The industry is cash-intensive and has a narrow economic moat. Buffett states investing in airlines as an «understandable mistake» as «the world changed for airlines» due to the travel shutdowns.

Airlines Cannot Control The Situation

Buffett states the airlines were well-managed before the pandemic. However, worldwide travel shutdowns and a genuine fear of travel have caused a lot of short-term damage to the travel industry. Airlines, hotels, and other travel companies can do little to mitigate the effects of a global pandemic.

Until the risk of spreading the novel coronavirus subsides and travel bans expire, airlines must function with a barebones operation. This uncertainty makes airline stocks a volatile investment until travel confidence returns.

Airlines Need To Borrow Lots Of Money

Potentially the main reason Buffett sold all shares can be the airline bailout loan terms. Borrowing huge sums of money to stay in business with record-low passenger levels is a cause of concern. But the federal government getting warrants they can eventually own airline stock is a deterrent for Buffett.

Buffett used a similar tactic with the big banks in the Great Recession. However, the government’s airline warrants to reduce Buffett’s investment influence as a shareholder.

Too Many Planes

Buffett is cautious of current airline fleet sizes and the ongoing maintenance costs until the skies reopen and passenger volumes increase. Air travel may not return to pre-coronavirus levels until mid-2021, at the earliest. Airlines will likely need to reduce their fleet sizes to match future flight capacity and reduce long-term costs.

Source: Forbes