Berkshire Hathaway had their annual shareholders meeting yesterday. This one was different than past ones, both based on the current economic uncertainty, and given the lack of people attending due to the current pandemic.
A couple of weeks ago we learned that Berkshire Hathaway had sold many of the airline stocks they held, and yesterday Warren Buffett provided some more details on that decision.
In this post:
Berkshire Hathaway sold all airline stocks
Prior to the pandemic, Berkshire Hathaway owned over $4 billion worth of of stocks with American, Delta, Southwest, and United. In recent weeks SEC filings suggested that the company sold airline stocks, though we’ve now officially learned that Berkshire Hathaway has sold all airline stocks, across all companies.
I think it’s interesting to take a look at Buffett’s explanation of the situation, not necessarily because of the implications on stocks, but rather because I find it interesting to hear his thoughts on airline recovery:
“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way. I don’t know if Americans have now changed their habits or will change their habits because of the extended period.
I think there are certain industries, and unfortunately, I think that the airline industry, among others, that are really hurt by a forced shutdown by events that are far beyond our control.
When we sell something, very often it’s going to be our entire stake. We don’t trim positions. That’s just not the way we approach it any more than if we buy 100% of a business. We’re going to sell it down to 90% or 80%. If we like a business, we’re going to buy as much of it as we can and keep it as long as we can. And when we change our mind we don’t take half measures.”
Berkshire Hathaway only took interest in airlines in 2016
Interestingly it’s only in the past several years that Berkshire Hathaway has invested in airlines.
Before 2016, Buffett was strongly opposed to investing in airlines. During a shareholders meeting in 2007 he even said “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
But in 2016 the company took a different approach, which Buffett regrets in retrospect, and calls his own mistake:
“When we bought, we were getting an attractive amount for our money when investing across the airlines. It turned out I was wrong about that business because of something that was not in any way the fault of four excellent CEOs. Believe me. No joy of being a CEO of an airline.
I don’t know that three, four years from now people will fly as many passenger miles as they did last year. You’ve got too many planes.”
Bottom line
Berkshire Hathaway has in the past few weeks sold the billions of dollars of stocks they had in airlines, and now Buffett has provided an explanation of why.
Obviously this is an uncertain time in the industry, but the interesting part is that Berkshire Hathaway sold the stocks after massive drops, right around where they are now. It’s not like they sold them when they first started going down after COVID-19 become known.
Indeed, I think we’re all curious to see what an airline recovery looks like…
@Eskimo
And to hell with the collateral damage, right? Icahn was a cancer. TWA's collapse did bad things to the St. Louis economy. When I moved there, it had daily nonstops to London and Paris. Now AA has been eclipsed in STL by WN and the only international destinations IIRC are Toronto and Cancun (pre-COVID, of course).
Unfortunately, it seems Warren Buffett fell for the idea that something was fundamentally different in the airline industry and that they'd never suffer losses as they had in the past. At the end of the day, airlines are kinda like Argentina. The first time investors lose all their money you might feel sorry, but at this point one has to ask what idiots are still giving them capital?
He bought Delta shares in February when they were worth more than 40$ and he is now selling them at half their value and you're still calling him the Oracle? I know this loss is just a tiny part of his fortune, but why did he bought airline shares at the start of a global pandemic?
@Luke Vader
Q: How do you make a small fortune in the airlines?
A: Pull a Carl Icahn. It's so easy to do in 4 simple steps.
Get a loan to buy an airline using the airline bought as collateral.
Break apart profitable pieces of the airline and sell it.
Compete against the (already unprofitable part) airline by selling the same seat at 45% discount.
Cash out and let the airline...
@Luke Vader
Q: How do you make a small fortune in the airlines?
A: Pull a Carl Icahn. It's so easy to do in 4 simple steps.
Get a loan to buy an airline using the airline bought as collateral.
Break apart profitable pieces of the airline and sell it.
Compete against the (already unprofitable part) airline by selling the same seat at 45% discount.
Cash out and let the airline rot and die.
The aftermath, you have billions in net worth and have a stadium named after you . Oh and your grandchildren are guaranteed a spot in an Ivy league school.
On the other end, the few that survived the collapsed airline had to struggle through 4 bankruptcies, 9/11, and now thinking what is coming next at AA.
Timeless joke indeed.
US airlines quickly pivoted to carrying cargo on transcon routes on their widebodies and use their narrowbodies for domestic.
United had already converted all 747s to cargo years ago.
Southwest is in the weakest position here because it only flies 737s.
Airlines can compete with Fedex, DHL, etc. for air cargo.
Q: How do you make a small fortune in the airlines?
A: Start with a large fortune!
It's a timeless joke that the Oracle of Omaha fell for. David Neeleman might be one of the few exceptions. Even Richard Branson is looking for the eject button.
Like the (Princess Bride) joke about never getting involved in a land war in Asia...
Don't forget - airlines already operate at slim margins. But, airlines are already one of the most subsidized industries in the world...especially the US. Hundreds upon hundreds of billions of dollars go out to runway upgrades, tiny airports, large airports, terminal upgrades, ATC towers, etc. Local communities subsidize flights just to keep them in their communities or the airlines wouldn't even be there. The airline industry as a whole is a huge loss maker b/c...
Don't forget - airlines already operate at slim margins. But, airlines are already one of the most subsidized industries in the world...especially the US. Hundreds upon hundreds of billions of dollars go out to runway upgrades, tiny airports, large airports, terminal upgrades, ATC towers, etc. Local communities subsidize flights just to keep them in their communities or the airlines wouldn't even be there. The airline industry as a whole is a huge loss maker b/c it really is a public good financed and kept afloat by public money ran like a private company where the stock holders are winners. I'm a firm believer that if it is going to be kept afloat by public money - even in the good times, then they should be owned at least 20% by the government. Infrastructure is a money losing public good just like roads. You pay taxes to have roads whether you use them or not and are critical to the economy - why do airline stock holders get to run off with the profits when they are only making money because of subsidies? All customers get are more crammed seats, more fees, more corporate fine print, more loopholes even though they are paying the subsidies that make the airline stock holders money. I know I'm in the minority but there has to be realization that airlines are among the biggest corporate welfare recipients. The amenities may have to be cut back in first (still get the big seats and have a loyalty program, etc), but I think the taxpayers and passengers deserve a decent seat if they already subsidize it anyways and not bread crumbs. It's just recognizing the welfare status of these airlines and stop pretending these are companies that are money makers to begin with.
@Eskimo
I think we are saying the same thing. As the revenue slump continues the only question left for airlines will be...do they survive with massive dilution (either by issuing equity at lower prices, or government bailout demanding equity stake) or do they go bankrupt. Neither scenario will lead to anything but losses for shareholders. The only scenario where the stocks go higher from here is a quick recovery which can likely only happen...
@Eskimo
I think we are saying the same thing. As the revenue slump continues the only question left for airlines will be...do they survive with massive dilution (either by issuing equity at lower prices, or government bailout demanding equity stake) or do they go bankrupt. Neither scenario will lead to anything but losses for shareholders. The only scenario where the stocks go higher from here is a quick recovery which can likely only happen if we get a widely available vaccine this year (which is not expected). United was smart to raise equity early, even though their stock was down, it is probably the best valuation they will get for equity capital in the next year or two.
Investors was kinda guessing that BRK would exit the airlines when their holdings went under 10%. Now it's official. Get ready to short airline stocks when the market opens.
@Ray
You owned BRK, so you should know this better.
"For all we know, they’re sitting on a literal mountain of cash" Not Buffet, for him cash is worthless when doing nothing. For all I'm guessing, he (more often then you think) buybacks BRK...
Investors was kinda guessing that BRK would exit the airlines when their holdings went under 10%. Now it's official. Get ready to short airline stocks when the market opens.
@Ray
You owned BRK, so you should know this better.
"For all we know, they’re sitting on a literal mountain of cash" Not Buffet, for him cash is worthless when doing nothing. For all I'm guessing, he (more often then you think) buybacks BRK shares. So there you go buyback haters, it happens all the time even with Warren Buffet.
@Rob
I don't think so, UA had just raised equity. The best time to raise equity is right now, when it's shares are still worth something. They can raise much less funding after burning $10 billion and they are still in distress by 2021. Investing in airline equity now is to bet they survive long enough that they don't go CH11 and wipe out equity holders. It is a risky bet with big payoff, like going all-in. So far I guess at BRK size, they have better investments with lower risks they can buy. I feel that buying airline equity now more like betting in Poker than investing in business.
Warren Buffet has a war chest of $147 billion sitting around. When he decides to use that is truly when the stock market will rise!
Not to mention that with the way they're handling refunds at the moment, there might be legislation put into place that will force them to keep the money in a separate account for those who haven't flown. I sure hope that will be the case so no more ponzi scheme going around.
This is why I am always mild in my criticism of airlines for fees, service cuts, etc.
In the long term... its basically a charity. Buffet has said in the past the industry as a whole has consumed more capital than it produced.
Maybe others can remember this time going forward.
This is a bet by Buffett that the disruption lasts long enough for the airlines to be forced to massively dilute their shares by issuing equity at distressed prices to make it through the downturn. Because once there is a vaccine, these stocks will shoot right back up to where they were...unless they were diluted. So buying an airline stock now is a bet that they will not be forced to issue equity before there...
This is a bet by Buffett that the disruption lasts long enough for the airlines to be forced to massively dilute their shares by issuing equity at distressed prices to make it through the downturn. Because once there is a vaccine, these stocks will shoot right back up to where they were...unless they were diluted. So buying an airline stock now is a bet that they will not be forced to issue equity before there is a vaccine. If you believe a vaccine will take at least until 2021, then they will pretty much have to issue equity, because that is too long to go without revenue. So Buffett was probably right to sell.
The Oracle of Omaha is always worth listening to.
Seems like a smart move. If you look at aviation markets globally, I think this crisis signals a turning point towards alternatives to aviation. This is especially true for the short haul market in Europe (high speed trains will overtake aviation very very soon). Intercontinentally, the need for aviation will still exist, but in the medium term, leisure travel will think twice about travelling too far from home, to foreign countries. Business travel may also...
Seems like a smart move. If you look at aviation markets globally, I think this crisis signals a turning point towards alternatives to aviation. This is especially true for the short haul market in Europe (high speed trains will overtake aviation very very soon). Intercontinentally, the need for aviation will still exist, but in the medium term, leisure travel will think twice about travelling too far from home, to foreign countries. Business travel may also reduce as the period we are in serves as proof-of-concept for Zoom and virtual meeting spaces. Just my thoughts. (p.s. sold my Delta shares in February)
It wasn’t just airline stocks BRK was long in, the company sniffed around buying Boeing as a distressed asset over the last year.
For all of his homey qualities, Buffett is a ruthless investor and really only wants businesses that will reliably throw off cash no matter what. He often sticks with products where there is unending desire from the public. Insurance, ice cream, railroads, car parts, Coca-Cola, iPhones, etc.
What he’s saying here he’s...
It wasn’t just airline stocks BRK was long in, the company sniffed around buying Boeing as a distressed asset over the last year.
For all of his homey qualities, Buffett is a ruthless investor and really only wants businesses that will reliably throw off cash no matter what. He often sticks with products where there is unending desire from the public. Insurance, ice cream, railroads, car parts, Coca-Cola, iPhones, etc.
What he’s saying here he’s not sure, in fact quite doubts, the desire for air travel in the medium term. Short term we all know that, he’s betting medium term too.
I hope he’s wrong but I do not know.
Investing in airlines has rarely ever been profitable. Great investors like Buffett buy into long term growth potential, and that’s hard to achieve when market conditions look dodgy for airlines. As an investor in BH myself, I look forward to what his next buy might be. For all we know, they’re sitting on a literal mountain of cash, comparable to Apple