How will Buffett weather the airline crisis?

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Looking back on the last financial crisis, Warren Buffett played a big role in appeasing chaotic markets. While sensational analysts called for an end to public action as we know it, Buffett’s company, Berkshire hathaway (NYSE: BRK.A) (NYSE: BRK.B) took his own advice with greed while others chose fear.

Buffett is not a stock trader. Instead, a rigorous quantitative analysis, an artistic touch and an in-depth management assessment are all time-consuming prerequisites for Berkshire Hathaway to decide on an investment. To put it clearly, Berkshire Hathaway covets a longer time horizon than most.

Young woman walks in the airport with a mask.

Image source: Getty Images.

In 2009, Berkshire Hathaway took advantage of the financial crisis to launch large investments in American banks, the sector which is the source of all economic difficulties. Although Buffett had called a stock fund nearly a full year too early, it didn’t matter. The call showed confidence and inspired tranquility in the financial markets desperately trying to find their place. During the previous crisis, he kept his guns as an investor and encouraged anxious investors to do the same. He didn’t subscribe to the scary news; instead, he cut the noise.

Buffett Coronavirus Strategy

The coronavirus pandemic offers us our next case study on how Buffett worked in a global crisis. The current pandemic is similar to the financial crisis in that the two are extremely frightening and temporary. None of the disasters have a final end date, but an end date is nonetheless inevitable.

Berkshire Hathaway bought aggressively in 2009 after the historic market crash, but not during this fall. Buffett has so far sold stakes in Delta Airlines (NYSE: DAL) and Southwest Airlines (NYSE: LUV) only a few weeks after their addition. The dichotomy of reactions when comparing the 2008 crisis to this one is remarkable to say the least.

Warren Buffett’s change in behavior is not a question of financial health. Berkshire Hathaway has the liquidity to make huge investments. Its balance sheet has no long-term debt and has a cash and cash equivalents position of $ 124 billion, up from just $ 59 billion in 2009. The result is a publicly traded company with a huge amount of funds available for investment, not a short of funds.

So, what happened?

Dissecting recent movements

As we know that Berkshire’s financial health is not at issue, it is important to note that Buffett sold just enough shares in each of the two airlines to reduce ownership below 10% of the float. Under SEC regulations, any shareholder with more than 10% of a public interest is considered an affiliate. Affiliate status subjects an investor to oversight of the federal government’s second stage acquisition (SSA). It is important to note that this subsidiary status induces regulatory oversight for any subsequent acquisition of a subsidiary of the same company or of a related company. This means that if Berkshire Hathaway wanted to make a major purchase in the aviation industry, affiliation with Delta or Southwest would have compromised the process.

By avoiding affiliate status, Buffett gains more flexibility to make a splash elsewhere. But the company’s continued silence raises questions. I thought the sales were preparing them for something big, but it has been weeks since abrupt trade with the airlines, and the markets have recovered strongly from the washing dips.

Inaction in Nebraska may be a less favorable prospect for this crisis than the previous one, but I don’t see it that way. Instead, I think Warren Buffett’s game manual is complicated by historic federal intervention. The federal government has bombarded record levels of liquidity in recent weeks, with fiscal and monetary easing, billions of dollars of cash being given to companies and individuals to try to ease the pain of the Coronavirus. Airlines receive payments to keep employees on the payroll, and the Federal Reserve continues to expand its loan programs to include more businesses.

Most of the hard-hit industries are backed by Washington D.C, which means Warren Buffett must compete with federal disaster loans with low-interest coupon coupons. It’s fierce competition, compared to the favorable conditions that Buffett and his company locked up during the financial crisis. To compare, Berkshire was paid 6% by Bank of America preferred shares to acquire an interest more than ten years ago. This time, if Berkshire Hathaway had chosen to compete with the federal government most involved, the actual return would have been lower. Buffett may want to wait until the dust settles to identify industries that are not already supported by the government.

Interesting weeks to come

Every morning I open my computer, half expecting to see a headline on Berkshire Hathaway buying a blue chip company in trouble. The multiple S&Ps have been significantly reduced from their February highs, the iconic brands have seen their stocks plummet, but I still see it as a possibility. Maybe federal intervention is preventing Buffett from getting the terms he wants, or maybe his views on the American economy have finally soured, but I don’t think so. I think there are things in the works and he is waiting for his time. Either way, following the activities of the Oracle of Omaha is always a fascinating practice.



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