Why I’m not surprised Warren Buffett sells his shares in airlines


After the markets close on Friday April 3 Berkshire hathaway (NYSE: BRK-A) (NYSE: BRK-B) has filed two disclosure forms with the U.S. Securities and Exchange Commission indicating that the company had sold 2.3 million shares of Southwest Airlines (NYSE: LUV) for 74 million dollars and almost 13 million Delta (NYSE: DAL) for $ 314 million.

Buffett and Co. had to disclose these sales because Berkshire owned more than 10% of each business. Normally, public share transactions should not be disclosed until a company files its 13-F statements in the middle of the next quarter. It is unclear whether Berkshire also sold its smaller holdings United airlines (NASDAQ: UAL) or American airlines (NASDAQ: AAL).

Some may have been surprised that Buffett, who is famous for coining the phrase “Be greedy when others are afraid”, would start selling stocks which are now trading at P / E ratios to just one figure and which are well over 50% since the beginning of the year.

However, these sales do not surprise me at all. In fact, I would not be shocked to learn that Berkshire has already sold its US and US holdings before making the above transactions and therefore the mandatory disclosures, which is sure to depress airline stocks on Monday. Here’s why.

an airplane flies in the setting sun on the clouds.

Image source: Getty Images.

Don’t ignore these other buffets

While many are familiar with Buffettism, “be greedy when others are afraid” and “our preferred period of detention is eternal”, investors should know that these are by no means general statements. For the second statement, the real quote is: “When we own portions of exceptional businesses with exceptional management, our preferred holding period is forever. “

Although all airlines still have their same directions, it is quite possible that Buffett has changed his mind when it comes to airlines that are exceptional companies. If Buffett now believes that COVID-19 has changed the intrinsic worth of American airlines, it shows a lot of objectivity and internal courage to sell and reduce losses. In this sense, these other less known buffets would apply to the current situation:

  • “If you find yourself in a chronically leaking boat, the energy spent on changing ships is likely to be more productive than the energy spent on plugging leaks. “
  • “The most important thing to do if you find yourself in a hole is to stop digging. “

Although Buffett generally remains true to his long-term buying and value approach to investing, he has not hesitated to sell when his mind changes on a company’s long-term prospects. Buffett completely exhausted IBM (NYSE: IBM) in 2018 after holding the stock for seven years, and also sold its long-standing holding Wells fargo (NYSE: WFC) after a series of scandals since 2016, the bank’s brand and reputation have been tainted.

How airline intrinsic value changed in a month

Investors may wonder how the intrinsic value of airlines may have changed so quickly, especially when most were already trading at relatively cheap valuations to start the year. The answer can be summed up in one word: leverage.

First, there is leverage. As you can see, the four airlines use debt on their balance sheets, which most have used to develop bonds and return profits to shareholders in the form of buyouts and dividends.

DAL Chart of Financial Debt to EBITDA (TTM)

DAL Financial Debt to EBITDA (TTM) data by YCharts

From the graphs above, you can see why Berkshire owned more of the Delta and the Southwest – these were the least operated of the top four airlines.

Second, airline business models have significant leverage. All airlines have relatively high fixed costs due to aircraft maintenance, unionized labor and other overhead costs. This is why Buffett had previously thought that airlines were terrible investments, before the consolidation of the industry during the last financial crisis made the industry much more attractive to him.

Following recent closings, airlines now consume an incredible amount of cash per day. United Airlines recently said it is losing $ 100 million a day in revenue. Delta CEO Ed Bastian said Delta was burning $ 60 million in cash a day, and that number was going to worst. Even the smallest JetBlue (NASDAQ: JBLU) burns $ 10 million a day. In late March, the International Air Transport Association (IATA) released a report predicting that the global airline industry would burn $ 61 billion in cash during the second trimester only. This includes about $ 39 billion in second quarter losses and about $ 35 billion from cancellations and refunds.

But you can reply: “But the government will intervene and bail out the airlines”. True, but these bailouts will add a third form of leverage to airlines in the form of loans or government guarantees. As a condition of bailouts, any company that receives government assistance will have to suspend redemptions and dividends until 2021, and it will also be prohibited from buying back shares as long as the company receives government assistance – likely up to ‘at the time of loan. is paid – then for an additional year thereafter.

Buffett has long been a fan of share buybacks, particularly for companies whose stocks are dumped. Therefore, as it looks like there will be no return on equity in airline stocks for a while, Buffett thought it best to leave this leaky boat for the time being.

We still don’t know

Of course, I could blow things out of proportion. It is quite possible that Berkshire has sold only the minimum amount of Delta and Southwest that we know of and still retains stakes in the other two airlines.

However, instead of clinging to hope on the airlines, I still think investors should follow Buffett and cut the bait. We will not know how much the airlines will need government bailouts, and therefore how much debt they will have to repay in the years to come. Also, we don’t know how quickly things will normalize. With a COVID-19 vaccine still likely in 18 months to two years, it may well be years before air travel returns to normal, even when the quarantines are lifted.

In addition, Berkshire has several other wholly-owned operating companies that may need internal head office “bailouts” in the coming months. So, with the abundant internal liquidity needs and with other actions offering better prospects than the airlines which are also falling with the market, it is not surprising to see Buffett withdrawing its bets on the airlines in order to put money in circulation elsewhere. You should do the same.


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