Warren Buffett has bailed on the airlines, with Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) selling its entire stakes in Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), American Airlines Group (NASDAQ:AAL), and United Airlines Holdings (NASDAQ:UAL).
Airlines have been hard hit by the COVID-19 pandemic, with travel demand all but evaporating. Most of the industry's stocks have lost half of their value or more this year as a result, with the industry now focused more on survival than earnings growth.
Speaking at Berkshire's annual meeting on Saturday, Buffett said he did not sell due to the declining share prices. Rather, "I just decided that I'd made a mistake."
The announcement is sure to put further pressure on airline shares, as investors have made a lot of money over the years doing as Buffett does. But is the Oracle of Omaha right this time around?
A rare double U-turn for Buffett
Berkshire has a long and turbulent history with the airlines. Three decades ago, he bought shares in USAir (now part of American) but ended up writing off much of that investment. In 2001, he swore off the industry, declaring that "if capitalists had been present at Kitty Hawk when the Wright brothers' plane first took off, they should have shot it down."
But in recent years he warmed to the sector, becoming one of the largest shareholders in each of the four biggest U.S. airlines. The industry in the late 2000s went through a period of restructuring and consolidation that reduced the number of competitors chasing every passenger and allowing all the remaining participants to be more profitable.
Buffett was so enamored with airlines that in 2019 he broke one of his cardinal rules and allowed Berkshire's position in Delta, and then Southwest, to climb above the 10% threshold. Crossing 10% led to Berkshire having to make more disclosures about its stakes in those carriers, which back in early April gave us our first hints Berkshire was selling.
A tough business even in the best of times
There is certainly reason for concern. Airlines have a rocky history during recessions, as the industry has seen a number of onetime high fliers -- including TWA, Pan Am, and Eastern -- disappear during past downturns. This COVID-19 slowdown has hit the industry worse than the attacks of Sept. 11, 2001, with United, for example, expecting to fly fewer passengers in the entire month of May 2020 than it did on any single day in May 2019.
Even after the pandemic is contained, the airline business appears headed for a difficult future. Between virus fears and a likely recession, travelers could take a long time to return. Buffett said Saturday, "I don't know that three or four years from now people will fly as many passenger miles as they did last year."
Boeing management backed up that sentiment on the company's earnings call last week, predicting it would take years for traffic to return to pre-pandemic levels. And while the airlines are getting $50 billion in bailout funds to help buffer the revenue declines, the companies have warned they might have to be significantly smaller in the future.
The airlines reported billions in losses in the first quarter, and the second quarter is going to be worse. They have traded stock warrants for government help, extended their balance sheets by adding billions in debt, and in some cases diluted shareholders by raising equity at multiyear share-price lows.
Buffett shied away from criticizing airline CEOs in his comments Saturday, saying he does not envy the challenges they face. "The world has changed for airlines, and I wish them well," he said, predicting the industry would have to shed significant portions of their fleets, and a lot of jobs, in the years to come.
He's probably right, and most of the airlines have already grounded large numbers of planes. But the airlines by and large have the wherewithal to survive a more typical recessionary travel environment. The big unknown is just how long travel demand will remain depressed, and just how severe the depression will be.
Should investors follow Buffett out the door?
Berkshire's dalliance with airlines is very off-key for an investor who famously said, "be greedy when others are fearful." Berkshire is almost without doubt selling low after buying high. And the fact that Buffett would rather take his lumps and move on than ride out the storm should send a shiver down the spines of other shareholders.
I'm one of those shareholders, and I believe he is right that the industry faces a multiyear recovery. I also believe that the airlines, thanks to all that hard work done in the past decade, can fly through this crisis without bankruptcies. But I'll concede that with so much still unknown about the extent of the pandemic, and the recession that will likely follow, it is impossible to say for sure. Traffic is currently down 90% or more year over year. If that continues through the summer and into the fall, all bets are off.
It also seems likely the airlines will be slower to recover once whatever trouble lies ahead is over. But with the major airline companies now trading at less than 0.4 times trailing sales, there is the potential for blockbuster returns if they make it through the down times and traffic does once again return.
Given the uncertainty, I think there are better sectors to buy into right now. If Buffett ends up redeploying the $6 billion in proceeds from the airline sales in the months to come, it will be hard to argue with the decision. But for now, at least, Buffett has remained on the sidelines, with Berkshire Hathaway's total cash stockpile rising to $137 billion at the end of March.
Time will tell, and as a Berkshire shareholder, I hate to go against Buffett. But given the choice between cash on the sidelines and holding Delta shares, I'm holding my shares. And I believe investors willing to hold on to top performers like Delta and Southwest will be rewarded.
Buffett's now been wrong about airlines multiple times during his long, storied career. The airlines are in a world of hurt right now. But I'm betting he didn't get it completely right when he decided to sell this time around, either.