Over the past year, investors have routinely questioned some of Warren Buffett's investing moves, especially his selling of airline stocks in the early days of the pandemic. The price levels at which Buffett sold wound up being near the March and April 2020 bottom. As such, critics have called out Buffett for not following his own axiom, "Be greedy when others are fearful."
Yet when asked about it at the recent Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting, Buffett's answer should have silenced all the naysayers. His answer made it clear that holding airline stocks in the context of Berkshire is a whole different ballgame from owning a few shares on Robinhood. Here are three good reasons Buffett was smart to sell the airlines, even at the bottom.
No. 1: Berkshire could have been stuck with a massive bill
During the crisis last year, none of Berkshire's majority-owned subsidiaries went to the government for help, even though some minority shareholders at some subsidiaries encouraged Buffett to do so. Here's what he said:
[W]e had a few people at various subsidiaries of Berkshire that wanted to go in for help from the government. ... And they said everybody's going in for them and why don't we go in? And I said, "Berkshire can handle it, that this is for people that can't handle what's happening. And so we're not applying to the [Payment Protection Program]."
Remember, at the onset of the crisis, Berkshire owned large stakes in all four major U.S. airlines, holding close to 10% of each, with 10%-plus holdings of both Delta (NYSE:DAL) and Southwest (NYSE:LUV). But while Berkshire could handle some extra costs for its majority-owned subsidiaries, if Berkshire were to have to save the four largest airlines with dilutive loans or equity infusions for an unknown length of time, that would be a completely different situation.
Could the government actually have made Berkshire save the airlines? At 10% ownership, it's unclear, but it could have led to some messy discussions and negotiations. Throughout history, airlines have routinely gone bankrupt and still operated in bankruptcy. Therefore, it wasn't a sure thing that the government was going to bail out the airlines if Berkshire, with its billions in cash on the balance sheet, had the means to help. Yet since Berkshire exited, the government stepped in:
[T]he airlines were the most prominent beneficiaries of what took place. Immediately, they got $25 billion initially, most of which went to the big four airlines and some of which went in as grants, not loans. And I think that was fine public policy. I was wishing it could go to every restaurant and dry cleaner and every small business that really was out of business and had no, they were made toast of, basically. ... So anyway, they went into the government, they needed the government help, or they needed it, or they would go bankrupt, some of them. And really the Congress ... decided they deserve the help, which I do not quarrel with it all. But imagine if Berkshire was the 10% holder, which they had been, if everyone in the airlines had said, "to get them Berkshire." They might've very well had a very, very, very different result if they'd had a very, very, very rich shareholder that owned eight or nine percent. And they didn't have that when they went in; you might not have gotten the same result. In fact, I would think you probably wouldn't. I mean, I can just see the headlines now. I mean, because you've seen the headlines on some companies that took a hundred million or two, and really didn't need it. And some of them gave it back then; most of them gave it back, but here you're actually looking at probably at a different result than if we'd kept our stock.
Not only does Buffett believe there was a distinct possibility Berkshire was going to have to foot an unknown tens of billions of dollars to keep the airlines out of bankruptcy, but that the airlines may actually not be doing as well today if Berkshire had held onto its stock.
No. 2: While airlines didn't take as much as feared in dilutive loans, they did take lots of PPP grants
Some may look at the airlines' balance sheets today and conclude they haven't had to take on as much debt and new equity as feared, and that is true. However, even the remaining excess debt and shares pales in comparison with what was contemplated or available from the government at the time. On top of that, the airlines did take $29 billion in PPP loans that are forgivable to the government, provided the money went to keep employees on the payroll. That PPP support ran out at the end of September and was only extended retroactively this January, allowing airlines to rehire those laid off in October. That extension was also no sure thing.
If there was even a 5% chance Berkshire would have to foot that PPP bill in whole or in part, instead of the government, it was a very smart decision for Berkshire to exit airlines right away.
No. 3: Airlines aren't out of the woods yet
Even though airline stocks have rebounded strongly from the lows of a year ago, they were fortunate to have multiple vaccines approved by mid-November, but that was unknowable in April 2020. And while the airline stocks seem to have priced in a strong recovery, the future of airlines is still highly uncertain.
While Buffett conceded that the business and management teams had performed better than expected, he also highlighted continued risks, saying: "Right now, international travel's not come back. ... People really want to want to travel for personal reasons, and business travel is another thing."
Of course, he's right. While domestic travel may boom this summer, international travel could take much longer to get back to normal. And of course, many businesses across the globe have adapted to Zoom meetings and other ways of communication without traveling. It's likely that not all previous business travel will come back -- at least not for a while. And of course, there's always the possibility of new vaccine-resistant variants popping up later this year, which could throw a wrench into the recovery.
Meanwhile, all the major airlines now have higher debt levels and more shares outstanding than pre-crisis, even with the help of PPP.
One thing to remember when looking at Berkshire's trades
Remember, investing as the CEO of a $640 billion operating company, and one that's also one of the largest insurance companies in the world, is a different ballgame from you or I investing in a few shares of a stock. Given the added political considerations and high uncertainty at that time, it definitely seems as if staying with large airline positions would have been extremely risky for Berkshire in the early days of the pandemic.
On the other hand, congrats to the independent-thinking airline investors who have done well over the past year by defying Buffett and going long. But before you go on bashing Warren Buffett, keep in mind you may have him to thank, since the government was able to foot much more of the pandemic bill than Berkshire likely would have.