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Warren Buffett: ‘I won’t be selling airline stocks’

Updated Fri, Mar 13, 2020, 8:28 AM 5 min read

According to recent filings with the Securities and Exchange Commission, Buffett’s Berkshire Hathaway (BRK-A, BRK-B) holds large stakes in several airlines: more than 53 million shares of Southwest (LUV), 42 million shares of American (AAL), 21.9 million shares of United (UAL), and 71.8 million shares of Delta (DAL) after buying almost a million new shares two weeks ago.

Berkshire Hathaway purchased the additional 976,000 shares of Delta at about $46 a share on February 27th. At the close of trading Thursday March 12th, Delta shares had fallen roughly 27.5% in just two weeks driven down by coronavirus related cuts in capacity and reservations.

“Well, it’s going to be terrible. I’ve always felt a pandemic would happen at some time,” Buffett said. He’s long suspected a pandemic could interrupt progress in the United States and globally. But Buffett predicts ultimately, “It won’t stop the progress of the country or the world.”

so many airplanes are in line on the runway waiting for take off

US Airlines better prepared than other global carriers

United Airlines President and incoming CEO Scott Kirby recently told investors, “Our current dire scenario planning option is for revenue to be down 70% in April.”

While he doesn’t expect the revenue hit to actually be that bad, he says United’s goal is to “raise liquidity, cut capex, and reduce capacity to position ourselves to bounce back when the crisis ends.”

But Kirby made those predictions a day before President Trump announced travel restrictions on passengers flying from Europe to the United States. Analysts at Stifel in a note published March 12th advised clients, “we view that dire revenue scenario as more likely.”

Delta CEO Ed Bastian says North America accounts for 1/5th of the global airline market but 2/3rds of the profits. The Stifel analysts wrote, “We expect the travel restrictions to have a greater financial impact on the European airline industry rather than the U.S.”

Cowen Equity Research analyst Helane Becker in a note sent to clients March 12th wrote, “We continue to believe near term U.S. bankruptcies are unlikely but our conviction is diminishing.”

The airlines are in cash preservation mode. Becker points out that United raised $2 billion in credit this week, Delta $1 billion last week and American $500 million two weeks ago. Becker expects the airlines to try and borrow more money in the coming days.

Becker recently told her clients the coronavirus crisis also mirrors the 9/11 period. “U.S. carriers saw 12 consecutive months of y/y enplanement declines following 9/11,” she said. It took 22 months of consecutive growth, according to Becker, for passenger loads to recover.

Looking for signs of recovery

The Stifel analysts point out the new travel restrictions are far from a total ban on travel to or from Europe. But they warn, “we would expect the same effect and now see business across the Atlantic as likely to resemble the Pacific which is to say that demand will likely be near zero for a period.”

Stifel expects the travel restrictions to eventually be implemented in South and Central America and potentially, domestically. “This feels like a significant deterioration for U.S. Airlines.” But Cowen’s Becker writes, “We expect the coronavirus crisis recovery to be more condensed than that of 2001/2002.”

Airlines with significant exposure to international and corporate travel are the most at risk according to Cowen. Delta’s Bastian says net bookings are already down almost 30% but Cowen sees clear skies ahead in the not so distant future.

“We continue to believe we will see a U-shaped recovery for airline traffic in Asia,” Becker writes. “In the U.S. we expect a V-shaped recovery in leisure travel and a U-shaped recovery in corporate travel as employers resume conferences and clear travel.” But Becker warns, “If bookings do not improve in the next three months, things could deteriorate quickly.”

Warren Buffett appears to agree with Becker’s more optimistic call equating the eventual recovery in airline fortunes to humanity’s progress over long periods of time.

“The progress of mankind has been incredible. And that won’t stop,” he told Serwer. “We haven’t forgotten how to make progress in this country. And we haven’t lost interest in making progress.”