National Post (National Edition)
Investors sour on airline sector as Buffett exits top U.S. carriers
When Warren Buffett speaks, the markets listen. On Monday, airline investors learned that the hard way.
Major North American airline stocks plunged on Monday, with each losing between five and nine per cent, after the “Oracle of Omaha” revealed on Saturday that he sold Berkshire Hathaway Inc.’s position in the Big Four U.S. carriers: American Airlines Group Inc., Delta Air Lines Inc., United Airlines Holdings Inc. and Southwest Airlines Co.
Buffett, who held around a 10 per cent stake in each, said that his investment in the group was a mistake.
“Berkshire is worth less today because I took that position than if I hadn’t,” Buffett said. “Four companies are each going to borrow perhaps an average of $10 billion to $12 billion each. Well, you have to pay that back out of earnings over time and I’m $10 billion to $12 billion worse off if that happens.”
The airline sector has been one of the hardest hit by COVID-19 and has essentially been slowed to a standstill. While the U.S. airlines saw their stocks enjoy double-digit rallies in April, Buffett argued there was too much uncertainty associated with the sector.
Buffett’s not sure if regular air-travel levels will resume in even two or three years. In the meantime, they have massive capital expenditures in the airplanes themselves which are not being used.
David Burrows, president and chief investment strategist at Barometer Capital Management, had identified Air Canada as one of his favourite stocks in his portfolio heading into 2020 but no longer owns it.
For Burrows to invest in a company, it has to be a name that’s “good and getting better” and in a sector that is seeing net inflows of capital. Burrows not only wants to see good performance from a particular name, but in the sector as a whole.
Although airlines rallied in April and discount online brokerage Robinhood said American Airlines was one of the most-bought stocks on its platform, Burrows is still skeptical.
He’s watched investors buy tech stocks immediately after the tech bubble burst in 2000 and double down on bank stocks after the financial crisis in 2008. Neither proved to be a good move.
“Buffett cut his losses because he doesn’t think it’s coming back any time soon,” said Burrows. “I would bank on Warren Buffett before I would bank on Robinhood investors.”
Air Canada chief executive Calin Rovinescu was grim with his own analysis of the sector after his company reported a $1.05-billion loss in the first quarter of 2020. Rovinescu described this as the “darkest period ever in the history of commercial aviation” and said he expected it would take three years to recover.
Some analysts believe that airline travel will pick up again in 2021 but as Burrows points out, their high fixed costs mean that even if they tried running at 75 per cent of their usual levels, they would still likely be losing money.
Bernstein analyst David Vernon, who covers the Big Four in the U.S., views their future as being binary.
“Either they emerge from this with their competitive equilibriums intact and you can see a path towards restoring balance sheets at a lower level of operations or you end up in a situation where we see a round of court-ordered restructurings,” Vernon said.
The industry needs to get out of crisis levels first, he said. “The runway is expanding into 2021 but there isn’t any runway if we don’t get our hands around this virus,” said Vernon. “If you think demand is not going to back in two years, you probably don’t want to own (airlines).”
Norman Levine, managing director of Portfolio Management Corp., owns shares of Berkshire Hathaway for his clients, but has not owned airlines. He’s seen airlines in bankruptcy before and what it has taught him is that a company can survive, but its shareholders may not.
COVID-19 will create serious questions for their business models going forward, he said. Although he’ll be comfortable getting on a plane once he’s given the green light, he’s not sure other consumers will be.
“The problem with airlines is they’ve been making their money because they’re treating you like sardines,” Levine said. “Airlines are going to have to do things differently — you’re going to have to be spaced out, you’re not going to be so close to everybody, but that kills your profit model.”