Northwest Arkansas Democrat-Gazette
Buffett’s move hurts airline stocks
Investor blames pandemic for sell of stakes in four carriers
U.S. airline stocks plummeted Monday after Warren Buffett dumped his stakes in the four biggest carriers, saying the industry’s prospects had been upended by the coronavirus pandemic.
The airline industry has been one of the hardest hit sectors amid the covid-19 outbreak that has decimated air travel, with countries and cities around the globe imposing lockdown measures in an effort to tackle the spread of the infection. The S&P Supercomposite Airlines Industry Index has fallen about 60% since Feb. 20 when the broader virus-related sell-off began, while the S&P 500 Index is down about 16% over the same period.
Shares of United Airlines, American Airlines, Delta Air Lines and Southwest Airlines were among the biggest decliners on the nine-member index.
American was the biggest loser in Monday trading, plummeting 7.7%. Delta fell 6%, Southwest dropped 5.5% and United stocks fell 5%.
Buffett’s Berkshire Hathaway had been investing in airlines since 2016, spending $7 billion to $8 billion to buy 10% of Delta, American, United and Southwest.
CUTTING LOSSES
Buffett, once a prominent skeptic of volatile airline investments, changed his stance after years of consolidation in the industry gave rise to a small number of players positioned to churn out profits. His decision to exit now underscores the diminished potential of the companies that once enticed him.
In comments at his company’s annual meeting Saturday, he said he thinks the airline business “changed in a very major way,” in part
because Delta and other airlines have borrowed billions of dollars to stay afloat and will have to pay that back over time.
Buffett emphasized that the decision to sell “was not in any way the fault of four excellent CEOs.” He said the downturn in travel is affecting hotels, cruises and theme parks, “but the airline business in particular.”
United and American declined to comment on Berkshire’s decision to sell shares. Southwest didn’t immediately comment.
Delta said it is aware of Buffett’s announcement about the sale of all airline holdings, including Delta’s, and said in a written statement that “we have tremendous respect for Mr. Buffett and the Berkshire team.”
“We remain confident that the strengths that are core to Delta’s business — our people, our brand, our network and our operational reliability — will endure and position Delta to succeed as a better, stronger, and more resilient airline in the future,” Delta said.
Buffett said he doesn’t know “whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year. They may and they may not, but the future is much less clear to me.”
PLANE INDUSTRY FALLOUT
Buffett’s comments also weighed on the shares of plane-maker Boeing, which fell 1.4%.
Shares in jet-engine producer General Electric dropped 4.5%, but that also came on the heels of GE’s announcement that it would cut about 13,000 jobs from its aviation operation.
The reductions, going well beyond cuts announced in March, will include “voluntary and involuntary actions” affecting about 25% of GE Aviation’s workers worldwide, the company said Monday in a statement. The total includes a previously announced move to cut about 2,600 positions in the U.S.
“The deep contraction of commercial aviation is unprecedented, affecting every customer worldwide,” GE Aviation Chief Executive Officer David Joyce said in the statement. “We have responded with difficult costcutting actions over the last two months. Unfortunately, more is required.”
The job cuts, coming after GE last week reported deep financial strains in its jet-engine manufacturing division, underscore the severe impact of the pandemic on aviation and the broader economy. Plane makers Boeing and Airbus, along with airlines worldwide, have launched desperate efforts to preserve and raise cash as demand has fallen sharply.
For GE, in particular, the stress on a key business threatens a broader turnaround effort as CEO Larry Culp attempts to shore up the balance sheet and pull the company from one of the deepest slumps in its history. GE Aviation had been a bulwark for the Boston-based company as it dealt with depleted cash and a slump in the power-equipment business.
The aviation job cuts, which will be permanent, will be rolled out “over the coming months,” Joyce said. GE previously announced employee furloughs in addition to layoffs.
The global airline industry is expected to reach only 60% of its typical traffic by yearend, Alexandre de Juniac, CEO of the International Air Transport Association, said Monday on a French business news TV program. The trade group in mid-April estimated that the industry would lose $314 billion in ticket sales this year. In the U.S. alone, air traffic is less than 10% what it was a year ago.