What Warren Buffett May Be Planning with Airline Stocks

The COVID-19 sell-off fueled an incredible downturn. The markets entered a bear market in record time, only before snapping back aggressively from their pre-stimulus lows.

The ongoing pandemic has shut down multiple sectors in the economy. Hotels, theme parks, restaurants, cruise lines, and sports leagues have completely shut down across America.

But no sector has taken a harder hit than airline companies.

The ongoing breakout has turned airports into ghost towns. Travelers have effectively stopped flying both domestically and internationally. And given the psychological strike that coronavirus has associated with air travel, it could be some time before we see a full recovery in this industry.

Perhaps the most surprising news around airlines came from famed investor Warren Buffett. His firm, Berkshire Hathaway Inc. (NYSE: BRK.A), has long been a holder of airline stocks given their steady demand and reliable cash flow streams.

With Delta Air Lines Inc. (NYSE: DAL) falling more than 50% from peak to trough, Buffett dumped shares in the firm. His firm also dumped shares of Southwest Airlines Co. (NYSE: LUV), American Airlines Group Inc. (NASDAQ: AAL), and United Airlines Holdings Inc. (NASDAQ: UAL). According to GuruFocus, Berkshire may have lost up to $5.3 billion on its stakes in airline companies.

So, what is Buffett's plan with airline stocks for the road ahead?

Let's cut through the noise in this industry and provide insight into what we can expect for the road ahead.

Airlines Stocks Face a Reckoning

When the dust clears, the airline industry might never look the same. Companies have drawn down their credit lines. The U.S. government has promised a massive bailout like what we witnessed after 9-11.

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And airline companies have slashed flights for the upcoming quarter. That's smart, considering that Southwest just flew several dozen empty planes across the United States in one day last week.

This glut of empty seats could last well beyond the flattened coronavirus curve. Many travelers might take some significant time away from airplanes given a new fear about flying.

Meanwhile, investors like Warren Buffett chose to simply walk away from the investment, and signs point that the investment company he runs may continue to pare its stake in these large organizations.

Buffett said in February that he had added to his holdings and said last month that he wouldn't be "selling airline stocks." But things change.

The decisions to cut stakes in United Airlines and American Airlines drives his stakes under 10%. This means that we won't know what Buffett is doing with those companies until it files 13F reports with the SEC in May.

Buffett's BRK.B is the largest shareholder of Delta Airlines as well at 9.2%. This has been a key holding for Berkshire as the company is a massive marketing partner and revenue driver for another big Berkshire stock in American Express Co. (NYSE: AXP).

However, I think the recent selling is just the start of something bigger.

What Is Warren Buffett's Strategy for Airline Stocks?

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To me, Buffett's decision to cut airline stocks is a troubling one. To be honest, it makes me believe that there are only two scenarios in this situation. First, Buffett's selling is a violation of his own advice.

He typically would move to buy more shares of airline stocks given their sharp pullback. But the question now is whether Buffett believes in the long-term thesis behind these companies.

Despite their economic moat and historical cash flow performance, we could be facing a very long recovery. The fact that Buffett isn't being greedy when others are fearful is a telling sign about the current situation.

That said, Buffett could be freeing up capital for other purchases.

Or, because of shifts in regulatory requirements, he could be working behind the scenes with these companies to seek favorable investment terms that would provide additional support where the government cannot. Remember that Buffett took a big stake in Goldman Sachs Group Inc. (NYSE: GS) at the height of the financial crisis. The problem with this speculation, however, is that there remains significant debt that would stand in front of preferred shares.

So, I'm willing to dismiss that theory and return to the first scenario.

Looking at the situation, I think Berkshire believes that it is holding a potentially poisonous position in airline companies. The sell-off that Berkshire initiated might not have been massive - but it was likely all that it could have sold.

If Berkshire unloaded its entire position, there's a possibility that the bid could have fallen another 20% at best, and down to just a few dollars at worst. Since there are very few buyers in the market, Berkshire is likely holding the stock until it starts to see some recovery in buying. At that point, we might be well into the second half of the year.

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About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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