A 95% plunge in passengers. Billions in losses. A rush for new debt. A recovery that executives expect to take years. Coronavirus is roiling the airline industry and the Oracle of Omaha has seen enough.
Warren Buffett told investors Saturday that Berkshire Hathaway has sold its entire stakes in the four largest U.S. airlines — American, Delta, Southwest, United — as the pandemic upends another bet on the sector that the famed investor had shunned for years before a surprise return in 2016.
An embittered Buffett said in 2007 investor letter: "If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down" and referred to a soured bet on US Air in the 1990s. "The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it," he continued.
But in late 2016, Buffett again warmed to the industry. Known for their cycles of boom and bust, U.S. airlines were riding a steady wave of profits and enjoying the spoils of a collapse in fuel prices, generally their biggest expense after labor.
Berkshire became one of the biggest shareholders in the big U.S. four, with a stake of close to 10% in each carrier. Those were worth close to $4 billion, according to the latest FactSet data. In the fall of 2017, his stakes in those airlines were valued at more than $9 billion. In February 2018, Buffett told CNBC he wouldn't rule out owning an entire airline. All four carriers hit all-time highs in the years after Berkshire took its big stakes.
But airlines are one of the industries hardest hit by the coronavirus and their share prices have plummeted by a far greater degree than the S&P 500's 12% drop this year. American shares have lost 63%, United's have shed 70%, Delta's are off 59% and Southwest's are down 46% since the start of the year.
"And it turned out I was wrong about that business because of something that was not in any way the fault of 4 excellent CEOs," Buffett said Saturday in Berkshire Hathaway's annual meeting, which was webcast because of the pandemic and travel restrictions. Berkshire reported a net loss of close to $50 billion in the first three months of the year. "I mean, believe me, no joy being a CEO of an airline. But the companies we bought were well managed. They did a lot of things right."
U.S. carriers in recent weeks posted their first losses in years and have warned investors that the second quarter is looking even more dismal as the virus and measures to stop it from spreading like shelter-in-place orders are keeping would-be travelers away from airports.
The slump has also hit aircraft manufacturers like Boeing as the pandemic and financial turmoil all but dries up demand for new jetliners, and raises the threat of cancellations and deferrals of existing orders. Berkshire is exposed to that dynamic through its $32 billion deal in 2015 to acquire aircraft parts supplier Precision Castparts.
For airlines, the timing couldn't be worse. The second and third quarters are the most lucrative for U.S. travelers as spring and summer vacations spur bookings.
"While no one has a perfect crystal ball, I think we all expect that recovery will be slow and demand for air travel will be suppressed for quite some time," American Airlines CEO Doug Parker told investors last week, upon reporting a $2.2 billion net loss. Delta's CEO Ed Bastian last month said it would likely take two or three years for air travel demand to recover, a forecast later echoed by Boeing's CEO.
"While we cannot speak to individual shareholders' decisions around buying and selling shares in Delta, we have tremendous respect for Mr. Buffett and the Berkshire team," Delta said in a statement. "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."
American Airlines and Southwest Airlines declined to comment. United didn't immediately respond to a request to comment.
Airlines are bleeding cash and are racing to cut costs: parking hundreds of jetliners, canceling thousands of flights and urging employees to take unpaid or partially paid leave. Tens of thousands of staff members have taken them up on that offer.
They have suspended dividends and share buybacks for the foreseeable future. Airlines are raising new debt to help weather the crisis and more leverage may be on the way.
"Well, you have to pay that back out of earnings over some period of time," Buffett told shareholders.
United and Southwest have also turned to equity sales to raise money.
U.S. carriers last month started to receive portions of government aid, including $25 billion mix of loans and grants that require them not to involuntarily furlough or cut the pay rates of their some 750,000 employees through Sept. 30. They also expect to receive portions of another $25 billion in other low-cost loans earmarked for the industry under the $2.2 trillion CARES Act.
But airline executives expect to emerge much smaller.
"We made a promise to our people and to American taxpayers to avoid involuntary furloughs or cuts to pay rates for U.S. employees until the end of September, and that's a promise we'll keep," said United's president, Scott Kirby, who takes the reins as CEO on May 20. "But if demand remains significantly diminished on Oct. 1, we simply won't be able to endure this crisis as a company without implementing some of the more difficult and painful actions. These include decisions on involuntary furloughs, further reductions in hours, as well as other actions that will have an immediate impact on our people and their livelihood."
Kirby added: "We simply cannot and will not risk the long-term future of United and the jobs the airline supports just because the short-term decisions are really hard."
But the chances for harsh cost-cutting measures to resize wasn't enough to convince Buffett to hang around and see how it plays out.
"If we like a business, we're going to buy as much of it as we can and keep it as long as we can," he said. "And when we change our mind, we don't take half measures."