Warren Buffett sells stakes in big four US airlines amid COVID-19 crisis

Berkshire’s CEO and chairman tells webcast AGM that the coronavirus has changed his thesis on the aviation industry.

The Berkshire Hathaway annual shareholders meeting was in full swing in Omaha, Nebraska, over the weekend but without the usual tens of thousands of shareholders from around the world present.

“It doesn’t look like an annual meeting, it certainly doesn’t feel like an annual meeting,” Berkshire’s CEO and chairman Warren Buffett said.

He was joined on stage by Greg Abel, the company’s vice chairman of non-insurance operations. Berkshire’s 96-year-old vice chairman Charlie Munger – who usually accompanies Buffett – wasn’t in Omaha on Saturday, having remained at his home in California.

The Berkshire CEO revealed that Berkshire has sold its entire stakes in the four major US airlines at a loss: Delta Air Lines, Southwest Airlines, American Airlines Group, and United Airlines Holdings. Berkshire had owned stakes of about 10 per cent in each.

Buffett said that the coronavirus has changed his thesis on the industry.

“A low probability event happened and it particularly hurt...the airline business,” Buffett said, noting that the crisis was no fault of the airlines themselves or their management teams.

Buffett said that he sees the path to recovery for the airline industry as a long one, and that companies may find themselves with more planes than they need if consumers are slow to returning to the air. He expects each of the four airlines Berkshire owns shares in will need to increase their debt considerably, which will eat into future earnings as they need to pay it back in future years.

“We like those airlines, but the world has changed for the airlines,” Buffett said. He also noted that the prices at which Berkshire sold were much lower than what Berkshire paid.

“Our airline position was a mistake,” Buffett later conceded. “Berkshire is worth less today than if I hadn’t made that decision.” Abel added that Berkshire’s Precision Castparts subsidiary was impacted by the loss of business from aircraft manufacturers Boeing and Airbus.

Here are other highlights from Saturday’s meeting:

• On the coronavirus pandemic and its economic impacts: Before discussing Berkshire’s first-quarter results, which came out on Saturday morning, the 89-year-old legendary investor began by sharing his thoughts on the coronavirus pandemic and its economic impacts.

He underlined the need to be humble in forecasting the future given the wide range of potential outcomes, and to listen to experts like Dr Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, and Bill Gates, the Microsoft founder who recently said he would step down from Berkshire’s board of directors.

“I don’t really have anything to add to your knowledge on health,” Buffett said.

“In school I did O.K. in accounting, but I was a disaster in biology. I’m learning about this the same way that you are...There’s an extraordinarily wide range of possibilities on the health and economy sides and nobody really knows.”

Echoing his 2018 shareholder letter, Buffett emphasised his conviction in the long-term success of the United States. He compared the coronavirus outbreak to other “bumps in the road” in the country’s history, citing his memories of naysayers concerned that the US wouldn’t rebound from World War II, the Cuban missile crisis, or 9/11.

“I’m convinced nothing can stop America,” Buffett said. “We haven’t faced this particular problem in the past...but America will prevail again.”

Buffett also spoke highly of the Federal Reserve’s emergency moves in recent months, which include lowering its target interest rate to near zero and trillions of dollars of bond-buying programs.

• On Berkshire’s first-quarter results: Berkshire Hathaway is the sixth-most valuable US company and likely its most diversified. The conglomerate’s wholly-owned subsidiaries range from the BNSF railroad to Geico insurance, Dairy Queen, Brooks Sports, Fruit of the Loom, and a collection of utility companies. It also owns a sizeable equity portfolio that includes large minority stakes in Apple, Coca-Cola, American Express, airlines such as United Continental Holdings, and Delta Air Lines, and banks including Wells Fargo and Bank of America.

Because of a recent change in Generally Accepted Accounting Principles, or GAAP, accounting rules require companies to report unrealised investment gains or losses in their quarterly net income. That weighed on Berkshire’s results in the first quarter, as the market tumbled in late February and through most of March. The bank and airline shares which feature prominently in Berkshire’s portfolio were particularly hard hit. The company reported a net loss of $US49.7bn ($77.4bn), after $US54.5bn in investment losses.

Buffett emphasised focusing on operating results to judge Berkshire’s performance instead of capital gains, which can swing wildly from period to period as they did in the first quarter. The conglomerate reported first-quarter operating earnings of $5.9bn, up about 6 per cent from a year ago.

“The operating earnings for the first quarter have little meaning for forecasting the next year,” Buffett said. “I don’t know the consequences of shutting down the US economy...For some period – certainly during the balance of the year but maybe much longer – our operating earnings will be considerably less than if the virus had never come along.” He noted that Berkshire’s three largest business units – insurance, the BNSF railroad, and Berkshire’s energy holdings – are relatively defensive and might see earnings decline but would continue to generate cash flow.

Geico was seeing more late payments in recent months, according to Buffett, and has been giving some customers discounts. But Buffett expects that to be balanced by fewer accidents as long as people are driving and commuting less.

Berkshire stock is down 19.3 per cent this year, versus an 11.8 per cent loss for the S&P 500 after dividends.

• On stock buybacks: Berkshire ended the first quarter with a record $US137.2bn in cash and equivalents, up about $US9bn from the end of 2019. The company bought back $US1.7bn of its own shares in the period, less than many investors were hoping for.

“We always think about it but I don’t feel it’s far more compelling to buy Berkshire shares now than I did three months ago, or nine months ago, or a year ago,” Buffett said.

He noted that even though Berkshire’s stock price has declined, so has the value of some of its holdings, such as the airlines. Buffett left the door open to greater buybacks in the future but said that it would be balanced with other uses of Berkshire’s cash.

“The price has not been at a level where it really feels way better to us than other things, including the option value of money, to step up in a big way,” Buffett said.

• On CEO succession: Responding to a shareholder question about Berkshire after Buffett and Munger, Abel said that he sees the pair’s investing approach and acumen continuing long after they are gone.

“I don’t see the culture at Berkshire changing...There’s no one better than Warren and Charlie but we’ve got a talented team at Berkshire,” said Abel, referring to both at the holding company level and the managers at Berkshire’s subsidiaries.

“I think it could very well be a significant improvement,” added Buffett.

-Barron’s