Only coronavirus vaccine can save aerospace sector: Warren Buffett

Warren Buffett warns that a COVID-19 vaccine may be the only way to salvage the immediate future of the aerospace market.

Warren Buffett used to be one of the biggest investors in the US airline sector, but has now sold out. Picture: AFP

Warren Buffett has warned investors that finding a COVID-19 vaccine may be the only way to salvage the immediate future of the aerospace market.

The investor, known as the Sage of Omaha, sold his airline holdings but his Berkshire Hathaway investment vehicle was forced to take a hit of almost $US10 billion against the value of its stake in Precision Castparts (PCC), which makes aircraft components.

In a regulatory filing for its second-quarter results issued at the weekend, Berkshire Hathaway said the pandemic had produced “material declines in commercial air travel”.

It added: “Airlines responded by reducing or cancelling aircraft orders, which is resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives being implemented by PCC’s customers.”

Until recently, Mr Buffett, 89, was one of the biggest investors in the US airline sector, with stakes in American Airlines, Southwest, United Airlines and Delta Air Lines, but at his annual meeting in May, the billionaire said he had completely sold out of the sector.

He retains Precision, which he acquired in 2016 in a $US37 billion transaction, although the business has been forced to undergo a painful restructuring involving the loss of 10,000 jobs. It swung $US78 million into the red in the second quarter.

Berkshire Hathaway said in its filing: “In our judgment, the timing and extent of the recovery in the commercial airline and aerospace industries may be dependent on the development and widescale distribution of medicines or vaccines that effectively treat the virus.”

Mr Buffett’s company reported an 87 per cent jump in second-quarter net income to $US 26.3 billion as a bounce in its stock portfolio offset the US9.8 billion Precision writedown and a fall in operating profits. Shares of Apple, its biggest stock investment, surged by 43 per cent in the three-month period, valuing its stake at $US92 billion out of a total equity portfolio of $US207 billion.

Further asset writedowns and restructurings were necessary at Netjets, its aircraft rental operation, and Flightsafety, its pilot training business, and it warned investors that more impairments were possible if conditions did not recover.

In its first quarter, the group had recorded losses of $US50 billion, its worst-ever loss, as it struggled to cope with changing consumer behaviour in the early stages of the pandemic.

Despite the mixed picture in the second quarter, Berkshire Hathaway reported a 6.8 per cent increase in its net cash since the end of March to $US146.6 billion at the end of June.

The amount of cash has attracted criticism although analysts say it provides the business with a huge war chest to go out and buy assets rendered cheap by the pandemic. In recent weeks it has spent $US2 billion buying Bank of America stock and acquired Dominion Energy’s natural gas transmission arm for $US4 billion plus debt of $US5.7 billion.

It also bought back a record $US5.1 billion of its own stock, almost double the previous record of $US2.2 billion in the fourth quarter of last year.

The Times