Each year, legendary investor Warren Buffett holds an annual meeting for investors. His company, Berkshire Hathaway, is essentially an investment vehicle, which allows him to house all of his investments. At the annual meeting, he provides a glimpse into his thinking and investing thoughts. For the latest annual meeting which took place over the weekend, there was plenty to talk about!
Sell airlines
Warren Buffett acknowledged that the world had changed since the coronavirus outbreak, with his investments taking a hit. While almost all of us can share in this, our losses are likely smaller than his. It’s been reported that Berkshire Hathaway lost around £40bn in the first quarter. A fair proportion of this was down to the airline industry. Ouch.
Warren Buffett invests mostly in the US, and has held around a 10% shareholding in US airlines such as Delta, United Airlines and American Airlines. But he announced that he was selling out of his investments in airlines, even though this meant taking a loss.
Why sell airline shares?
The reasoning Buffett gave was that the airlines are burning through cash, with this likely to continue. He also flagged the unprecedented dry up in demand for flying. Both points are valid for UK airline stocks as well, including the likes of IAG (British Airways owner), easyJet and Ryanair.
With these airlines being unable to operate at anywhere near full capacity due to the virus, incoming revenue (as a proxy for demand) is small. Yet a lot of their overhead costs remain. Think of the cost of maintaining the fleet of planes, marketing and other committed financial obligations. Ultimately this could have a severe impact on the ability of these firms to survive.
Warren Buffett vs Jonathan Smith
It’s a slightly one-sided argument when looking at who’s the better investor. The clear answer is Buffett. Yet that doesn’t mean that I agree with everything he says. In this case, I feel US airlines are in worse shape than their UK peers. Therefore I wouldn’t sell out of existing airline investments.
Take the point about burning through cash. I agree this is an issue, but efforts from the UK Government will help stem this for large UK airlines. The ability to furlough employees eases short-term cash flow issues too. For example, British Airways has furloughed around 30,000 workers under the scheme.
Regarding a pick-up in demand, we could see this happening in the coming months. Various nations within Europe have relaxed lockdown measures, with the UK set to announce plans at the end of this working week. While the transition to book flights will have a longer lag, any positive movement will likely steady the fall in airline shares.
Thus, while I won’t be buying into airline shares with fresh money, I won’t be selling my airline shares at a loss right now. This goes against Warren Buffett and what he has said. But as the age old expression goes, for a market to function you need both buyers and sellers!
