Warren Buffett’s Berkshire Hathaway
“We put, whatever it was, seven or eight billion into it and we did not take out anything like seven or eight billion,” Buffett said during Berkshire’s annual meeting on May 2. “That was my mistake.”
“We have sold the entire positions,” he said. “When we change our mind we don’t take half measures or anything of the sort.”
Berkshire had an 11% stake in Delta, 10% in each American and Southwest, and 9% in United. It sold some of the Delta and Southwest stakes in April. Berkshire started accumulating holdings in 2016, a reversal from Buffett’s long disdain for airlines.
The Oracle of Omaha professes no insight to the long-term outlook of travel and the aviation business. But Buffett sees the immediate future negative for investors since airlines are accumulating debt, diluting shareholder value by issuing equity, and could have overcapacity.
“It’s obviously changed in the fact that the four companies are each going to borrow perhaps an average of at least $10 or $12 billion each,” Buffett said. “You have to pay that back out of earnings over some period of time.”
Buffett does not fault airline management.
“We were not disappointed at all in how the businesses were being run,” he said. Current problems are “through absolutely no fault of the airlines themselves but something that was a low probability event.”
Buffett expects further short-term aviation weakness from over-capacity. “The airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear,” he said. “You’ve got too many planes.”
American and Delta are exiting around 100 aircraft and evaluating further retirements. United and others are also assessing their future sizes.
Buffett was displeased shareholder value in airlines could be diluted from new equity.
“In some cases they’re having to sell stock or sell the right to buy stock,” Buffett said. “That takes away from the upside.”
U.S. airlines agreed to give the government warrants in exchange for the $25 billion of loans authorized under the CARES Act. The warrants generally equate to around a 1% stake.
United Airlines is raising $1.04 billion of new equity, so far the only U.S. airline to do so. Outside of the U.S., Singapore Airlines raised S$5.3 billion (US$3.74 billion) in new equity. But most governments are only giving loans.
By accepting the U.S. government loans, airlines are prohibited from issuing dividends until one year after they repay the loan.
The loans also went to smaller airlines like Alaska and JetBlue, but Buffett only invested in the big four: American, Delta, Southwest and United.
“We would have bought other airlines,” Buffett disclosed. “But those were the four big ones and the ones we could put some money into.”
U.S. airlines are further raising debt by tapping private markets, often in amounts that exceed the loans from the U.S. government. The CARES Act separately authorized $25 billion of direct grants to cover payroll expenses.
Buffett did not disclose the size of losses by selling his airline portfolio, but said it was “relatively minor.”
There is considerable attention on Buffet’s proclamation “the world changed for airlines.”
But Buffett said he had no insights. “I don’t know how it’s changed,” he conceded.
“I don’t know whether Americans will have now changed their habits or will change their habits,” Buffett said.
“It’s been seven weeks since I’ve had a haircut,” he said. “I’ve been just a question of ‘Which sweatsuit I wear?’ so who knows. Who knows how we come out of this.”