Buffet’s Sell Off

The legendary Warren Buffet has announced that his Berkshire Hathaway investment group have sold their shares in American airline companies due to the Covid-19 crisis and his reasons could spell even worse news for Europe. Benjamin Szwediuk reports

Warren Buffet is almost certainly the most famous living American investor. His “value investing” strategy- learned from business partner Charlie Munger- focuses on safe, long-term gains, by acquiring stocks in quality companies, with proven business models guaranteed to give stable growth and returns in the long-term, has made him one of the richest men alive and a guru to many stock-market investors. Buffett is also famous for his faith in the American economy. Long-term, he believes, the American stock-market will always grow, and sensible investors will always make money. One of the results of this is that relatively recently, despite previous scepticism, he has been particularly bullish about the Airline industry, and America’s big airlines as sound long-term investments.

His reasoning is simple. Air travel expands with economic growth. It suggests greater commerce, more trade in goods over more of the world, while greater disposable incomes for more people affords them more opportunities for greater travel for purposes of recreation. The barriers to entry in the industry are necessarily great due to start-up costs and regulation, ergo, he reasons, the larger players in the aviation game are unlikely to be easily usurped by competitors, and should enjoy the bulk of gains afforded by growth in the wider economy.

This famous bullishness- and the logic which underpins it- unravelled in spectacular fashion last week at the Berkshire Hathaway 2020 shareholder meeting. Usually held in a packed indoor venue, the 89 year-old Buffett addressed shareholders and journalists via online video-conference due to the travel-restrictions brought about by the coronavirus pandemic. In a four hour presentation he announced, despite his ever-optimistic long-term view that the American economy would bounce back eventually, he was dumping all his positions in the four big US airlines at a substantial loss.

Had the auditorium been packed as is the custom at the BH annual meeting this announcement would surely have drawn gasps as Buffett so resoundly dropped a fundamentally long held position, apologising to investors for his folly into the bargain. So what caused such an abrupt turnaround?

Put simply, Covid-19. No amount of his trademark macroeconomic optimism could, in his view, obviate his analysis that the pandemic has caused massive damage to the American airline industry in the short to medium term, with any gains in the long term uncertain. Buffett anticipated the four major American airlines would borrow over $10bn each in private and government backed loans, which would come on top of existing debt and what he perceived as over-capacity. In addition, even in a fairly optimistic economic scenario of a post-Coronavirus recovery, he doesn’t see air travel returning to pre-pandemic levels for at least three years.

A stark analysis. One which, quite naturally, will have investors fleeing American airline stocks, and possibly- like Berkshire Hathaway- establishing substantial cash positions until the stock market and the broader economy approaches something like stability as the Covid-19 pandemic plays itself out around the world. But what does this mean for the industry’s counterparts across the Atlantic?

At a glance the fundamentals are even more grim and nebulous. Like the USA, The EU and UK have suffered a massive drop in demand for air travel in both cargo and people, and many airlines are openly flirting with the possibility of outright collapse. Both Ireland’s Ryanair and the UK’s Virgin have called for government assistance which has not been forthcoming with Virgin- partially owned by Delta Airlines- laying off a massive 3000 staff shortly after Buffett’s announcement to investors. 

In the EU the situation is, if anything, even more fraught as nations, bureaucracies, and central banks squabble over loans, taxes and bailouts, particularly as they relate to the myriad of regulation within the single-market, with the fallout more likely to take decades rather than years. The great competitive disadvantage Europe will suffer relative to the United States, however, are its climate commitments.

Whereas in America, the billions in bailouts are increasingly subject to undertakings regarding the retention of employees and not closing certain routes, the EU has all this to contend with in addition to demand from politician’s across the block to reduce carbon emissions.

When Donald Trump controversially withdrew from the UN Paris Agreement on climate in 2017 he drew widespread criticism at home and abroad, but with the economic devastation Covid-19 has wrought on the aviation industry that chorus of disapproval- domestically at least- is likely to fade into the background during an election year whereas, in Europe, political heavy-hitters like Merkel and Macron have been quick to tie any bailouts to ambitious goals on reducing CO2 which may inherently be beyond the capabilities of the aviation industry, especially in addition to their current woes.

It seems that, for the immediate future, Buffett’s wisdom should be heeded. It could be several years before US Airlines are a ‘buy’. In Europe that ‘when’ could very well be never.