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Is Warren Buffet Wrong About Airline Stocks?


Recently on Saturday, Warren Buffet admitted to selling all of his shares in four airlines: Delta, America Airlines, Southwest, and United. His rationale for selling were due to fears of covid repercussions that airlines might not recover from in the near to intermediate term. In this article, I want to point out a few things that I have noticed about Warren throughout the years and what I think about his view on air travel—whether it is right or wrong.

Warren is a shark. In my opinion, I believe a lot of people downplay this aspect about him. They generally feel like he is the "Oracle of Omaha," with a big track record; he is a wholesome guy living in Nebraska. But what they fail to recognize is, a lot of times, he speaks in platitudes which hide what his real intentions are for stock purchases or sales.

 
In this case, Warren rationalized selling airline stocks because he felt like the covid-repercussions for demand will cause it to flatline for the airline industry for an unforeseeable indeterminate amount of time. He compelled his audience during his annual shareholders' meeting by saying this:
“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way...I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”
Seemingly over the weekend, airline stock prices started to dip further down coinciding this news. Essentially, in my opinion, Warren is saying that due to fears of uncertainty in the airline industry, he will exit out of the entire industry regardless of company. Prior to 2016 he was unabashedly against investing in capital intensive companies like airlines, but post-2016, started buying up airline stocks when they started churning out record setting profits. This due to lowering fuel costs and companies focusing on profits and customer satisfaction at the same time.

In this annual shareholders' meeting, Warren admitted he was wrong about airlines and was exiting the entire space altogether. This goes against his credo of buying and holding great quality companies for the long term. This increases his cash balance of $130 billion in reserves to play with in the future when opportunity arises. A sale of $6.1 billion is negligible in a sea of cash like $130 billion. Further, at least one of his airline stocks, Southwest Airlines, had a conservative outlook on business. They had about $5 billion in cash and $6 billion in debt, with a lower cash burn than industry peers at $30 to $35 million.

He has also been documented stating that customer satisfaction will dip down as companies like Southwest or United focus on profits to prop up their organizations. In my opinion, if he were really about investing in individual companies, he would know that Alaska Airlines and Southwest have a strong tone from the top of being one of the most relatable companies with great service. I do not think this will diminish just because a bag of peanuts are no longer going to be offered in flight.

Although air travel has dived 95% this quarter due to covid alone, travel will always be a strong consumer demand, and will make its way back into the picture once businesses open back up. Remote technology companies will make its way into the picture as a result of these fears, but business and leisure travel will always be in the mix as a result of globalization and familial ties.

If anything, should airline companies go to zero on an apocalyptic scale, there are still companies out there with low PE ratios, high cash, big government bailouts, conservative outlooks in business, and strong tone from the top; Companies like Southwest ($LUV), Alaska Airlines ($ALK), and even JetBlue ($JBLU). This meaning that these are companies to be potentially bullish on with the thinking that there is a slim possibility of the airline industry going to zero like Buffet implies (at least in the intermediate term).

Let me know what you think about the airline industry. Is Warren right or is he wrong?

Disclaimer: This is my opinion, and I do have a long swing trade for $LUV with a few downside entry points; and a take-profit of $50 per share price. Do your own research (DYOR). Consider starting your first stock portfolio using M1Finance or opening up a trading account using Webull.

Sources: 
https://seekingalpha.com/article/4343996-jetblue-all-eyes-on-cash-preservation
https://seekingalpha.com/article/4343571-warren-buffett-is-wrong-airlines
https://www.cnbc.com/2020/05/02/warren-buffett-says-berkshire-sold-its-entire-position-in-airlines-because-of-the-coronavirus.html

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