Warren Buffett used to be known for saying he would never own an airline stock. That changed after airlines became wildly profitable with very wide moats. Those moats may still be in place, but Berkshire Hathaway Inc. (NYSE: BRK-A) suddenly has started seeing rather large losses in the airline holdings on the heels of the coronavirus outbreak putting a serious hit on airline travel demand.
Several things brought Berkshire Hathaway’s investment dollars into airlines in recent years. On top of low price-to-earnings ratios and strong profitability, the closures among the money-losing carriers in prior years has given legacy carriers solid pricing power (even discounters want to be profitable now). The airline industry consolidation also gave carriers an ability to dictate fees for everything. There became significant barriers to entry as gate fees at airports also have become locked in.
Berkshire Hathaway Inc. (NYSE: BRK-B) bought billions of dollars worth of airline stocks in recent years, and the move was looking solid until the weakness of 2019 went way south in 2020. Slower demand from the trade war fallout in 2019 and the simultaneous slowing of certain travel demand last year have run into additional pain and suffering as the COVID-19 outbreak is making its dent on the economy. The latest drop in airlines from lower domestic demand and an endless amount of conferences being canceled has done serious damage to the travel-related sector.
To add insult on top of injury, the expanding outbreak is hitting right before spring break, and some parents have already had to discuss what happens to summer travel plans if there are systemwide school closures that extend the school year.
After taking a look at Buffett’s equity holdings as of the end of 2019, it seems Berkshire Hathaway has seen some serious damage to the value of its airline stocks.
24/7 Wall St. has reviewed the latest stakes held by Team Buffett in the airlines to see just how bad the damage has been since the end of 2019. Buffett himself recently gave a CNBC interview saying that the coronavirus was not a reason he would be selling stocks. Assuming that also applied to his portfolio managers, it could be assumed that the airline stakes have not changed.
Southwest Airlines Co. (NYSE: LUV) is down $480 million year to date. It has Berkshire Hathaway as the second largest holder of stock, with some 53.65 million shares (10.37% of the float) worth $2.89 billion at the end of 2019. With shares hitting $45.00 after its warning on Thursday, the new value would be about $2.41 billion.
American Airlines Group Inc. (NASDAQ: AAL) is down $510 million. It was a stake of 42.5 million shares (9.98%) worth $1.22 billion at the end of 2019. This was a $30 stock as recently as February 12 (and at year-end), but a 10% drop on Thursday to $16.70 gave a new value of just $710 million.
Delta Air Lines Inc. (NYSE: DAL) is down almost $940 million. It counts Berkshire Hathaway as its largest outside holder, with an 11.08% stake of 70.91 million shares. Its value at the end of 2019 was $4.146 billion. With Delta shares trading down over 6% at $45.25, down from $58 as recently as February 20, the new value of the stake would be about $3.21 billion.
United Airlines Holdings Inc. (NYSE: UAL) is down $740 million and is a stake of 21.938 million shares, which was worth just over $1.93 billion at the end of 2019. Now that United has announced capacity cuts of 10% domestic and 20% international this week, its shares were down almost 9% at $54.20 on Thursday. That new stake valuation would be closer to $1.19 billion after such a large fall.
After you add up all these stakes, the valuation would have been closer to $10.2 billion at the end of 2019. The value after the coronavirus impact has been seen on March 5, 2020, would be closer to $7.5 billion. A loss of $2.7 billion is certainly not the end of the world, considering that the entire Berkshire Hathaway portfolio of U.S. public companies at the end of 2019 was worth $242 billion. That said, a 10% correction (and then some) doesn’t spare even the great Warren Buffett and his team of portfolio managers.
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