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Warren Buffett was honored for making Forbes’ list of the Top 100 Trading Minds during the … [+]
Many people have made money investing in the airline industry. Warren Buffett is not among them.
Buffett just sold again, possibly selling at a low point, as all three major airlines have near-zero bookings, fly at approximately 10% of capacity, face layoffs, expect to lose money in the current quarter, and have just declared their April earnings calls that they like to think they have enough liquidity to survive.
Obviously, the picture is not spectacular. Airlines, disproportionately affected by the coronavirus crisis, have generally lost at least half their share value this year.
Although the best advice is often said to be to buy low and sell high, Buffett’s Berkshire Hathaway said Saturday that he recently sold all of its stakes in the four largest U.S. airlines: American, Delta, Southwest and United.
The investment firm owned 11% of Delta’s shares, 10% of American, 10% of Southwest and 9% of United. He started investing in airlines in 2016, after Buffett had been warning against airline investment for years.
At the Berkshire virtual meeting on Saturday, Buffett said of the airline industry: “We put in whatever it was seven or eight billion and we didn’t get anything like seven or eight billion.
“That was my mistake,” said Buffett. “We have sold all positions.”
Before 2016, Buffett spent years worrying about an investment experience with an airline in 1989, when he bought debt at US Airways.
In an interview for the book “American Airways: Building the World’s Largest Airline” (published in 2014 by McFarland & Co.) that I wrote with Dan Reed, I asked former US Airways CEO Ed Colodny about the involvement of Buffett on the airline, later called USAir.
It started when hedge fund manager Michael Steinhardt seemed ready to launch a hostile bid for US Air, acquiring approximately 6% of the company. After a friend suggested that he talk to Buffet about protecting the airline from a hostile takeover, Colodny went to Omaha, where he and CFO William Loftus joined Buffett for lunch at Gorat’s Steak House, a favorite of Buffett.
“We spent a couple of hours talking about the airline, a very friendly informal conversation, and I had a great T-bone steak,” said Colodny. “At the end of the discussion, Warren indicated that he was interested in making an investment. We established a small team to reunite with his family and two weeks later we reached an agreement to sell him 9.25% convertible preferred shares. After making the deal, Michael Steinhardt left. We never had any real problems with him. “
Buffett purchased $ 358 million debt at 9.25%, convertible in two years to US Air shares at $ 60 per share, above the $ 52 trading price. The shares represented about 12% of the company. Buffet and associate Charles Munger subsequently served a few years on the US Air board. Stocks were never appreciated, and Buffet was never converted. “He wrote down his investment at one point, and withdrew the money as soon as he could,” Colodny said. “I think at the end of the day they paid him all his dividends and returned his capital.”
However, over the past two decades, Buffett has made a series of widely reported rejections of airline investment, including this statement from a 2002 interview with the London newspaper. The Telegraph: “If a capitalist had been present at Kitty Hawk in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
“But seriously, the airline business has been extraordinary,” Buffett continued. “It has consumed capital over the past century like almost no other business because people seem to go back to it and put in fresh money. You have huge fixed costs; you have strong unions and commodity prices. That is not a great recipe for success. I have an 800 number (toll free) now that I call if I feel like buying shares in an airline. I call two in the morning and say, “My name is Warren and I am an alcohol addict.” And then they talk bad to me.
In short, Buffett invested in US Air, seemingly struck a breakeven, was advised never to do it again, ignored his own advice, and lost money in 2020.
I have never invested in airlines, except for a brief period in 2005 when I worked for US Airways, made two small investments in other airlines, and kept my balance. I never imagined that the AMFA mechanics union would be fool enough to attack the northwest.
Right now, what I see is a cumulative demand that will increase until we have a vaccine. I agree with Buffett: we probably have a long wait.
