The airline shares that Berkshire Hathaway Inc. dumped at the start of the travel-quashing COVID-19 pandemic have continued their slide since Warren Buffett's sudden investment reversal, and the companies face a lengthy trip to full recovery.
Berkshire first took up stakes in the nation's four largest airlines in 2016. In the fourth quarter of 2019, shares of Delta Air Lines Inc., United Airlines Holdings Inc., Southwest Airlines Co. and American Airlines Group Inc. began falling amid fears that the viral infection that had taken hold in China would become a pandemic.
In the first quarter, Buffett added to Berkshire's positions in Delta and United. Airline shares subsequently went into free fall as pandemic worries became reality, prompting the Berkshire chairman, president and CEO to abruptly reverse course weeks later during the second quarter and sell off all Berkshire's airline holdings.
As of the end of the second quarter, Delta's share price was down 28.7% from where it stood at the end of the period during which Berkshire first invested, according to S&P Global Market Intelligence data. The equivalent figures for Southwest, United and American were 31.4%, 34.0% and 64.3%, respectively. All four endured first-quarter batterings, which were followed by slight second-quarter drops for Delta and Southwest and modest rises for American and United, although those performances came as the S&P 500 added 20% during the three months.
Without the pandemic crisis, the holdings were sound investments as 2020 approached, said Robert Mann, an independent airlines analyst and principal of R.W. Mann & Co., in an interview. The carriers were on pace for historically good results until the COVID-19 spread sank them to historically bad ones, he said.
"[Buffett] was probably right to get out when he got out, but of course, getting out two months earlier would have been even better," Mann said, adding that the second quarter for the industry will be far worse than the previous period.
During the past 10 years, airline companies had successfully restructured their operations to produce healthy and consistent profits, Goldman Sachs airline analyst Catherine O'Brien said in a June 28 research note to clients. The industry generated 5x more profits than it had produced the preceding 20 years, O'Brien wrote.
Buffett said during Berkshire's annual shareholders' meeting in May that he expected the investment to yield $1 billion annually before the pandemic hampered the travel business so acutely. The debt that airlines had to build to keep their businesses in the air depressed that investment outlook, he said.
Among the myriad uncertainties the pandemic has cast over the immediate future is when people will feel comfortable enough to travel, Mann said. Recent surveys indicate that right now, most travelers are apprehensive of getting on planes, he said. The carriers do not hold much cash on their balance sheets, he noted, and their cash equivalents are advanced bookings, which have all but evaporated.
O'Brien in her note revised to 2023 the year in which she expects airlines to return to normal business from a previous forecast of 2022.
In addition to the airlines' new debt loads, Delta, United and Southwest were already facing expenditures needed to replace aging planes and equipment, Mann said. American has plenty of new planes, but was already heavily leveraged compared to its peers going into the crisis, he said.
"American was slow to realize the benefits of consolidation, and this will just make future cash flows have to go towards settling debt as opposed to back to investors," Mann said.