The ‘Oracle of Omaha’ has a lot of fans, but this week Gary Kelly, CEO of Southwest Airlines reckons Warren Buffet is far too bearish when it comes to the future of the airline industry. Mr Buffet sold his entire stake in Southwest Airlines and three other U.S. carriers in April, taking a pessimistic tone on the future of the airline industry. In contrast, Mr Kelly has a more upbeat outlook.
Billionaire exits the entire airline industry
Mr Buffet’s investment vehicle, Berkshire Hathaway, sold its entire 10.1% shareholding in Southwest Airlines. It also sold its all of its 10% plus stakes in Delta Air Lines, American Airlines, and United Airlines. Berkshire Hathaway had been among the top shareholders in each airline, pocketing more than $4 billion from the April sale.
“The world has changed for the airlines,” said Warren Buffet on the weekend
“The future is much less clear to me. I don’t know whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year.“
Historically, Mr Buffet has advised against investing in airline shares, calling the industry a bottomless pit.
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” Mr Buffet once said.
Airline investment was a mistake says Oracle of Omaha
But the siren call of increasing demand, reliable share prices, and buybacks lured Berkshire Hathaway into the industry about four years ago. Mr Buffet bought into airlines like Southwest with his eyes wide open, but figuring passenger demand would keep rising, and the airlines wouldn’t shrink in value.
He hadn’t factored in what has happened this year. Berkshire Hathaway has sold its stakes in the U.S. carriers for a significant loss, saying it should have never gone near the industry in the first place. Mr Buffet’s famed investment company recently posted an overall USD$49.7 billion quarterly loss.
“Our airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn’t.”
Mr Buffet’s decision to sell and the subsequent recent announcement caused airline stocks to tank ever further.
Southwest’s CEO strikes a more upbeat tone
Southwest’s CEO says he gets why Berkshire Hathaway sold its stake in his airline, but he doesn’t agree with the reasoning behind it.
“That’s not an unreasonable view to take,” Mr Kelly told CNN in an interview.
“It’s a pessimistic one (view). I, for one, am far more optimistic.”
Mr Kelly highlighted the advantages Southwest Airlines has. Citing his domestic competitors, he said his low-cost carrier was better positioned to take advantage of a price-sensitive post-pandemic market than his higher overhead business traveler reliant competitors. Saying he had enough cash reserves, Mr Kelly thinks Southwest Airlines will be well placed to compete in the post-pandemic world.
The airline boss did acknowledge that if Mr Buffet’s bearish forecast was right, there would be a decrease in travel and tourism. But Mr Kelly doesn’t agree the future operating environment will be that grim.
“I believe this too shall pass. You go back to the Spanish Flu in 1918, it was followed by the roaring 20’s. Life will get back to normal. It is a question of how long that is going to take,” said Mr Kelly.
Berkshire Hathaway owned 51.3 million shares in Southwest Airlines, giving it a 10.1% stake. Southwest’s share price has declined by 45.8% this year. The price dropped substantially on the back of Berkshire Hathaway’s announcement earlier this week. Mr Buffet is estimated to have taken a USD$1 billion-plus haircut on the sale of the Southwest shares alone. No wonder he’s striking a pessimistic tone.