In May, investor Warren Buffet confirmed he had sold $6.1 billion of shares in the four largest US airlines due to uncertainty in the future of the aviation industry. Although Buffet claimed he was aware that airlines could do nothing about the situation, he still felt the investment was unwise. Now, US President Donald Trump has criticized Buffet’s decision and highlighted the latest figures, which show shares at the four airlines are up, and recovery could be on the way.
Why did Buffet pull investments?
With global travel demand falling by around 90% due to the virus outbreak, it’s no surprise that the last few months have been tough for airlines. Revenues disappeared, and so share prices plummeted. But now, airlines were dealt another blow when famed investor Warren Buffet pulled his money and his confidence from the industry.
Buffet dumped $6.1 billion of shares in April this year. Previously Buffet held between 8% to 11% of shares in the big four; American Airlines, Delta Air Lines, United, and Southwest. He cited concerns over passenger numbers as a critical issue.
Buffet claimed that airlines would be stuck with planes in the short-term, which won’t be needed due to a lack of demand. He also said that as airlines in the US will have to pay back part of the loans given to them by the government under the CARES act, that airlines were not a good investment for the foreseeable future.
Donald Trump’s reaction
On Friday, President Trump said that although he respected Buffet, sometimes even Buffet made mistakes. At a White House press conference, Trump confirmed that Buffet “should have kept the airline stocks because the airline stocks went through the roof today.” At the time of Trump’s conference on Friday, Shares at American, Delta, Southwest, and United were up 18%, 9%, 5%, and 13%, respectively.
However, Trump has a vested interest in airline shares now. Part of the CARES act means that airlines handed over warrants. The US government can turn these into shares in the future. This means that the US government could own between 1-3% of each of the big four. It’s also important to remember that some airlines reissued shares to raise capital. This diluted the power of existing shareholders and could have contributed to Buffets’ decision.
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Signs of recovery
Although the boost on Friday may hint of positive things to come, airline shares are still down compared to the same time last year. The sudden rise on Friday was due to the Bureau of Labor Statistics data, which showed that the US unemployment rate was not as bad an experts had predicted. Consequently, shares prices soared across many industries, not just aviation.
Within the US, airlines are looking to operate more domestic routes as states begin to open up. With international travel restrictions still in place, airlines with robust domestic offerings within the US will fare better than competitors. But it isn’t all good news. Delta announced last week that it was still suspending operations. The airline announced the suspension of routes serving 11 destinations saying that demand, even on domestic routes, was still low.
Who was right, Buffet, or Trump?
Realistically, only time will tell. The current state of the industry means its not a surprise that Warren Buffet decided to sell. He has been vocal against investing in airlines for several years now. But with shares prices so low, and the industry in disarray, surely the only way is up. Trump may be correct in saying that selling was a mistake. But Buffet was certainly correct in saying that the future of the aviation industry is uncertain. However the industry recovers, it’s going to be a very different industry than before.
Let us know what you think about Warren Buffet’s decision in the comments section.