Warren Buffet may be the most legendary Wall Street investor of all time. With that being said, this topic seemed quite suiting for our first article. Thanks Mr. Buffet.
Buffet has been famously known for his rather simple investing strategies. Famously put, the man himself once said, “Our favourite holding time is forever”. Only if millennial day traders could get that through their heads. Only if…
So why did the Berkshire Hathaway founder finally give in to the low stock prices and sell his entire share airline stock when they finally went on sale after the atrociously long bull market came to a crashing halt?
1. The Airline Industry Will Require Large Quantities Of Third Party Debt
According to the most recent annual Berkshire Hathaway shareholders meeting, Warren predicts that airlines are going to have to take on a minimum of $10 billion in loans in order to coast through these troubling times. That’s right, 10,000,000,000 D O L L A R S, and that’s for each individual airline. When the time comes for these airlines to pay back these enormous loans, it is very likely that they will be forced to use shareholder earnings in order to hack away at the debt. From an 89-year-old investors perspective, this certainly doesn’t seem very appealing as it could be years before he would see his money generating a fair return.
2. No One Knows If The Airline Industry Will Make A Full Recovery
The problem with investing during times like these is that no one knows where the bottom is. While times like these provide promising opportunity to those who choose to invest different businesses wisely (such as various tech companies), it also brings great risk to other industries. For example, Air Canada had a peaking price of around $51.54 back in-mid January and the stock is now priced at a whopping low of only $9.26. To most investors this seems like a great opportunity to make a fortune, however, these truly are unprecedented times and to Warren’s concern, he’s not 100% sure that the airline industry will recover to what it once was. Granted that Warren Buffet was not a shareholder in Air Canada, this serves as an extreme example of what most American Airlines will be facing in the near future.
3. Airline Profit Margins Are Likely Going To Drop… A Lot
With the significant decrease in demand for international flights across the airline industry, there will be a surplus of supply and a deficit of demand. Now supply and demand works a little bit differently for airlines because even if demand is low, airlines still have to pay the full cost of production for their flights. So even if demand is low, plane tickets may or may not fluctuate in price as much as people are anticipating they will. That being said, Buffet thinks there is going to be a major increase in competition across the airline industry resulting in major net operating losses. More specifically, he predicts there will be billions lost in operating revenues.
So Is Now A Bad Time To Invest In Airlines?
Well, I’m not sure. It could be a very good time to invest in airlines. But that’s a risky bet to take because no one knows where the bottom is and if airlines will ever recover to what they once were. To be fair, most airlines like Boeing and Delta have a decent amount of operating cash to get them through the next little bit, but this is a long term game and if they don’t make a complete recovery, Warren would have made the right move by selling when most investors are buying.
Time will tell.