Why Warren Buffett's Berkshire Hathaway Dumped Big Four Airline Stocks
Warren Buffett, one of the world's most renowned investors, has never been a fan of the airline industry. His disapproval of the sector dates back decades, with him highlighting the challenges inherent in such businesses. In his 2007 shareholder letter, Buffett stated, "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." This was an early warning of the struggles to come in the aviation sector.
Buffett’s Criticism and Current Investment Strategy
Buffett's skepticism towards the airline industry is a reflection of its structural weaknesses. The industry is characterized by high fixed costs and tight profit margins. In his Berkshire Hathaway investor letter, Buffett emphasized, "There is no tougher job in corporate America than running an airline: Despite the huge amounts of equity capital that have been injected into it, the industry in aggregate has posted a net loss since its birth after Kitty Hawk. Airline managers need brains, guts, and experience."
Berkshire Hathaway's decision to divest from major airline stocks in April was a strategic move based on Buffett's long-term insights and investor principles. The airline industry was among the first to be severely affected by the global coronavirus pandemic. When lockdown measures were implemented, revenue for these companies plummetted almost immediately, leading to widespread bankruptcies.
The Shift in Perspective
Personal experience and academic credentials play a significant role in shaping an investor's perspective. My degree in transportation and years in the industry have taught me that investing in airlines and trucking companies can be particularly precarious. These sectors are cyclical, with assets often being intangible and their presence on specific routes labor-intensive and highly unionized. These factors can create significant volatility and make long-term profitability elusive.
Starting a trucking company is relatively easy, but starting an airline, even with the right people, can be challenging due to the high potential for financial distress and bankruptcy. Southwest Airlines (LUV) is a notable exception, as it is a stable player in the industry, but even they face significant challenges such as millions spent on depreciating assets like aircraft and difficulty controlling fuel expenses and labor costs.
Why Buffett Sold Out
Buffett’s decision to sell airline stocks was a pure indication of his keen eye for fundamental changes in the business landscape. The airline industry is unlikely to recover quickly from the pandemic-induced blow, and there are no shortcuts to achieving profitability. This is why Buffett took the step to divest from these companies. Many investors, including Buffett, have trades they regret, and this was one of his.
Buffett’s ability to recognize these shifts and act accordingly is a testament to his reputation as a shrewd investor. His decision to sell indicates that he saw the long-term challenges facing the airline industry and made the prudent choice to reallocate capital to more promising sectors.