Investor extraordinaire Warren Buffett sent shockwaves through the business world on Monday when he announced he would withdraw all investments from the struggling airline industry. While traders betting against airlines made a killing, others warn that Buffett may have made a severe mistake.
Selloff Puts Airlines Into Freefall
Buffett sold off his stakes in Delta, United, American, and Southwest. Stock prices were historically low for all four airlines when Buffett sold, further emphasizing his lack of confidence in the industry.
The response to Buffett’s move was almost immediate. Shares for all four plummeted further, with American Airlines (AAL) falling 7.7%, Delta Air Lines (DAL) falling 6.4%, Southwest Airlines CO. (LUV) falling 5.7%, and United Airlines Holdings Inc. (UAL) falling 5.1%.
On an industry level, the U.S. Global Jet Exchange-Traded Fund (JETS) plunged 10.1%, but ultimately closed the day at 4.3% down. This drop is shocking considering the U.S. market had a somewhat good day with the S&P 500 index up 0.4%. These data highlight what a uniquely difficult spot airlines are in, even compared to other ailing industries.
Buffett’s Stance on Airlines
“We were not disappointed at all in the businesses that were being run and the management,” Buffett explained, trying to clarify his dramatic decision. “The world changed for airlines.” Buffett insists that his decision was based on uncontrollable events related to the pandemic, as opposed to poor leadership within the airlines.
Part of the shock around Buffett’s decision comes from the fact that his holding company, Berkshire Hathaway Inc., had enormous stakes in airlines. It was the largest shareholder in Delta, owning 9% of shares, and the second-largest shareholder of American Airlines, Southwest, and United.
Still, Buffet conceded that he was “wrong” about airlines and, eager to relinquish himself from their drag, he sold his shares on Monday for far less than he had paid for them.
A Great Day For Some
The big winners on Monday were those who were betting against the airline industry. In a single day, these traders made $188 million in mark-to-market profits.
Ihor Dusaniwsky, the managing director at S3 Partners, a financial analytics firm, claims that continued short-selling should be expected for American Airlines, United, Delta, and Southwest. “Shorts, who are already deep in the money, should be letting their profits run as long as the airline stock prices trend downward,” he added.
Could This Decision Be A Mistake?
Two big unknowns for the airline industry are whether it has already seen the worst of the pandemic’s impact and whether the industry will ever be able to recover. The answer to both of these questions is likely, yes.
Data from the Transportation Security Administration (TSA) suggest that the worst has passed. Passenger traffic levels are down 93% from last year, which represents 2.3 million fewer travelers, but travel is picking up. Over the weekend the daily number of travelers doubled.
And investors seeking hope that these companies will pull through ought to look at their perseverance in the past. Between 2005 and 2008, 70% of U.S. airlines were operating under Chapter 11 bankruptcy protection. However, after the recession, the industry became profitable again, with annual global passenger counts increasing by about 2 billion between 2008 and 2018. This pandemic is a temporary setback, but it’s unlikely that people will stop flying forever.