Entering text into the input field will update the search result below

Warren Buffett Is Wrong About The Airlines

May 06, 2020 10:03 AM ETALK, DAL, JBLU, LUV139 Comments


  • Warren Buffett revealed on Saturday that he had sold all of Berkshire Hathaway's airline stock positions. Airline stocks fell on Monday in response.
  • Buffett expects the recovery in travel demand to be extremely slow. As a result, he believes airline fleets are too large and debt levels will become unmanageable.
  • The pace of the demand recovery is impossible to predict, but Buffett's other concerns appear misguided.
  • Alaska Air Group, Delta Air Lines, JetBlue Airways, and Southwest Airlines shares all appear undervalued.

Airline stocks plunged again on Monday after Warren Buffett revealed at the Berkshire Hathaway (BRK.A) (BRK.B) annual meeting that Berkshire had sold all of its airline shares. Considering that the conglomerate had accumulated major stakes of 8-11% in all four of the largest U.S. airlines over the past few years, this marked a big shift in Buffett's thinking.

At a high level, this decision to exit the airline industry is understandable. For decades, Warren Buffett has prioritized investing in high-quality businesses. Given that airlines are burning cash rapidly in the current environment and it's not clear when they will return to positive cash flow, airlines may no longer meet Buffett's investment criteria.

That said, some of the rationales Buffett gave for selling Berkshire's airline stocks don't hold up to scrutiny. To be sure, some individual airlines face a difficult future. I have previously described how American Airlines (AAL) and United Airlines (UAL) will struggle to adapt to lower demand in the near term due to the former's massive debt load and the latter's high exposure to long-haul international travel and undersized domestic hubs.

However, rivals like Alaska Air (ALK), Delta Air Lines (DAL), JetBlue Airways (JBLU), and Southwest Airlines (LUV) probably won't end up as overleveraged as Buffett fears and have more levers to get back to breakeven than he may appreciate. As a result, their shares represent compelling bargains at their current, marked-down prices.

An Alaska Airlines plane flying over clouds

(Source: Alaska Airlines)

Airlines are not the terrible businesses they once were

In the two months since the COVID-19 pandemic crushed air travel (and caused airlines to start burning cash), many airline bears have reverted to some of the traditional stereotypes about the industry: namely that airlines are eternally doomed to destroy investor wealth.

For many years, Buffett held that view, and with good reason. As he described

ChartData by YCharts

This article was written by

Adam Levine-Weinberg is a value investor who has been researching and writing about stocks for Seeking Alpha and The Motley Fool since 2011. He graduated from Swarthmore College in 2007, received an M.A. in Political Science from the University of Chicago in 2009, and received his CFA charter in 2017. He is always on the hunt for irrationally beaten-down stocks, particularly in the aerospace, retail, real estate, and auto sectors.

Analyst’s Disclosure: I am/we are long ALK, DAL, JBLU, LUV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am also long Jan. 2021 $40 calls on LUV and Jan. 2022 $10 calls on JBLU.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.