The Godfather of investing – Warren Buffett announced on Saturday that he had sold $6 Billion in US airline stocks. The news came as Buffett announced to the press that his infamous Berkshire Hathaway fund had decided to cut ties with the US airline industry. Buffett explained that after consideration he had decided buying into the US airline industry was a mistake. He went on to express how the future of the airline industry is still very uncertain. Buffett explains the four large airlines are very well managed however the industry itself faces a hard task in shifting consumers perspective in flying.
Highlight: Buffett on why he sold $6B in airline stock: "I just decided that I made a mistake in valuing… The companies we bought were well-managed… I don't know whether two or three years from now that as many people will fly as many passenger miles as they did." #YFBuffett pic.twitter.com/Whw28DrURN
— Yahoo Finance (@YahooFinance) May 2, 2020
Delta Airlines NYSE:DAL
Delta airlines has been a popular topic over the past 3 months as Buffett among other investors have shown interest in the company. Fast track to now, it seems DAL is likely to slip further as international travel seems unlikely until the end of this year. DAL earnings report on 22nd of April showed the grim reality of the entire industry. DAL recorded an EPS of -0.51, in comparison to an estimated -0.12. The stock is currently trading less than 50% it’s value at the beginning of this year. Now the good news is that DAL is likely to survive financially through this year as management is successfully cutting costs and raising enough capital to remain afloat. The real issue is the long term debt the company must payback over time. This will result in a sluggish growth in net profit. As well as likely postponing the idea of dividends until the company pays the subdued debt. However DAL will not be alone, as the big four airlines alongside the cruise industry will be in the same debt boat.
American Airlines NASDAQ:AAL
American Airlines headquartered in Texas, is currently trading 1/3 of it’s value PRE-COVID. The airline saw the worst performing balance sheet of the big US airlines. No demand for travel is squeezing the company of it’s liquidity. Evercore ISI analyst Duane Pfennigwerth went as far as putting a new target price of $1 on the company as investors fear the company may never recover. The company has over $34 billion in debt, causing great concern over the future of the company. The company recently posted a first-quarter net loss of $2.2 billion.
Never before has our airline, or our industry, faced such a significant challenge,” said American Airlines Chairman and CEO Doug Parker.
The future of American Airlines looks grim however with the right management and a fast recovery- AAL will be at unbelievable value. It seems this may be the biggest risk for reward case in the US airline industry.
United Airlines Holdings NASDAQ:UAL
The United Airlines are currently trading at roughly 1/3 of it’s value PRE-COVID. UAL reported losing $1.7 Billion in the first quarter. UAL was trading above $90 a share at the beginning of 2020, a huge blow for long term shareholders. The company estimates a cash burn of $40-$45 million per day. This illustrates the extreme impact of putting a pause on international travel.
“While we are still in the midst of this crisis, we will not hesitate to make difficult decisions we believe will ensure the long term success of our company,” Chief Executive Oscar Munoz.
Southwest Airlines NYSE:LUV
With a current market cap of $16.9 Billion, Southwest Airlines had undeniably the best balance sheet leading into COVID-19. The company has the lowest debt-capital ratio giving investors confidence in a faster recovery. With clever management, LUV has been able to cut costs efficiently and manage the crisis effectively. Although in a strong position, the next few months will be a incredible test for Southwest Airlines management. The company looks promising in it’s ability in handling this crisis, however only time will tell whether they can “walk the walk”.