How will Buffett steer through the airline crisis?

Interpreting Warren Buffett's actions from one crisis to the next.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Thinking back to the last financial crisis, Warren Buffett played a big role in calming chaotic markets. While sensationalist analysts were calling for the end of public equities as we know them, Buffett's company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) was taking his own advice by exercising greed while others chose fear. 

Buffett is not a stock trader. Instead, rigorous quantitative analysis, an artistic touch, and extensive management evaluation are all time-consuming prerequisites for Berkshire Hathaway deciding on an investment. To put it plainly, Berkshire Hathaway covets a time horizon longer than most.

In 2009, Berkshire Hathaway used the financial crisis as a chance to initiate large investments in American banks, the sector at the root of all economic pain. While Buffett called a stock market bottom nearly a full year too early, it did not matter. The call showed confidence and inspired tranquility in financial markets desperately trying to find their footing. In the previous crisis, he stuck to his guns as an investor, and inspired anxious investors to do the same. He did not subscribe to frightening current events; instead, he tuned out the noise.

Buffett's coronavirus strategy

The coronavirus pandemic offers us our next case study of Buffett functioning in a global crisis. The current pandemic is similar to the financial crisis in that both are overwhelmingly frightening, and temporary. Neither catastrophe enjoys a definitive end date, but an end date is inevitable, nonetheless.

Berkshire Hathaway bought aggressively in 2009 after the market's historic crash, but not during this tumble. So far, Buffett has sold, at a sizeable loss, stakes in Delta Airlines (NYSE: DAL) and Southwest Airlines (NYSE: LUV) just weeks after adding to them. The dichotomy of reactions when comparing the 2008 crisis to this one is notable to say the least.

Warren Buffett's behavioural change is not a matter of financial health. Berkshire Hathaway has the liquidity to make mammoth investments. Its balance sheet boasts zero long term debt and features a $124 billion cash and equivalents position, compared to just $59 billion in 2009. The result is a publicly traded company with a massive amount of funds available for investment, not one strapped for funds.

So what happened?

Dissecting recent moves

Since we know Berkshire's financial health isn't in question, it is important to note that Buffett sold just enough stock in each of the two airlines to reduce the stake below 10% of the float. Under SEC regulations, any stockholder owning over 10% of a public equity is considered an affiliate. Affiliate status subjects an investor to Second-Step Acquisition (SSA) oversight by the Federal Government. Importantly, this affiliate status induces regulatory oversight for any subsequent affiliate acquisition of the same company, or of a related company. This means if Berkshire Hathaway wanted to make a large purchase in the aviation industry, affiliation status with Delta or Southwest would have jeopardised the process. 

By avoiding affiliation status, Buffett gains more flexibility to make a big splash elsewhere. But the company's continued silence raises questions. I believed the sales were setting them up for something big, but it has been weeks since the abrupt airline trades, and markets have strongly recovered from wash-out lows.

The inaction in Nebraska could be a less favourable outlook on this crisis than the past one, but I don't see it that way. Instead, I think the Warren Buffett playbook is being complicated by historic federal intervention. The federal government has shelled out record levels of liquidity over the last few weeks, via fiscal and monetary easing, trillions of dollars in liquidity has been granted to corporations and individuals to try and ease the pain of the Coronavirus. Airlines are receiving payments to keep employees on payroll, and the federal reserve continues to expand their lending programs to include more companies.

Most of the hard hit industries are being supported by Washington D.C, meaning Warren Buffett must compete with federal disaster loans carrying low to zero interest coupons. That is steep competition, compared to the favourable terms Buffett and his firm locked in during the financial crisis. To compare, Berkshire was paid 6% by Bank of America preferred shares to take a stake more than a decade ago. This time around, If Berkshire Hathaway opted to compete with the more involved federal government, the real return would have been inferior. It is possible that Buffett wants to wait for the dust to settle to identify industries not already aided by the government.

Interesting weeks ahead

Each morning, I open my computer, half expecting to see a headline about Berkshire Hathaway buying a struggling blue-chip company. S&P multiples have been trimmed dramatically from February highs, iconic brands have seen their stocks crumble, but I still see it as a possibility. Perhaps federal intervention prevents Buffett from getting the terms he wants, or maybe his view on the American economy has finally soured, but I don't think so. I think there are things in the works and he is biding his time. Regardless, following the activities of the Oracle of Omaha is always a fascinating practice.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Bradley Freeman has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares), Delta Air Lines, and Southwest Airlines and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). shares), The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

Digital rocket on a laptop.
Broker Notes

Is the Nvidia share price on course to reach US$1,400?

You betcha, says one analyst.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Could Nvidia become the most valuable stock on earth?

Can anything stop the Nvidia stock price?

Read more »

A group of young ASX investors sitting around a laptop with an older lady standing behind them explaining how investing works.
International Stock News

What can ASX investors learn from Warren Buffett's latest buys and sells?

We've just found out what Buffett's been buying and selling recently.

Read more »

electric vehicle such as Tesla being charged at charging station
International Stock News

Why Tesla stock tanked in January

Will the electric vehicle leader see earnings decline once again in 2024?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

Will Nvidia stock be worth more than Microsoft by 2030?

The graphics giant has been growing at a much faster pace than Microsoft, but can it sustain that momentum?

Read more »

Man with hands in the middle of two items with money bags on them.
International Stock News

Stock-split watch: Is Tesla next?

Stock splits are fun. But how much substance there is in Tesla splitting its stock is debatable.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

Yes, Microsoft is a star AI stock, but this is what really powered its solid second-quarter results

Deep involvement with artificial intelligence (AI) has made the company popular with investors, but that isn't (yet) the top motor…

Read more »

Search toolbar with a finger pointing to it.
International Stock News

Why Alphabet stock was sliding today

Shares of the tech giant pulled back on weaker-than-expected ad revenue in its fourth-quarter report.

Read more »