Warren Buffett sold all his airline shares. Should you sell too?

Warren Buffett, the legendary American investor, has decided to get rid of all of his airline stocks. This is presumably because he thinks it will take ages for the industry to return to profitability. The Oracle of Omaha chose to sell his entire stakes in United, American, Southwest and Delta Airlines. But I’m asking myself whether the future is really so grim for the airline industry as a whole? And how about top UK companies operating in this sector?

Why did Buffett sell?

In an interview Warren Buffett said” “I don’t know that three, four years from now people will fly as many passenger miles as they did last year… You’ve got too many planes.” This is essentially about the long-term demand for flights, sales revenue and profit. 

There’s a good chance that the airline industry will recover after the end of the global economy’s lockdown. Restrictions will be removed and many people will, arguably, start traveling again both for work and leisure. But there’s a problem. In the UK, as like all over the world, the Covid-19 crisis is the sharpest recession on record. Many people have lost their jobs and some economists argue that the worst is not behind the world yet. 

Many companies will not hire their workers back. As a result, the unemployment rate will remain high and many people won’t have enough cash to spend on holidays. So demand for holiday flight may not recover for a long time. And how about travel for work? Well, many enterprises are cutting their costs and will probably continue to do so for a while. These costs include paying for their employees’ business trips. 

FTSE 100 airlines

If all the arguments mentioned above turn out to be true, the demand for flights will stay limited for a long time. This will lead to the industry and its players shrinking in size. Companies could have to sell some of their assets, including planes. Large airlines like easyJet and IAG could be bailed out by the government, but will not operate on the same scale for some time.

Both of these airlines have already received so-called soft loans from the government. easyJet received £600m and IAG secured £300m. This certainly doesn’t solve all their financial problems since airlines are still burning cash during the lockdown. Still, it shows the government’s willingness to help the sector. However, it remains unclear whether these airlines will get more state aid. Richard Branson’s Virgin Airlines, for example, was advised to seek other ways of raising cash before applying for £565m of government funding. 

In my view, there will also be some consolidation in the airline industry and it’s likely to be a case of ‘survival of the fittest’. I think smaller airlines around the world may go bankrupt, whereas larger companies may get leaner and fitter.

Is the Oracle of Omaha right?

I agree it might not be the right time to buy airlines. In fact, it carries substantial risk. But there’s still a chance that larger airlines will survive and could represent an opportunity for risk-tolerant investors. Yet for those new to investing or seeking a safer home for their cash, I’d follow Warren Buffett and keep away. And I’d sell existing shares as there are better stocks to invest in today, I feel.