On Sunday, we heard that Warren Buffett has abandoned investing in airlines. And shares in easyJet (LSE: EZJ) and International Consolidated Airlines both lost ground on Monday. The easyJet share price fell 6% in early trading, with the International price down 4.5%.
Speaking at the annual shareholders’ meeting, Buffett revealed that Berkshire Hathaway had sold all its airline holdings. After steering clear of airlines for years, Berkshire had started buying in 2016, investing $7bn-$8bn.
UK airlines had already been in a big slump as a result of the Covid-19 pandemic. But loss of confidence in the sector from the world’s best-known investor surely won’t help.
Since the crisis hit, the easyJet share price has crashed 65% as aviation traffic has pretty much halted. It had been climbing in the second half of 2019, but that was after years of weakness. Even before the virus arrived, the easyJet share price had lost around 35% over the previous five years.
International Consolidated Airlines, the owner of British Airways, has seen its shares lose 68% of their value too.
easyJet share price
It’s easy to sound smug, and I really don’t mean to. But never buying an airline has always been a key part of my investing strategy.
There have been times in recent years when I’ve liked the look of the easyJet share price, as I think the company has largely been very well managed during its existence. But my conclusion has always been it’s only one for those who are prepared to take the risks that come with airlines.
I’ve had mixed feelings about International too, especially as its dividend had been climbing. Reservations about buying an airline are one thing, but a nice long-term income stream is very tempting. And, after some historic bad old days, I do think the company’s management was getting things right.
“It was a mistake”
It’s tempting to see Buffett’s airline sale as a knee-jerk reaction to a short-term problem. But it seems he’s looking at the longer-term prospects. Telling us he made a mistake, he added: “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.”
Buffett also noted something I think is relevant to UK investors tempted by the low easyJet share price, or considering becoming a part-owner of British Airways. He said: “I was wrong about that business because of something that was not in any way the fault of four excellent CEOs. Believe me. No joy of being a CEO of an airline.“
No control
That, for me, is the core reason why I’ve always resisted the easyJet share price. Airlines have their businesses largely dictated by factors outside of their control. No matter how strong easyJet’s management, there’s nothing they can do about fuel prices. And no matter how good its marketing, you can’t change the fact ticket price is all that matters to most flyers. Price competition is what gets seats sold, and that’s intense.
Now, obviously, nobody saw the coronavirus pandemic coming. But avoiding companies whose fates are largely outside of the control of their management teams is, I think, a sound part of my investing strategy. The easyJet share price still doesn’t tempt me.