Warren Buffett’s big bet on airlines could have lost $3bn in three weeks

Coronavirus takes a bite out of Berkshire Hathaway’s investments in four airlines, as Jets ETF has dropped in 14 of past 15 sessions

The selloff in airline stocks resulting from the coronavirus outbreak could be costing Warren Buffett nearly $3bn over the past few weeks.

Buffett’s investment arm Berkshire Hathaway, of which he’s chair and chief executive officer, was Delta Air Lines’s largest shareholder with a stake of 70.91 million shares as of 31 December, according to Berkshire’s latest 13F filing with the Securities and Exchange Commission.

Berkshire also owned 42.5 million shares of American Airlines, 53.65 million shares of Southwest Airlines and 21.94 million shares of United Airlines, making him the second-largest shareholder in each of those airlines, according to FactSet.

The US Global Jets exchange-traded fund plummeted 9.0% on Thursday. Since 12 February, when the ETF started a 15-session stretch in which it has declined 14 times, that ETF has tumbled 32.1%.

That compares with an 18.1% drop in the Dow Jones Transportation Average and the Dow Jones Industrial Average’s 11.6% selloff over the same time, amid growing fears of the global economic impact of the coronavirus outbreak, which was first detected in China.

Over the same time, shares of American have lost 14.4%, Delta have shed 14.5%, Southwest have dropped 13.2% and United have given up 30.6%.

READ Citadel and Marshall Wace see bets against airlines pay off as virus spreads

On Thursday, shares of Southwest slumped 3.6% after the company cut its first-quarter unit revenue guidance, while United’s stock tumbled 13.3% after the carrier said it was reducing US flights and asking worker to take unpaid leave. Separately, the UK’s largest domestic airline Flybe collapsed on Thursday, with all flights being grounded.

If Berkshire’s holdings remain the same as of 31 December, the value of its investments in those carriers could have declined by a total of about $3.02bn since 12 February.

Keep in mind that Buffett is in it for the long haul, as he started nibbling on airlines during the third quarter of 2016, by buying 21.77 million shares of American and 4.53 million shares of United. He then loaded up on the sector during the following quarter, as filings show he owned 45.54 million shares of American, 60.03 million shares of Delta, 43.20 million shares of Southwest and 28.95 million shares of United, as of the end of 2016.

From the end of 2016 through 12 February 2020, American’s stock had lost 34.7%, while shares of Delta had gained 20.9%, Southwest had advanced 17.3% and United had rallied 12.8%. Over the same time, the Dow transports had slipped 0.4% and the Dow industrials had run up 32.2%.

Some Wall Street analysts suggested negative effects of COVID-19 on airlines could be short lived, as sooner-than-expected cuts in seat supply, like those announced by United, could help soften the effects of reduced demand.

“We continue to believe the US airlines under coverage are well positioned to weather demand headwinds and these proactive steps (re: capacity) are likely to help investor sentiment, albeit with headline risk (related to revenue/demand weakness) still elevated over the next few weeks,” Analyst Savanthi Syth wrote in a note to clients.

Meanwhile, Stifel Nicolaus’s Joseph DeNardi wrote: “First, we see the fact that the virus is novel, easily transmissible and likely under-reported (due to insufficient diagnostics) as leading to continued disruptions to domestic demand. Whether these disruptions will be short-term in nature will depend primarily on the asymptomatic nature of the virus.”

Source: Financial News

Can’t stop reading? Read more