Berkshire Hathaway Cuts Delta, Southwest Stakes With Airlines In Freefall

Industry is suffering worst-ever crisis on virus pandemic. Carriers see bleak outlook, apply for U.S. Treasury lifeline.

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Warren Buffett’s Berkshire Hathaway Inc. unloaded shares this week in Delta Air Lines Inc. and Southwest Airlines Co. as U.S. carriers braced for an unprecedented collapse in travel demand because of the coronavirus pandemic.

Berkshire cut its Southwest holding by 4% and its Delta stake by 18%, according to regulatory filings Friday. That reduced the exposure of Buffett’s company to an industry in freefall, with Delta predicting a 90% drop in second-quarter sales and competitors making similarly dire forecasts.

U.S. airlines, which enticed Berkshire three years ago despite Buffett’s longtime skepticism of the industry, are now turning to the government for financial aid as passengers stay home amid the viral outbreak. Drastic cuts to flight schedules reflect the virtual disappearance of U.S. airline traffic, with barely more than 150,000 passengers flying nationwide on any given weekday compared with normal loads of more than 2.2 million.

“I wish I could predict this would end soon, but the reality is we simply don’t know how long it will take before the virus is contained and customers are ready to fly again,” Delta Chief Executive Officer Ed Bastian told employees. “Unfortunately, even as Delta is burning more than $60 million in cash every day, we know we still haven’t seen the bottom.”

Delta fell 10% to $20.15 after the close of regular trading in New York, with Southwest and other airlines down as well. A Standard & Poor’s index of major U.S. carriers has tumbled 60% this year, paced by the 74% drop of United Airlines Holdings Inc.

Federal Aid

Airlines are applying for federal aid as the government steps in with cash assistance for passenger carriers of $25 billion to help make payroll, plus another $25 billion in loans.

United and American Airlines Group Inc. — in which Berkshire also owns stakes — are seeking help, as are Delta, Southwest, JetBlue Airways Corp. and Alaska Air Group Inc. The carriers submitted proposals for payroll assistance Friday. Several said they would negotiate terms in the coming days with the U.S. Treasury, which declined to comment.

But as their customers stop flying, the companies said they would be forced to do more to reduce costs and seek additional capital because the government aid won’t be enough.

About 30,000 of Delta’s workers have applied for unpaid, voluntary leaves and “we continue to need more volunteers,” Bastian said.

Parked Jets

JetBlue is parking more than 100 planes out of its fleet of 259 and cut its April flying schedule by 70%.

“We’ve shared with you in the past weeks the unprecedented decline in demand for travel, and the situation continues to deteriorate,” JetBlue CEO Robin Hayes said in a message to employees.

United is chopping about 80% of its capacity this month to curb costs, with even larger cuts planned in May. The weakness is likely to linger, with United planning for sales “at least 30%” lower in the fourth quarter than in the same period last year, according to a regulatory filing.

The airline said it will “proactively evaluate and cancel flights on a rolling 90-day basis until it sees signs of a recovery in demand.”

Berkshire has seen enough to pare its holdings. Buffett’s company still has a $1.32 billion stake in Delta and a $1.57 billion investment in Southwest. Berkshire has to report mid-quarter changes because its holdings in those airlines are above a 10% threshold.

Berkshire Investments

Buffett’s company also has previously reported investments in American and United, but doesn’t have to disclose changes to those stakes as frequently since he’s below a 10% ownership level. Buffett’s assistant didn’t immediately respond to a message seeking comment.

The billionaire was a longtime critic of the airline industry after making a bet on US Airways that he called a “mistake.” He even once joked that capitalists should have shot down the Wright brothers’ plane and saved money for investors.

In late 2016, however, Berkshire revealed major investments in the big U.S. airlines. Buffett has said that some of the issues in the industry had stabilized as competition dwindled.

Berkshire’s large stakes have stoked speculation that it could buy one of the airlines given that Buffett’s company had nearly $128 billion in cash at the end of the year. But the investor said in February that that would be “very unlikely” since such a deal would be complicated in the highly regulated industry.

Since then, the airlines have plunged into the worst crisis in their history.

“If anyone tells you that they’ve seen anything like this before,” said JetBlue’s Hayes, “don’t believe them.”

— Bloomberg


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