Has Warren Buffett broken his long-term investing principle with his dumping of airline stocks? His conglomerate, Berkshire Hathaway, recently sold its holdings in Delta Airlines and Southwest Airlines. In Canada, the country’s flag carrier is taking a major hit.
The National Air Council of Canada, the representative of larger air operators in the country, is requesting the government to act swiftly to help the aviation industry. Similarly, the Air Transport Association of Canada (ATAC) is sounding the call on behalf of the smaller airline companies.
Canada’s airline industry contributes about $49 billion to the country’s gross domestic product (GDP). The industry also employs around 60,000. While other governments in Europe and Asia, as well as the U.S., have announced direct financial support, industry representatives in Canada are desperately awaiting a bailout.
The temporary layoffs of employees have begun in Air Canada. As the airline company drastically reduces capacity, the layoffs of about 15,200 unionized workers and 1,300 managers will last through April and May 2020.
Letting go of 16,500 workers is a painful decision by management. However, the move will enable Air Canada to save at least $500 million as part of its cost reduction scheme. Its CEO Mike Rousseau will forego 100% of his salary while the rest of the executive team will take between 25% to 50% pay cuts.
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From buyer to seller
The sale of Buffett’s airline stocks was a surprise to investors. Berkshire has turned from buyer to seller. The company sold 13 million and 2.3 million shares of Delta and Southwest, respectively. Warren Buffett might sell his shares in American Airlines next.
Many view the losses of airline stocks are no longer tolerable. The airline industry is the hardest hit by COVID-19. Travel restrictions and border closures have practically brought the business to a standstill.
Air Canada has lost its wings. From $48.51 at the beginning of 2020, the share price has fallen by 65.84% to $16.57 as of this writing. During the same period, the market capitalization has gone down by $8.63 billion. It now stands at $4.37 billion.
The deal to acquire tour operator Transat is also in peril. It would have been the new growth driver for Air Canada. But with the grim outlook for travel companies, the acquisition might no longer push through.
Under the terms of Air Canada’s agreement with Transat, the buyer can terminate the intended purchase if there is a material adverse effect. The coronavirus is endangering the travel space and the businesses of companies operating in the industry.
Now that Warren Buffett has pulled the ejection seat, investors would be keeping a safe distance from airline stocks like Air Canada. Airline companies are facing zero revenues if the pandemic drags on for months.
The situation in the airline industry is nothing short of an apocalypse. Without a bailout, there’s no clear runway for Air Canada. This time, the nightmare of 2003 where Air Canada filed for bankruptcy might come true again.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool 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).