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Warren Buffett: “I Made a Mistake” About Airlines

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“The world has changed for airlines.” Those were the exact words of Warren Buffett after his admission that investing in the airline industry was a mistake. The billionaire investor had $4 billion invested in four American airline stocks.

Buffett’s conglomerate Berkshire Hathaway dumped all its stock holdings in American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines. The revelation shook the industry such that few investors will dare take positions in the sector from here on out.

Mighty wings are gone

Air Canada (TSX:AC) was flying high in 2019 until COVID-19 clipped its wings in 2020. All top global airlines crashed in unison. Air pollution has been diminished significantly, as only cargo planes are taking flight.

Canada’s most dominant airline posted $1 billion in losses in the first quarter of this year and continues to bleed. The federal government is in a dilemma and exploring options for saving the drowning air travel sector.

Available support

The Canada Emergency Wage Subsidy (CEWS) is offering a 75% wage subsidy so that employers like Air Canada can keep workers in the payroll or rehire laid-off employees. So far, the country’s flag carrier is not participating in the program. It has until June 6, 2020, to avail, although it could extend up to August 2020.

Effective May 11, 2020, the Large Employer Emergency Financing Facility (LEEFF) program is available. Large for-profit businesses in all sectors, excluding the financial sector, can apply for the new program. LEEFF will provide at least $60 million bridge-financing to large corporations.

Air Canada has yet to confirm if it will avail of LEEFF. The financing access can help contain the bleeding but only in the short term. Fixed costs, such as maintenance costs, among others, are fast rising. With little or no revenues coming in, airline companies are burning vast sums of money.

The federal government might need to come up with a specialized program. Otherwise, Air Canada will be dead in the water soon.

Grim business outlook

One of the cost-reduction measures of Canada was the mass layoff. In April, the company laid off some 16,500 employees, including customer service agents, flight attendants, and mechanics.

On May 15, 2020, management announced it is letting go of 50-60% of the workforce. According to some sources, Air Canada will offer flight attendants the option to slash schedules, go on a two-year leave, or resign with travel privileges. The move aims to minimize the number of layoffs.

Air Canada can no longer afford to keep a workforce that is supposed to handle 1,500 daily flights. The company was previously transporting 51 million passengers a year and flying 258 aircraft. The sad reality is that Air Canada is presently operating at only 5% of full capacity.

Follow Buffett’s lead

Warren Buffett said his mistake was understandable, as he did not foresee the industry downturn. Everyone has known since 2003 that the value investor did not have an interest in the air travel business. His intuition was correct, but he paid a heavy price.

The fate of Air Canada is doomed. Investors should avoid airline stocks because the runway for growth is closed.

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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). The Motley Fool recommends 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).

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