Between 2012 and 2019, Air Canada (TSX:AC) shares rose 50 times in value. The coronavirus ended that run, sending shares 70% lower. Right now, thousands are betting that another big run is on the way.
Warren Buffett is typically a fan of these opportunities. He urges investors to be fearful when others are greedy, and greedy when others are fearful.
Plus, Buffett has proven willing to invest billions into the airline industry. At the end of 2019, he owned millions of shares in four different carriers.
Will Buffett jump into Air Canada stock? The answer is surprising.
History is messy
Buffett hasn’t always been a fan of airlines. Throughout history, some of his most famous quotes poked fun at the industry.
“When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: There’s really nothing to it. Start as a billionaire and then buy an airline,” Buffett wrote in a 1996 letter to investors.
That wasn’t the end of it, however. In 2007, he went into more detail. Competition and capital, he believed would make it hard for any airline to turn a long-term profit, including Canadian carriers like Air Canada.
“The airline industry’s demand for capital ever since that first flight has been insatiable,” Buffett explained. “Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
Just look at what Air Canada stock did from 2006 to 2009. In just three years, the company lost 95% of its value!
But times change. By the end of 2019, his holding company Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) owned stock in four different airlines. He thought the days of over-competition were finished. He was wrong.
Why Buffett hates Air Canada stock
Buffett dumped his entire airline portfolio earlier this year. Known for his long-term thinking, he threw in the towel uncharacteristically early. What changed?
“We took money out of the business basically even at a substantial loss,” Buffett revealed. “We will not fund a company…where we think that it is going to chew up money in the future.”
Just look at Air Canada. Last quarter the company lost $1.7 billion. The quarter before, it posted a $1.1 billion loss. This upcoming quarter, another billion-dollar loss is on the table.
This isn’t good. No company can do this forever. That’s what has Buffett scared.
Air Canada believes it has roughly $9 billion in liquidity left. At the current burn rate, it may go bankrupt before the end of 2021. The clock is ticking.
The problem is that every airline is in this position. They’re on the brink of collapse. But the planes themselves are fine. No matter what happens to the companies, the planes will still exist.
That’s the crisis in a nutshell. For years to come, industry profits will remain elusive. There’s just way too much supply versus demand. That’ll cause pricing to remain low for longer than these airlines can survive.
Why isn’t Buffett buying Air Canada stock? Because he’s not sure the company will exist in 12 months.
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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) 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 December 2020 $210 calls on Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned.