Warren Buffett: Avoid Air Canada (TSX:AC) Like the Plague?

Warren Buffett sold his entire holdings in airline companies because the chances of recovery are slim. Investors can rethink their positions on the Air Canada stock or maybe avoid it altogether.

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Commercial aviation never had it so good in the past two decades. It was a period of superheated growth, no less. Airline stocks soared in 2016 when Warren Buffett’s Berkshire Hathaway invested not just in one, but in four big airlines in the U.S. However, the American billionaire wasn’t expecting a pandemic to throw airlines into the boneyard in 2020.

Airline stocks crashed as travel demand abruptly collapse following border closures and lockdowns by countries. Buffett’s conglomerate sold its entire airline stock holdings in April and lost an estimated $5 billion. Across the border, it’s almost the same death sentence. Thus, should investors avoid Air Canada (TSX: AC) like the plague?

Profitless growth

Buffett told his shareholders in 2012 that investors were pouring money in airlines to finance profitless growth. It might be the case today if you were to invest in Air Canada. The company’s fortunes tumbled beginning in March 2020 then posted two consecutive billion-dollar quarterly losses.

Management has no control of COVID-19 that’s destroying the global airline industry. Air Canada sunk to the depths ($12.15 per share) on March 19, 2020. Although the stock is currently trading at $16.77 or 38% higher than its COVID-low, the year-to-date loss is 65.4%.

Don’t trim your position, sell all

In May 2020, Buffett gave the rationale for ditching all airline stocks. He said, “The world has changed for the airlines. And I don’t know how it’s changed, and I hope it corrects itself in a reasonably prompt way.” He adds that COVID-19 is the primary reason for the sale. The airline industry, among others, is hurt by forced shutdowns.

He explains that when Berkshire sells something, very often, it’s going to be the entire stake. The company doesn’t trim positions and that has been the approach always. If his firm likes a business, it will buy as much of it and keep it as long as Berkshire can. If they change their mind, the company won’t take half measures.

Like the four U.S. airlines, Air Canada is scrambling to save cash and stop the bleeding. Compounding the problem is the extension of border closures and the mandatory 14-day quarantine. For months now, the company has been begging the government to consider science-based alternatives to blanket quarantines.

Decimated industry needs liquidity

The Canadian government hasn’t come out with sector-specific support yet despite the crisis in the aviation industry. Heads of pilot associations and labour unions ask for a $7 billion loan to carriers at a one percent interest rate. Unifor, the country’s largest private-sector union, said Air Canada is in dire, dire straits.

According to Unifor President Jerry Dias, the company’s daily cash burn of $15 million is completely unsustainable. For Robert Giguere, head of the Air Canada Pilots Association, today’s decimating industry will impede the recovery for Canadians tomorrow and beyond.

Meanwhile, the International Association of Machinists and Aerospace Workers (IAMAW) proposes an alternative to arrest the “unparalleled devastation” of the industry. On October 20, 2020, the airline’s machinists’ union wrote the ministers of transport and finance asking to discuss returning the airline to government ownership. The plot thickens for Air Canada.

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) 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).

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