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Warren Buffett: Was He Wrong About Air Canada (TSX:AC)?

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Investors worldwide look towards Warren Buffett for investment decisions that they can make in response to different market situations. Buffett has made a name for himself due to his largely successful career in stock market investing in the last several decades.

Warren Buffett took on several airlines in his massive investment portfolio through his conglomerate Berkshire Hathaway. Airlines began rising to soaring heights at the start of 2020. However, the onset of the pandemic sent them crashing down. Buffett grabbed the emergency parachute and jumped out of the airline sector in April.

His aversion to airlines was clear, and it means Canadians seeking airline stocks might not be considering Air Canada (TSX:AC) to align with this move by the Oracle of Omaha. Did he make a mistake about airlines? Let’s discuss the situation to help you make a more well-informed decision about the battered airline stock.

Rare Buffett failures

Warren Buffett is known for his successes over the years. He is the Oracle of Omaha, but that does not mean he cannot make mistakes. Buffett hunts for value, because that is how he has become a billionaire. He purchases shares of companies that might not seem like they are in a good position but have immense potential.

Buffett did that when he bought Goldman Sachs in 2009 to make gigantic profits. However, he also bought Berkshire Hathaway in 1962, a textile company that was dying at the time. He considers it one of his biggest investing mistakes. He also invested in US Air back in 1989 but sold his shares, because he said investing in airlines is like funding the companies’ losses.

Buffett’s opinion on airlines a few years ago

Buffett seemed to have a change of heart regarding airlines when he purchased four of the most significant airline stocks in the United States. However, he expressed caution to investors. He said, “I think there have been almost 100 airline bankruptcies. I mean, that is a lot. It’s been a disaster for capital.”

Buffett chose to invest in the airlines, because the companies had begun making more profits as the demand for air travel increased. The profitability of airlines can only increase when there is significant demand. Until 2019, there was a significant demand, and airlines increased their capacity to transport people. The result was more cash coming in for greater profits.

Buffett on airlines recently

The pandemic came along to change everything. As the pandemic grounded almost all commercial flights, that growing demand disappeared into thin air. The only reason Buffett invested in airlines managed to collapse amid the pandemic.

Before the pandemic, these planes were minting money for shareholders. However, the same planes began burning through millions across airlines by sitting idle. Buffett sold off $6 billion of airline stock.

It comes as no surprise that Air Canada also suffered from COVID-19’s impact on air travel demand. The flag-carrying airline retired a third of its fleet and canceled orders for more aircraft. The company is taking all possible measures to help the government ease travel restrictions, trying to generate some revenue by transporting the vaccines as well.

Air Canada is still a better investment to consider compared to most U.S. airlines. It has most of the market share for airlines in Canada, and its acquisition of Transat A.T. spells good news for the Canadian airlines. Air Canada also had a stronger balance sheet going into the pandemic.

Foolish takeaway

While I cannot say that Buffett will invest in Air Canada himself, the airline could be a valuable investment to consider. If normalcy resumes and Air Canada can achieve its pre-pandemic business, the airline could return to better valuations.

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Fool contributor Adam Othman 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: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares).

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