If you’re an investor in airline stocks, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) delivered some bad news on Friday. Charlie Munger, Warren Buffett’s long-time right-hand man, gave an extensive interview with the Wall Street Journal. In it, Munger dumped a huge bucket of cold water on folks expecting a quick turnaround in the economy. Munger’s comments are particularly bad news for Delta Air Lines (NYSE:DAL) stock and other large Berkshire Hathaway holdings.
You see, at this time, psychology is driving the trading action in Delta and other airline stocks. As our Chris Markoch put it, economics just don’t matter right now because we have no idea when aviation demand will come back. There are too many outstanding questions around when the virus will be contained, if there will be a second wave, how deeply the economic damage will run, and so on.
Air traffic could get back to, let’s say 80% of normal by the end of the year. Or it could be down for quite a few years as business travel slumps and consumers prefer to avoid airports and other densely crowded areas for a while. In the absence of hard data and clear models, trading sentiment will rule the day. And on that front, Charlie Munger just dropped a huge piece of negativity into the mix.
Berkshire Sells Some of Its Airline Holdings
Two weeks ago, Berkshire disclosed that it has sold off some of its shares in Delta and also Southwest Airlines (NYSE:LUV). This seemed like a negative for those stocks.
Some bulls tried to spin it as a positive, however, suggesting that Berkshire was strategically reducing its stockholdings. Why would they do that? For one, it might have looked bad optically for Berkshire to be a huge holder of a company receiving a government bailout. By reducing its stake, Berkshire would potentially get less heat for taking part in a major taxpayer-funded rescue.
Additionally, investors speculated that Berkshire might be getting ready to make a big move. By reducing stakes below the 10% threshold in Delta and Southwest, it would open a path for Berkshire to buy out an entire airline on the cheap. Whereas, if it had held big stakes in various airlines, it might have complicated antitrust concerns in trying to completely buy one out. That was the theory anyway.
Munger Shoots Down Imminent Takeover Chatter
While anything is possible, the idea that Berkshire is waiting in the wings to acquire an airliner now appears to be off the table. In his interview, the reporter asked Munger if companies were calling to try to make deals with Berkshire. Munger emphatically said no, and specifically called out the airlines for not doing anything:
The typical reaction is that people are frozen. Take the airlines. They don’t know what the hell’s doing. They’re all negotiating with the government, but they’re not calling Warren. They’re frozen. They’ve never seen anything like it. Their playbook does not have this as a possibility.
So much for all the rumors that Berkshire was getting ready to make a huge move in the airline space. It’s hard to read Munger’s quote and still think that Berkshire is about to buy out DAL stock or another U.S. airline entirely.
Furthermore, Berkshire doesn’t appear to be in the mood to go on a big buying spree regardless of whether the airlines were asking for Berkshire’s help or not. Munger suggested that this could be the worst storm of their lengthy investing career, and that they wanted to keep their cash on hand rather than plowing everything into the market now. Berkshire Hathaway famously waited until near the 2008-2009 financial crisis lows before deploying major funds into distressed companies. Their reluctance to act now suggests that the bear market may have another wave coming this summer.
The Verdict on DAL Stock
If you purchased DAL stock on the idea that Berkshire was going to be the company’s white knight, it’s probably time to abandon that idea. It seems that the airline industry isn’t finding practical solutions to the current mess yet. Rather, it is just hoping for further government assistance to keep muddling along.
The problem is, however, that the clock is ticking. Sure, Delta and other airlines received substantial grants and loans from the CARES Act. But how long will it last? Delta alone paid more than $11 billion in salaries and related costs in 2019. And a condition of the government aid is that the airlines can’t fire their employees. Needless to say, it won’t be anywhere near profitable to keep paying out $11 billion per year in salaries while flying mostly empty planes around the country.
Delta and other airlines got their rescue money. But it won’t last forever. Meanwhile, the bailout euphoria is already wearing off. Sentiment could swing sharply lower for DAL stock in the coming days and weeks.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned shares of the B-class of Berkshire Hathaway stock.
