Delta Air Lines (NYSE:DAL) announced April 30 that it obtained $5 billion in new financing and would be applying for $4.6 billion in loans under the CARES Act. That wasn’t enough to keep Warren Buffett invested in DAL stock.
The Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) founder and CEO told shareholders Saturday at the company’s virtual annual meeting that he sold all four of his airline stocks, jettisoning a $6 billion investment.
If you’re thinking about getting Delta stock, here is why only the most risk-tolerant investors should consider making a bet.
Buffett Admits He Was Wrong About DAL Stock
Warren Buffett is one of the most patient investors on the planet. If he’s given up on the airlines, that’s a pretty strong signal that the industry isn’t coming back anytime soon.
“It turned out I was wrong about that business because of something that was not in any way the fault of four excellent CEOs … ” Buffett stated during the company’s virtual annual meeting.
“The airline business, and I may be wrong and I hope I’m wrong; I think it changed in a very major way and it’s obviously changed in the fact that their four companies are each going to borrow an average of at least $10 or $12 billion each.”
Could he be wrong about the long-term implications of the novel coronavirus on the airline industry? I suppose so, but it’s important to remember that Buffett was once anti-airlines.
In 1989, Buffett bought $358 million in convertible preferred US Air stock. Those preferred shares paid 9.25% interest, convertible into common stock at $60 a share. The investment was good for 12% of the company. The shares never reached $60 and wrote down his investment at the earliest point possible.
US Air ultimately merged with American Airlines (NASDAQ:AAL) in 2013.
In 2002, Buffett told The Telegraph what he thought about the airline industry.
The airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.
In 2013, at Berkshire Hathaway’s annual meeting, Buffett reiterated his disinterest in the airline industry, suggesting, “If it ever gets down to one airline it will be a wonderful business.”
So, it’s astonishing that Berkshire bought into airline stocks in 2016. Less than four years later, Buffett’s come to realize that his original aversion to airline stocks was the right call.
How Much Did Berkshire Lose on Delta?
According to Berkshire’s 2019 annual shareholder letter, the company’s cost for 70.9 million shares of Delta stock was $3.125 billion. That’s an average of $44.07 a share. At the end of the year, Berkshire’s Delta investment was up 33%.
On April 3, Berkshire announced that it sold 18% of its Delta shares for prices between $22.96 and $26.04. It held 58,900,759 shares after divesting those shares. Between April 2 and April 30, Delta shares had a high of $27.60 (April 29) and a low of $20.76 (April 6).
Let’s assume Berkshire got the mid-point between the high and low, for an average realized sale price of $24.18. On the 12 million it sold in early April, let’s assume it got $24.50 a share on average.
So, Berkshire lost approximately $1.4 billion on 70.9 million Delta shares it held as of Dec. 31, 2019.
Interestingly, Berkshire Hathaway added 976,507 shares of Delta stock on Feb. 27 at prices between $45.48 and $47.14 for an average price of $46.31, which means it lost an additional $22 million on shares it held for no more than two months.
One can assume Buffett won’t be in a hurry to repeat this performance with DAL stock or any of its other airline holdings.
You might want to take the hint and stay away from Delta until the situation gets healthier.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
