• Berkshire pulled out of United Airlines , American Airlines , Southwest Airlines and Delta Airlines
  • In April, all carriers posted their first quarterly losses in several years
  • Buffett had shunned airline stocks prior to 2016

In a stunning blow to the U.S. airline industry, Warren Buffett, CEO of Berkshire Hathaway (BRK-B) said his conglomerate sold off its entire $4 billion stake in U.S. airlines at a loss due to the ongoing negative impact of the coronavirus outbreak.

Super investor Buffett had held equity positions in United Airlines (UAL), American Airlines (AAL), Southwest Airlines (LUV) and Delta Airlines (DAL).

“The airline business -- and I may be wrong and I hope I’m wrong -- but I think it’s changed in a very major way,” Buffett said. “The future is much less clear to me… I hope it corrects itself in a reasonably prompt way… I don’t know if Americans have now changed their habits or will change their habits because of the extended [lockdown] period.”

Air travel demand has plunged, thousands of aircraft have been grounded, routes have been eliminated and carriers have cut numerous jobs or asked employees to take unpaid leave.

"We took money out of the [airlines] business basically even at a substantial loss,” Buffett said. “We will not fund a company that... where we think that it is going to chew up money in the future... It is a blow to have, essentially, your demand dry up. It is basically that we shut off air travel in this country."

Berkshire had an 11% stake in Delta, 10% in American and Southwest each, and 9% in United. These stocks have plunged between 46% and 70% so far this year. In April, all four carriers posted their first quarterly losses in several years.

Buffett added: “I think there are certain industries, and unfortunately, I think that the airline industry, among others, that are really hurt by a forced shutdown by events that are far beyond our control.”

Buffett took responsibility for his airline investments.

“We put, whatever it was, seven or eight billion [dollars] into [airline stocks] and we did not take out anything like seven or eight billion [dollars],” Buffett said. “That was my mistake.”

Berkshire’s decision was highly unusual since the company rarely cuts positions in stocks or industries.

“When we change our mind we don’t take half measures or anything of the sort… When we sell something, very often it’s going to be our entire stake,” Buffet explained. “We don’t trim positions. That’s just not the way we approach it any more than if we buy 100% of a business… If we like a business, we’re going to buy as much of it as we can and keep it as long as we can. And when we change our mind we don’t take half measures.”

Buffett emphasized that while he still admires the airlines and the industry’s managers, the unexpected coronavirus pandemic required a dramatic change in his investment thesis.

“When we [initially] bought [airline stocks], we were getting an attractive amount for our money when investing across the airlines,” he said. “It turned out I was wrong about that business because of something that was not in any way the fault of four excellent [airline company] CEOs. Believe me. [There is] no joy [in] being a CEO of an airline.”

He added: “We were not disappointed at all in how the businesses were being run… The companies we bought were well managed. They did a lot of things right. It’s a very, very, very difficult business because you’re dealing with millions of people every day and if something goes wrong for 1% of them, they are very unhappy.”

Buffett was also pessimistic about the industry’s immediate future.

“I don’t know that three, four years from now people will fly as many passenger miles as they did last year,” he said. “You’ve got too many planes… The airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear.”

Buffett also warned these airlines are going to be burdened with huge debts which will hurt earnings and shareholder value.

“The four companies are each going to borrow perhaps an average of at least $10 or $12 billion each,” Buffett said. “You have to pay that back out of earnings over some period of time… In some cases they’re having to sell stock or sell the right to buy stock, That takes away from the upside.”

In response to Berkshire’s decision, Delta said it has "tremendous respect for Mr. Buffett and the Berkshire team.”

Interestingly, Buffett had shunned airline stocks prior to 2016. He once told shareholders that “if a farsighted capitalist had been present at Kitty Hawk [in 1903 during first successful flight], he would have done his successors a huge favor by shooting Orville [Wright] down.”

However, Bloomberg reported that Buffett still remains heavily exposed to the air travel sector. For example, Berkshire still owns all of Precision Castparts Corp., a maker of aerospace parts that faces pressure as Boeing Co. (BA) and Airbus cut production. Buffett purchased Precision Castparts in 2016 in a deal valued at $37.2 billion – one of his biggest ever transactions.

Buffett himself acknowledged the vulnerability of Precision Castparts.

“We’re going to have aircraft in this country, we’re going to be flying. But the real question is whether you need a lot of new planes or not and when you’re likely to need them and it affects a lot of people,” Buffett said. “And it certainly affects Precision Castparts, it affects General Electric (GE). It obviously affects Boeing.”

James Armstrong, president of Henry H. Armstrong Associates, noted: “It’s good for Precision Castparts that they’re not a standalone public company right now, because if they were, they’d certainly have a very low stock price. It’s not great news for them, but I don’t think that business goes away. I think it slows down.”

But Bill Smead, chief investment officer of Smead Capital Management, thinks Buffett made a mistake in buying Precision Castparts.

“That’s a big-time dud,” he said. “[Buffett] obviously in retrospect made a real bad whole-company purchase.”