Warren Buffett is MORE LIKELY to purchase an individual airline than sell all his airline positions.

by boccherini-trader

Here’s some insight into Warren Buffett’s selloff of Delta Airlines (DAL) and Southwest Airlines (LUV). The backing away from airline stocks marks something of a reversal for Warren Buffett. The investor bought more Delta stock several weeks ago. Buffett told Yahoo Finance less than a month ago that “I won’t be selling airline stocks.” Why did Buffett sell so many shares of DAL and LUV yesterday? Thoughts below:

  1. Warren Buffett reduced his ownership of DAL and LUV to under 10%, so he does not need to report every trade he makes. Prior to this sale, Buffett owned over 10% of DAL and LUV. Because of his significant ownership in the companies, he needs to report every move he makes to the SEC. With his ownership reduced to <10%, Buffett can buy and sell DAL and LUV without needing to report it until the end of the quarter. Now his airline stakes are all <10%.
  2. Buffett is NOT selling DAL for cash to invest elsewhere. Berkshire Hathaway is currently sitting on $128B in cash. Buffett has plenty of ammunition to buy any stock he likes. Therefore, his move to sell DAL and LUV is NOT to free up money to purchase other stocks.
  3. Buffett may be about to make a dramatic move as airlines have ~3 months without government aid until it runs out of cash. We will use DAL as a representation of the airline industry. Accounting for cash and cash equivalents and credit withdrawal only, DAL only has 3 months of cash left given its CEO reported the company is burning through $60M per day. Of course, this is not accounting for government support, other current assets, and cost cutting (e.g., furloughing employees). With these measures, DAL may have a few months above water. Given the situation that DAL is in, Buffett is likely about to make a dramatic move – either sell off his remaining airline positions or purchase 100% shares of an airline company.

Here are three things Buffett may be doing in order of likelihood:

  1. High Likelihood: Buffett is simply trimming his positions so they are under 10% stake. Buffett has mentioned several times that he likes to own less than 10% stake for reporting reasons, specifically in regards to airline stocks. He may have just trimmed his stake to <10% and plan on holding there.
  2. Moderate Likelihood: Buffett is reducing stakes in DAL and LUV as it plans to acquire and competitor airline. Prior to Buffett’s acquisition of Burlington Northern Santa Fe (BNSF) railway, he scaled down his position in Union Pacific (UNP) and Norfolk Southern (NSC) railways about a year before his purchase of BNSF. If Buffett is thinking about purchasing an airline, which he has contemplated in the past, he may be targeting American Airlines, which he currently owns the largest stake in (10%). Keep in mind that before he extended a tender offer to BNSF, he owned 17% of the company. Finally, Buffett already owns NetJets, the world’s largest private jet company.
  3. Low Likelihood: Buffett reduced his shares to <10% so he does not need to report his complete exit from airlines. There is speculation that Buffett is reducing his stake to under 10% so he can exit airlines completely without needing to report his trades. We believe this is unlikely because Buffett’s mantra is “be greedy when others are fearful”. Airlines are not going anywhere as the U.S. is one of the most globalized nations. The only reason why Buffett may be selling is if he fears the government stake in airlines will be at a significantly reduced price. With this said, he may as well just buy the airline at that point to not sell at a complete loss.

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.