Why did Warren Buffett sell his airline shares?

In a very un-Buffett like move, Berkshire sold $314 million worth of Delta and $74 million worth of Southwest shares last week. We want to know why.

In a filing with the SEC on Friday, Berkshire Hathaway (NYSE:BRK.B) disclosed that it had sold 13 million shares of Delta Airlines (NYSE:DAL) and 2.3 million shares of Southwest Airlines (NYSE:LUV). The sales represented 4% of its Southwest holdings and a whopping 18% of its Delta holdings. As Berkshire owned more than 10% of both companies at the time, it falls under insider-selling regulations and is forced to disclose its activities with the Securities and Exchange Commission (SEC). 

The move was a surprising one for a number of reasons: 

  • It had just purchased nearly a million shares of Delta in late February at the start of the wider market sell-off 
  • Buffett said “I won’t be selling airline stocks” in an interview only three weeks ago
  • He’s locking in losses, contradictory to Buffett’s style of investing which has brought him to where he is today 

So why did Buffett sell?

Reducing exposure to the airlines industry

It is no secret that the airline industry is one of the hardest-hit by the coronavirus. Air travel is down roughly 92% from the same time last year and the sector has been decimated. Berkshire also owns significant stakes in United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL), and it’s estimated that the reduction in valuations of the 4 respective carriers has caused a $5 billion hit to Berkshire’s portfolio. As it does not own more than 10% of United or American, it does not have to disclose any sales. We may find that when Berkshire files its 13-F statement that it has reduced its airlines holdings across the board. 

As airlines begin to apply for the payroll grants and loans offered by the U.S. government in order to keep the industry afloat, they are forced to adhere to the regulations attached to the bailout. This means no buybacks, no dividends, and being forced to maintain certain routes throughout the pandemic, irrelevant of demand. While the government is taking no equity in return for these grants, it is the logical next step if there is a need for further funding. Having Uncle Sam on the board is not a good outcome for investors, as profits and increasing shareholder value fall down the priority list in favor of maintaining essential services to customers. 

Has the long-term prospects of the industry intrinsically shifted? Could government regulations, even more debt, and a potential long-term aversion to discretionary travel have soured Buffett’s outlook? Perhaps he read my piece on why airlines may never fully recover. I mean the article was written Thursday and the news of the sales came Friday, a little bit too much of a coincidence if you ask me.   

Or maybe there’s another reason why Berkshire sold some of its airline holdings.

Buffett no longer has to disclose his trades

Buffett and Berkshire previously owned 11.1% of Delta and 10.4% of Southwest, meaning any sale or purchase of shares would have to be disclosed to the SEC. This meant every move Buffett makes would make the headlines and cause stocks to move. Case and point: Friday’s announcement triggered an 11% dip in Delta’s stock price and 9% in Southwest’s in after-hours trading. The stocks have since recovered slightly, but it is a big problem for many institutional investors; they can’t reallocate a portion of their stake without adversely affecting the rest of it. It’s important to note that Berkshire is only selling a small portion of its overall holdings of both airlines, yet the reduction in share price caused by its sale has hurt its portfolio.

The sale of the nearly $400 million in shares over the week has brought Berkshire’s ownership levels below 10% for both companies. This means he no longer has to disclose trades to the SEC and the impact of any sale he makes will be reduced. Considering he still owns 9.9% of Southwest and 9.2% of Delta, this could very much be the motivating factor behind the sell-off. 

Whether it is to get the SEC off his back or if he’s slowly reducing exposure to airlines as a whole will come out in the wash when Berkshire releases its 13-F statement. What it has done with its American and United holdings will tell us a lot about the motivations behind the Oracle of Omaha’s seemingly out-of-character sell-off.

One promising thing to come out of this is that Berkshire has added to its cash reserves, freeing up money to potentially add to its positions in Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) at a coronavirus-induced discount, or perhaps even purchasing a company outright, as Buffett is want to do. Either way, the Oracle of Omaha sitting with this much dry powder in a discounted market is an exciting prospect.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.