U.S. Airlines Tumble After Buffett Abandons Bet on Industry

(Bloomberg) -- U.S. airline stocks plummeted Monday after Warren Buffett dumped his stakes in the four biggest carriers, saying the industry's prospects had been upended by the coronavirus pandemic.

The airline industry has been one of the hardest hit sectors amid the Covid-19 outbreak that has decimated air travel, with countries and cities around the globe imposing lockdown measures in an effort to tackle the spread of the infection. The S&P Supercomposite Airlines Industry Index has fallen about 60% since Feb. 20 when the broader virus-related sell-off began, while the S&P 500 Index is down about 16% over the same period.

Shares of United Airlines Holdings Inc., American Airlines Group Inc., Delta Air Lines Inc. and Southwest Airlines Co. were among the biggest decliners on the nine-member index that dropped as much as 12% Monday.

Buffett, once a prominent skeptic of volatile airline investments, changed his stance in 2016 after years of consolidation in the industry gave rise to a small number of players positioned to churn out profits. His decision to exit now underscores the diminished potential of the companies that once enticed him: American, Delta, Southwest and United.

“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 May 2, explaining why he took losses to dump his holdings. “The future is much less clear to me.”

Buffett's comments also weighed on the shares of plane-maker Boeing Co. and jet-engine producer General Electric Co.

United and American declined to comment on Berkshire's decision to sell shares. Southwest didn't immediately comment. Delta declined to comment on the share sale, but said in an emailed statement it has “tremendous respect for Mr. Buffett and the Berkshire team.”

The sector faced one more setback after Barclays analyst Brandon Oglenski downgraded the group to neutral from positive, and also lowered his rating on American and Delta. “Apart from not knowing when revenue will return for an industry collectively burning an estimated $20 billion of cash this quarter, sizable debt balances and yet unknown structural cost burdens loom large,” the analyst wrote in a note to clients.

Oglenski said American's debt burden limits its ability to “dynamically respond” to swings in demand, while Southwest's balance-sheet capacity should allow it to outperform in a post-pandemic period.

Southwest's Chief Executive Officer Gary Kelly also praised the airline's finance and legal teams Monday for “what can only be described as a bold, brash, audacious move” in raising an additional $4 billion last week from the sale of notes and its first equity offering in nearly three decades.

The carrier is now focusing on stepped-up cleaning procedures and social distancing to assure customers it's safe to return to airports and airplanes.

“We've got cash in the bank and now we're really shifting gears to put in place an environment where customers can come back and travel and be confident, where our employees can also be confident in serving our customers,” Kelly said.