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Warren Buffett sells airline shares. Here’s what I’d do now

Warren Buffett announced at Berkshire Hathaway’s annual shareholder meeting that his company has sold its entire holdings in US airlines.

After avoiding the industry for years, Berkshire Hathaway started buying airline shares in 2016. Recently, it had a position in all four of the top US airlines.

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The coronavirus outbreak has caused air travel to grind to a halt. Unsurprisingly, with planes still sitting on the tarmac, aviation shares have plunged recently. For example, International Consolidated Airlines has dropped 68% since the start of the year.

Warren Buffett on airlines

For those who’ve read the Sage of Omaha’s legendary quotes, the selling off of his airline holdings seems to fly in face of being “greedy when others are fearful”. Why is he not following this advice?

Warren Buffett commented that “the world has changed” for airlines following the coronavirus outbreak and the companies looked like they would “chew up” money. He estimated that each of the airlines would need to borrow $10bn to survive the crisis.

Some UK-based investors might be banking on a government bail-out for airlines. I believe this is a risky strategy and I would only buy a company based on its own merits. In my view, a viable company needs to have strong cash flow, low levels of debt and be well-positioned against its competition. At the moment, most UK airlines don’t have these attributes.

For Buffett, the benefits of retrieving at least some of his capital outweighed making a loss. And he revealed that investing in the airlines was the wrong decision. At the conference, he said that “we took money out of the business basically even at a substantial loss.”

A question of cash

Although many of Berkshire Hathaway’s holdings have suffered due to the ongoing crisis, the business is sitting on a lot of cash: roughly $137bn.

Market analysts believe that this signals Warren Buffett believes stocks could fall further, which might make individual investors feel nervous.

However, Buffett has often said that he can’t predict what the market will do in the short term, but remains confident that in a few decades, businesses will continue to flourish.

With Berkshire Hathaway sitting on this amount of cash, I think it’s clear that he’s looking for a major acquisition, but can’t identify a suitable opportunity in the current market.

For those investing on a smaller scale, the situation is slightly different. Making an elephant-sized acquisition and buying a company in its entirety isn’t an option. With smaller sums, I would argue that there are plenty of opportunities to buy cheap shares in quality UK-listed companies.

Be like Buffett?

Should you sell your holdings in airlines like Warren Buffett has? This is a difficult question because there’s no indication of when things will return to normal. Realistically, it could be years before customer confidence returns. During this time, planes could be flying with low passenger numbers, and not generating the revenues that companies need to survive.

If I owned shares in any airlines, I would probably follow Warren Buffett’s move. I think my money would be of more use buying shares in companies that would benefit from the FTSE 100’s likely recovery.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.