Taking a Flyer
David Simmonds

Oh, to be Warren Buffett. You write off an $8US billion investment in the airline industry. You show a first quarter loss of about $50 billion. Yet, everybody still calls you a genius. 

Ten percent ownership amounts to eight billion dollars.

Prior to April 2020, Berkshire Hathaway Incorporated, the company headed by Buffett, held approximately ten per cent interest in four major US airlines, an investment of about $US8 billion. In April, Berkshire Hathaway sold its airline industry stock, which Buffett admitted “was for less than anything like what it paid for it.” Buffett said he will not fund a company that “is going to chew up money for the future.” 

If I had charge of the Buffett investments, I’d have been out of a job and out of a career faster than you can deal me into a bridge game. So, too, will the poor sod that recently lost a cool $2.1 billion for the Alberta pension fund corporation AIMCl on derivative contracts for safe short-term income. 

Why is the 89-year-old Warren Buffett, the Oracle of Omaha, thought of as a hero? To start off, he has a long history of superior returns for his investors. Thus, he went into 2020 with a haystack-sized amount of goodwill. 

On top of that, Buffett takes responsibility for his actions. He admitted the airline investment was a mistake. He bet on the industry itself rather than a company by buying shares in multiple carriers. “I am,” Buffett said, “the one who made the decision.” Contrast that with the usual amorphous mistakes-were-made executive level admissions.

Furthermore, Buffett made a cold-blooded decision not to stick with a dubious investment on its way to the gutter. That requires discipline, because it runs contrary to our natural proclivity to postpone the unpleasant feelings brought on by taking a loss. Of course, it softened the blow at the same time his company was sitting on a balance sheet that included cash on hand of US137.3 billion.

Despite his home-spun demeanor Buffett is tough.

His modest lifestyle, plainspokenness and personal longevity also make Buffett an endearing character. He is known for his forthright and lengthy presentations to annual meetings of his company. He has pledged 99 per cent of his wealth to charity. He has encouraged the US government to substantially increase the taxes paid by the billionaire class to which he belongs. He says he is a long-term investor who believes in the American economy.

The wonder of the transaction is that Berkshire Hathaway was able to find a buyer for its shares at any price. Somebody, obviously, a believer in magical thinking was prepared to take a gamble that airline shares would go up in value. Demand for air travel has fallen by about ninety-five per cent in the pandemic.

We may all be flying again soon, but the volatility of the airline industry makes the prospect of solid returns for investors a very dicey proposition. It is almost inevitable that the federal government is going to have to step forward in a bigger way than it has to date. The question is how far down the priority list air travel lies.

Onex Corporation must be wondering what it has bought for the $5 billion it paid for WestJet last year. That was before anyone had heard anything of the novel coronavirus. Let’s hope Onex is a long-term investor.

The thrill has gone out of air travel. Sure, it’s handy to think of being able to travel from Toronto to Vancouver in a single day. The hassles of lining up to process your ticket, pass security, board, deplane and get your luggage, combined with being confined to a wedged-in seat, make the experience unpleasant.

Now, everywhere you go in an airport or on a plane you are reminded you are running the risk of infection. The fact that not as many people will be travelling and therefore lineups shouldn’t be as long is offset by the requirement to wear a mask and submit to questioning about your health, with the chance that you won’t be allowed on the plane at all. In addition, if Greta Thunberg gets to run the world, air travel will acquire the same stigma as smoking or meat eating and the government will invest in fleets of trans-oceanic catamarans to replace fossil fuel guzzling aircraft.

Good luck Onex.

Good luck to the airline industry. Best to Onex and those that invest in it. It just won’t be me or Warren Buffett.