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Buffett’s Grim View of Air Travel Realized in $10 Billion Charge

Bloomberg logoBloomberg 8/8/2020 Katherine Chiglinsky
a man standing in front of a window: A traveler wearing a protective mask walks past an American Airlines Group Inc. plane tail fin at Ronald Reagan National Airport (DCA) in Arlington, Virginia, U.S., on Tuesday, June 9, 2020. U.S. airline shares last week headed for a record weekly gain as investors bet that travel demand was poised to rebound on signs that passengers were returning after the Covid-19 pandemic devastated demand. © Photographer: Bloomberg/Bloomberg A traveler wearing a protective mask walks past an American Airlines Group Inc. plane tail fin at Ronald Reagan National Airport (DCA) in Arlington, Virginia, U.S., on Tuesday, June 9, 2020. U.S. airline shares last week headed for a record weekly gain as investors bet that travel demand was poised to rebound on signs that passengers were returning after the Covid-19 pandemic devastated demand.

(Bloomberg) -- Warren Buffett’s dire airline predictions have hit close to home.

After dumping his stakes in airlines earlier this year with a warning that the pandemic had unleashed fundamental change on that business, Buffett’s own Berkshire Hathaway Inc. took a roughly $10 billion impairment charge tied to Precision Castparts, its massive maker of plane parts. A vaccine may be the only remedy for the pandemic’s “particularly severe” impact on the aerospace market, Berkshire said.

“The Covid-19 pandemic produced material declines in commercial air travel during the second quarter,” Berkshire said Saturday in a regulatory filing discussing second-quarter results. “Airlines responded by reducing and/or cancelling aircraft orders, which is resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives being implemented by PCC’s customers.”

At Berkshire’s annual meeting in May, Buffett announced a full reversal on his airline bet, with his conglomerate going from one of the biggest shareholders in all four major U.S. carriers to owning none. A rally in airline shares over the next month had critics including President Donald Trump saying Buffett had erred, but the S&P 500 Airlines index is down 26% since that early June high.

Despite those stock sales, the Omaha, Nebraska-based company still had a significant exposure to the air travel slump through Precision, a business it bought more than four years ago in a deal valued at $37.2 billion.

Read more about Buffett’s Precision Castparts bet here

Now, Precision has had to restructure, including by cutting 10,000 employees in the first half of this year. The business reported a pretax loss of $78 million in the second quarter, compared to a profit of $481 million in the same period a year earlier.

Berkshire expressed caution about when this pain might end.

“In our judgment, the timing and extent of the recovery in the commercial airline and aerospace industries may be dependent on the development and wide-scale distribution of medicines or vaccines that effectively treat the virus,” Berkshire said in the filing.

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