Warren Buffett is waving goodbye to aviation stocks, should you follow the billionaire investor?

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Published: May 4, 2020 3:40:15 PM

“The world has changed for the airlines and I don’t know how it’s changed,” said ace investor Warren Buffett at the annual general meeting of Berkshire Hathaway last Saturday, after his company sold all their holdings in four of the largest airlines in April.

Big relief for air traveler! government orders Airline to give full refund to passenger booked ticket during first phase of lockdown for travel up to May 3 amid covid19 outbreakSince the troubled carrier Jet Airways taxied towards bankruptcy, Spice Jet and IndiGo have gone on to fill the void.

“The world has changed for the airlines and I don’t know how it’s changed,” said ace investor Warren Buffett at the annual general meeting of Berkshire Hathaway last Saturday, after his company sold all their holdings in four of the largest airlines in April. The move sent warning signals to investors across the globe, hinting that a lot has changed for the aviation sector nudged by the coronavirus pandemic that has locked people inside their homes. Under a complete lockdown in India since the end of March, airlines are staring at a negative earnings performance in the January-March quarter, according to experts. So, should you follow what Buffett is doing blindly or are there some players that could offer things differently in the Indian aviation industry?

While home-grown carriers like IndiGo and Spice Jet had announced a cut in salary earlier in April to save cash during the turbulent times. Since then IndiGo the largest domestic carrier has gone on to roll-back the salary cut for employees with only the top management biting the bullet. “Apart from IndiGo, given whatever strength it has in terms of the balance sheet or cost structure, that is only investable stock during the current pandemic times,” Paarth Gala, analyst Prabhudas Lilladher. Despite the tussle between the top leadership of IndiGo the strong market share that the carrier commands and not dwindled. “When things normalise, it (IndiGo) will be coming stronger from this given the efforts that it has put in over the years. But that is not the case for everyone,” warns Parth.

Since the troubled carrier Jet Airways taxied towards bankruptcy, Spice Jet and IndiGo have gone on to fill the void. Analysts at Edelweiss Securities earlier last month predicted a sharp fall in the aviation industry’s profitability with revival in financial year 2022. “Although yields are down 5%/10% YoY for Indigo/ SJ, airlines have somewhat benefited from lower fuel prices, keeping a shield for airlines. Yield pressure is primarily on domestic routes with slackening demand. Low PLFs for Indigo/ SJ at -1%/- 5.5% YoY may have added on to the pressure on prices,” Edelweiss Securities said. The brokerage recommended investors to ‘buy’ Spice Jet with a target price of Rs 79 apiece and ‘Hold’ IndiGo with a target price of Rs 961 per share.

“With Warren Buffett, selling for airline stocks post the COVID-19 condition, clearly highlights the fact that the entire dynamics of this industry is in for a sea change going forward,” said Aamar Deo Singh, Head Advisory, Angel Broking Ltd. “Aviation industry in India is in serious trouble, with travel coming to a grinding halt, and with fixed costs and other various costs, it’s becoming very difficult for this sector to survive for long, if such as the current scenario continues for a few more months. As per the International Air Transport Association, Indian aviation could see a 47% fall in passenger demand, with 3 million jobs at risk, he added while advising investors to maintain caution while trading aviation stocks. 

The dent in the aviation industry has also attracted the clouds of uncertainty over the sale of Air India that the government was planning this year. With airlines still unsure when they will be able to resume operations it is not clear how the recovery will plan out for the sector. “Investors should wait before investing in airlines as we no clarity on when they start flying again. When they do, then we will understand how things go for them depending on how much they can carry with them,” Gala added. Given the domestic dependence of both Spice Jet and IndiGo the damage done will not be as bad as seen in the western countries but the impact will be severe, he added. 

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