Buffett, Airline Shares, and A Greener Future

Posted by James Hughes -
Scope Markets


We have seen some monstrous market moves over the last few weeks during the global pandemic. One of the most aggressive was the move that took the May futures contract for WTI oil into negative territory. Oil sellers were willing to pay buyers to take the stuff off their hands. Such aggressive market moves impact several industries, but airlines feel the shake.

A couple of weeks is a long time in the current reality we live in. Talks of easing lockdown in Asia, some parts of Europe and some US states led to oil price relief. The move back to more sensible levels is much better compared to -$40 per barrel seen a few weeks ago. To many, the easing of lockdown is a sure-fire signal that demand will pick up. Sooner or later energy firms might charge along yet again charging $80 per barrel.

There are two key reasons why this will not be the case. Firstly, demand might not pick up to the levels markets expect. Recent stockpiles numbers showed that storage was running near capacity. This means it would take a near full rollback of lockdown measures to even begin to clear the backlog.

The second is the Oracle of Omaha. The legendary American investor stated on the earnings call for his investment behemoth Berkshire Hathaway earlier this week. The company had dumped all of its US airlines stocks holdings with a stark warning that “the world has changed” for the aviation industry due to the COVID-19 outbreak.

Buffett & airlines shares

His comments sent shockwaves through not just the airline industry but the markets in general. It led to brief selling pressure on US stock indices, but maybe, more importantly, another move to the safe havens such as Gold and the Greenback as investors became reluctant to take on riskier assets.

The airline industry is already afloat with thousands of jobs already gone at large international carriers. Also, many airlines reduced the number of airports they operate from. This has been the case with Virgin Atlantic, bankrolled so successfully by billionaire businessman Richard Branson in the past. Flybe in the UK has gone into administration as has Virgin Australia. In the US, schedules saw a cut of 80% in June and July and demand for airline tickets dropped by around 95%.

Over the past two weeks, aviation production giant Boeing announced 16,000 job cuts, the equivalent to 10% of its workforce. Delta Airlines have asked 37,000 employees to take unpaid leave. American Airlines stated that the company will be significantly smaller than it was going into 2021. Understatement!

This is not to mention the airports. Unions stated that at least 13,000 union members in the US lost jobs with over 1,000 further layoffs planned.

Aviation fuel is a giant hole in the oil demand picture. Current predictions suggest that we could see a 33.6% total decline in aviation fuel, equal to approximately 2.4 million barrels per day.

When one of the world’s wealthiest people and renowned investment guru sold all of his portfolio’s aviation stocks that raises questions. Buffett claims the world of air travel will change fundamentally after the pandemic. He believes fewer people will fly, with fewer options for tickets.

The perfect opportunity to begin a greener future

The International Monetary Fund (IMF) said it before. However, they went one step further. The organization struck a cautionary tone when talking about a return to business as usual for the airline industry. Of course, there is a need for demand to pick up and for flights to resume. However, now seems like the planets opportunity to start from scratch when it comes to a greener future.

Taking measures now to fight the climate crisis does not seem like a nice to have. Instead is “a must-have if we are to leave a better future for our children”. Theoretically, this means that for the next couple of years we could well find measures being taken and more funds being made available from the IMF to renewables and more motivation for legislation to curb the world’s hunger for oil.

A green recovery from this crisis is the opportunity to make a dent in the climate crisis. We have already seen the hole in the ozone layer over the North Pole finally close and pollution levels clear over many major cities. A return to old ways would seem foolhardy and a blatant disregard for the crisis that had escalated to such an emergency in the years leading up to this.

Buffett warns on stock market rally

Stock markets rallied strongly over the last few weeks. Markets have been dominated by talks of lockdown easing, a return to everyday life and the prospect of a potential vaccine. Worries are that it seems very little attention turned to the economic impact of the crisis.

Once the health aspect of Coronavirus passed, and there are no new cases, the world could enter into the deepest recession seen since the 1930s. Warren Buffett yet again warned on the ability of the stock markets to recover. So far, we have seen a V-shaped recovery, with over 50% of stock market losses already recovered.

However, the Sage of Omaha stated that his view is that stock markets have yet to hit their lows. He stated there are no parallels where the most productive country in the world side-lined its entire economy and workforce. In short, Warren Buffett is not sure what comes next, and that’s a scary thought.

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