Was Buffett right about airline stocks? Testing vs. Quarantine

Rising COVID-19 cases has sent airline stocks spiralling lower, but it needn't be the case moving forward if testing replaces quarantine requirements.


Virus news

September is known as being a bad month for stock markets anyway but this year it also marks the beginning of Autumn (fall), where flu and virus cases seasonally rise after a lull in the summer.

The United States has exceeded the dreadful milestone of 200,000 COVID-related deaths but it is in Europe, which is now in the grip of a second wave where the situation is more worrisome. Numerous countries inside Europe, including the UK, France, Germany, Spain and Poland have recorded new daily records for number of cases.


In response this week the UK U-turned on its economic reopening plans, telling people to work from home if they can and closing pubs early at 10pm. Spain said Friday that Madrid will enter a new lockdown. These new measures in the UK and Spain have pushed the stock of British Airways and Iberia-owner IAG to a fresh record low.


The saving grace so far is that no new national lockdowns have not been introduced, with governments preferring track and trace systems where possible, and regional lockdowns when the infrastructure is not there for track and trace.


Airlines underperform

While the losses accelerated this week, it has been a multi-month pattern of underperformance from airline stocks. There was a brief period in May as economies began to reopen that beaten-down cyclical company stocks including airlines were bought up and out-performed benchmark indices, but it proved fleeting.

We compared the share price of some of the biggest and best-known global airlines with the S&P 500 as a global equity benchmark.

SPX = S&P 500
RYA = Ryanair
LHA = Lufthansa
AAL = American Airlines
EZJ = EasyJet
DAL = Delta Airlines
AF = Air France / KLM
IAG = International Consolidated Airlines (owns BA & Iberia)

Chart: Airline stocks (3-months)

Past performance is not an indicator of future results.

All the airline stocks listed are underperforming the benchmark US stock index over the past three months


Was Warren Buffet right?

“Investors have poured their money into airlines for 100 years with terrible results... It's been a death trap for investors.” - Warren Buffet, 2013

Warren buffet took some heat at the time, but it would appear his call to dump his airline stocks in March/April was probably a wise one.

The future for airline stocks over the short term likely will have little to do with the revenue per seat, load-factors and other such statistics reported by the companies. It likely hangs on government policy towards travel restrictions and consumer confidence, which are inter-linked.


Quarantine versus testing

This week the European Travel Commission (ETC) urged the European Commission to address the issue of the ongoing decrease in air passenger traffic. ACI Europe noted a 73% drop in air passenger traffic in the first two weeks of September.


The ETC wrote:
“European travel and tourism have suffered a devastating blow from the coronavirus crisis due to insufficiently coordinated border restrictions, declining traveller confidence and reduced consumer demand.”

It neatly defines the situation. Not only are people worried about catching COVID-19, they are put off by complicated travel conditions.

Coordination over travel restrictions on a national level is probably wishful thinking. Each nation will want to respond according to its own virus statistics.

In a worst-case second wave it is reasonable to think that people will be on either government or self-imposed lockdown with few likely deciding to travel overseas. In a more middle of the road scenario of higher cases but much lower death rates, the use of testing over quarantine would act as a sizeable incentive to travel and unlock some of the underlying demand from those who to travel for business in leisure but are put off by quarantine requirements.



Warren Buffett was probably right to hold off on airline stocks, though perhaps not forever.


Testing infrastructure should improve to the extent that governments will be able to rely on it and that will make travel options less confusing until a COVID-19 vaccine is available or there is herd immunity next year. By that logic, we are probably getting to the lows in international travel demand.



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