Southwest CEO says Warren Buffett is too pessimistic about airlines' future

Warren Buffett's Berkshire Hathaway sold its entire stake in airline stocks, including Southwest. CEO Gary Kelly says a "low-fare environment" will help Southwest survive the coronavirus crisis.

Posted: May 7, 2020 4:31 AM
Updated: May 7, 2020 4:31 AM

Southwest Airlines CEO Gary Kelly says he understands why he just lost Warren Buffett as one of the airline's biggest shareholders.

But he doesn't agree with Buffett's bearish view on the future of the US airline industry. Buffett disclosed Saturday that Berkshire Hathaway recently sold its entire stake in Southwest and the three other major US airlines because he believes it will take years for air travel to recover.

"I don't think anybody knows, and certainly that's not an unreasonable view to take," Kelly told CNN in an interview Wednesday with Poppy Harlow. "It's a pessimistic one. I am far more optimistic."

Berkshire also disclosed a nearly $50 billion loss in the first quarter, greatly due to the drop in the value of its investments. All the airlines have reported losses in the first quarter so far. Southwest reported its first quarterly operating loss in 11 years as demand for air travel plunged. All of the airlines are expecting even deeper losses in the current quarter.

Until recently, Buffett's Berkshire Hathaway had owned 10.3% of Southwest and more than 10% of Delta, American and United airlines, making him one of the top three biggest shareholders in each. But at his annual meeting Saturday, he said he doesn't believe airlines will be a good business for the foreseeable future.

"I think it changed in a very major way," Buffett said of the airline industry, while adding that he hoped he was wrong about that outlook.

"I don't know whether it's two or three years from now that as many people will fly as many passenger miles as they did last year," Buffett said. "The future is much less clear to me about how the business will turn out through absolutely no fault of the airlines themselves."

And he said that even if 70% to 80% of the business comes back, "the aircraft don't disappear. So you've got too many planes."

But Kelly said he doesn't believe the industry is facing a prolonged decline in the demand for air travel.

"I believe this too shall pass," he said. "You go back to the Spanish Flu in 1918, it was followed by the roaring 20's. Life will get back to normal. It is a question of how long that is going to take."

Kelly said business and international travel will take longer to return to normal compared to domestic leisure travel. Southwest depends less on business and international travel than its larger rivals American, Delta and United.

"We've got to have multiple planning scenarios," he said, adding that Southwest has looked at a scenario where travel doesn't pick up from current levels by the fall. In that case, "you would have a fraction of the airline industry. I just don't think that's the future."

If demand for travel doesn't rebound, he said Southwest and other airlines will need to cut tens of thousands of jobs. Other airlines have already signaled that that they will be cutting jobs after Sept. 30, when prohibitions against job cuts in the federal bailout of the industry ends. But Kelly said he's not predicting job cuts at Southwest yet.

"We're going to do everything we can to preserve jobs," he said. If demand doesn't improve from current levels "we would have to dramatically downsize .... I don't think that's the future. We're working hard to make sure that doesn't happen."

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