It was only a couple of weeks ago that we looked at Warren Buffett’s 2019 letter to shareholders - a lot has happened between then and now.

In that piece, point two (“Acquisition discipline is key”) remains particularly relevant. Certain high profile Berkshire shareholders have expressed disappointment at the company’s lack of significant acquisitions over the past four years, but that c$130bn cash pile must look a lot more enticing now.

In recent years, Berkshire has been frustrated in its aim to buy good companies at attractive valuations. Given recent dramatic price moves, however, it is worth noting that Berkshire’s response has been to spend around $45m on Delta Air Lines shares. In upping its stake in Delta, Berkshire is living up to that famous mantra: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

But is this actually the time to be buying airlines? It looks like there is more short term disruption to come. If any contrarians out there are tempted, I would encourage caution and a keen focus on financial health.

Stock market Darwinism: how bad markets can help good operators

Let’s just get this out of the way: airline stocks are particularly risky investments. Low barriers to entry, brutal competition, high fixed cost bases and a weak negotiating position with suppliers are just some of the dangers. That said, you do get big winners as well.

Airline stocks have been clobbered in recent weeks. People are flying less. It is highly likely that most operators will report reduced business for at least a quarter or two. And while those sales might have evaporated, operating costs will be much stickier. This week’s crashing oil price could provide some welcome relief, but not immediately - most airlines work hard to hedge out oil price exposure.

It doesn’t take a genius to see that a market shakeout and possible sector consolidation is on the cards.

Shakeouts never feel good, but in the long term they are a net positive for quality operators. It’s a harsh, Darwinian truth. Good businesses with strong balance sheets can take advantage of market weakness while the competition suffers. This might be done through buying back stock, acquiring competitors at knockdown rates, or just investing for future growth at a time when others are fighting twice as hard to keep the lights on.

It is in such…

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