2020: Has Berkshire changed its policy of retaining underperforming subsidiaries?

Becky Quick:
This next question is a followup on that. It comes from Chris Fareed of Philadelphia. And he says, “It’s been a longterm policy of Berkshire to not sell or close any ongoing subsidiaries as long as their business prospects weren’t a money hole.” Over the last year, he points out the sale of Berkshire Hathaway media. And then Charlie’s comments from that interview saying that several small Berkshire subsidiaries will not be opening when the coronavirus lockdown is lifted. “So should shareholders assume that Berkshire has now changed its longterm policy in regards to keeping underperforming subsidiaries around?”

Warren Buffett:
I think that policies were spelled out for maybe 30 years or so. An addendum in the annual report that we have said that if a company, or if an operation, we think that its prospects are that it will continually lose money in the future, that we’ll try to sell it to somebody else. But one way or another we will not continue to hold it.

Warren Buffett:
And that that is not a new policy and it’s not been changed. You can say in effect, we did that with the airline industry to some extent. If we owned all of an airline now, it would be a tough decision to decide whether to sustain billions of dollars in operating losses when you don’t know how long it’s going to happen or occur. And secondly, you know that it’s very likely that there’ll be too many planes around.

Warren Buffett:
And we know what happens in airline pricing, when load factors go down and there’s an oversupply of airline seats. So we didn’t have to make that decision in terms of our own operation on it, but we did make a decision that that’s a very tough management decision to make. And the government of course is as well, they’ve had the first wave of financing for the airlines.

Warren Buffett:
But to the airlines credit, they have very aggressively raised money. I mean it’s amazing to me what a good job they’ve done of that. And I think in the case of three of them, no, two of them, but there may be more coming, that they’ve raised equity money too. They are saying that the debt holders and investors, you’ve got to put more money into this business if we’re going to be able to continue. And the government’s done it. And private sources have done it and it’s exactly the right thing for the managements to be doing. But whether it makes sense, we’ll find out for the investors.

Becky Quick:
This next question comes from Eric LaFont and it’s directed to Greg. He asks, “How is Precision Castparts handling the severe slowdown in the aerospace industry?”

Greg Abel:
So very consistent with everything we’ve just discussed, which is obviously a large part of their business is the aerospace industry, and it can really be broken into three areas as we do in our queue, but two are being impacted.

Greg Abel:
The defense contract business remains very sound and strong within Precision Castparts, but if you look at the large body aircraft, the aircraft that they use within the regional jets, that business will move directly with the demand there. And the jets that are ordered longer-term. So Precision Castparts is literally as we speak, continuing to adjust their business relative to the demand that would come out of Boeing.

Greg Abel:
They would be having weekly calls with Boeing, recognizing what are their production orders there and adjusting the business accordingly.

Warren Buffett:
Boeing raised 25 billion just a day or two ago, and they raised 14 billion before that. And a year ago they felt they were in a fine cash position. And I understand not all that happened.

Warren Buffett:
Airbus has had the same situation. They’ve made some comments reasonably within the last week. The fact that they really don’t know what their future is, and I don’t know what their future is. We’re going to have aircraft in this country, we’re going to be flying.

Warren Buffett:
But the real question is whether you need a lot of new planes or not. And when you’re likely to need them. And it affects a lot of people and it certainly affects Precision Castparts. It affects General Electric. It obviously affects Boeing and it is a blow to essentially have your demand dry up and it goes up the chain.

Warren Buffett:
And the aircraft manufacturers didn’t bring it on themselves. The airlines didn’t bring it on themself. Precision Castparts didn’t bring it on itself. General electric didn’t. It’s basically that we shut off air travel in this country, and what that does to people’s habits and how they behave in the future. it’s just hard to evaluate.

Warren Buffett:
I don’t know the answer, but we do know that will have an effect on Precision Castparts. And how severe it will be depends on this same sort of variables that are hitting Boeing. Then you name the company in aircrafts. And aircraft is a big business. And this country is good at it incidentally too.

Warren Buffett:
I mean if you think about Boeing, it is one hell of a company and and it’s important. It’s a huge exporter and it affects a lot of jobs and some of them are with us. We hope for the best and we wish everybody the best. Obviously and we wish ourselves the best in it, but part of it is certainly out of our control.

Greg Abel:
Right.