Friendly Skies — For Airline Investors, Not Passengers

One of Warren Buffett’s few unsuccessful investments was buying convertible preferred stock of USAir in the late 1980s. For decades after that episode, Buffett would characteristically make fun of himself, while decrying the entire airline industry for its capital requirements and onerous competition.

As he put it in an interview, “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say:

“My name is Warren and I’m an aeroholic.’ And then they talk me down.”

But Buffett seems to have changed his mind lately, and maybe so should other investors. In a Berkshire Hathaway filing from September 2016, almost three decades after the USAir debacle, three of the four airlines – Delta Air Lines, UnitedContinental, and American Airlines – appeared among the firm’s publicly traded holdings. By the final filing of that year, Southwest, the fourth in what Jonathan Tepper’s The Myth of Capitalism calls an oligopoly that now dominates the industry, appeared on the holdings list. All four have been there ever since, and it’s not because he 88-year-old Buffett has lost his marbles.

Somehow, a fragmented, intensely competitive industry plagued by unions and underfunded pensions, has become insulated enough from competition that Warren Buffett wants to own the major players. It’s not simply that Buffett now owns an airline. It’s that an investor whose calling card has been finding a company with a durable competitive advantage now owns four major players in an industry that are virtually indistinguishable from each other except for their ability to dominate hubs and routes and seemingly divide the industry among themselves against smaller competitors.

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