Warren Buffett on Investing in the Airline Industry

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More than half a century ago, Ben Graham was critical of investing in airline stocks. His pupil Warren Buffett has said the same thing.

In a speech to students at the Kenan-Flagler Business School at the lpehwxv University of North Carolina at Chapel Hill in 1995, Warren stated:

The fella that runs USAir is a wonderful guy, but he just happens to be in an extraordinarily tough business. And the interesting thing is that I had written something for {Benjamin} Graham’s book in the early 70’s about how the airline business was about the toughest business there was.

And the interesting thing is, of course, is that if you go back to the time of Kitty Hawk, net, the airline transport business in the United States has made no money. I mean, just think if you had been down there at Kitty Hawk, and you had saw this guy {Wilbur Wright} go up {in the air}, and all of a sudden this vision hit you that tens of millions of people would be doing this all over the world some day and that it would bring us all closer together and everything, and think my God this is something to be in on.

And despite putting in billions and billions and billions of dollars, the net return to owners from being in the entire airline industry, if you owned it all, and if you put up all this money, is less than zero.

If there had been a capitalist down there {at Kitty Hawk the day the Wright brothers made their first flight} the guy should have shot down Wilbur! I mean … {audience laughter}. You know… one small step for mankind, and one huge step backwards for capitalism!

But anyway…. So along comes 1989 and I’ve got a lot of cash. And no one misled me in any way shape or form. And I mean this was 100% my decision {to invest in USAir}. And I put money in it. Seth Scofield, you can’t find a better human being or manager than Seth Scofield, but he is operating with revenues based on market factors and cost that are not based market factors, and that’s a recipe for a lot of trouble.

So I now have this 800 {telephone} number, and if I ever get the urge to buy an airline stock I dial this number. And I say my name is Warren, and I’m an “air-o-holic,” and then this guy talks me down on the other end {of the line}….

High fuel costs have turned the airline industry into a good investment

Paradoxically, high fuel costs have turned the airline industry into a good investment. When oil prices skyrocketed in 2008 to $147 a barrel, the airlines cut capacity, ground flights, develop more-efficient scheduling, and take other steps to offset higher fuel costs. High fuel costs also curtailed the start-up or accelerated the demise of many airlines. Barriers to competition rose. In the past few years, the industry has consolidated and oil prices are lower. Airlines are running their businesses for profitability and not for market share. Airlines have raised fares, unbundled their offerings by charging for bags, extra legroom, and food, while maintaining low capacity growth.

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Posted in Airlines and Airliners Investing and Finance

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