Warren Buffett is betting on US airlines. Maybe he should heed his own advice from a decade ago

Going up?
Going up?
Image: Reuters/Louis Nastro
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When Warren Buffett bought his private jet, he named it The Indefensible in reference to his past criticisms of CEOs at big firms who wasted shareholders’ money on the vanity purchases. (He eventually renamed it The Indispensable.)

He’s betting that commercial planes will be as indispensable to the masses at his own plane was to him. Buffett’s vast holding empire, Berkshire Hathaway, revealed in a filing on Nov. 14 that it bought shares in the airlines that dominate the US skies: American Airlines, United Continental Holdings, and Delta Air Lines. Buffett told CNBC that Berkshire has also taken a stake in Southwest Airlines. And these aren’t exactly the world’s favorite airlines, either.

Buffett, also the owner of luxury private-jet company NetJets, might be betting on commercial airlines as these have raked in profits thanks to a tumble in oil prices. US airlines took in record profits of $25.6 billion last year, according to the US Department of Transportation.

But while US carriers aren’t having the same trouble as some of its fellow airlines in Europe, breaking that record this year is uncertain as profits have slipped along with fares, partially the result of airlines adding flights as their fuel costs fell. Airline executives have said they will try to reign in growth to avoid the cost of flying seats empty.

Perhaps he thinks there is more money to be extracted from the poor, wary American traveler. With airfares at their lowest level since 2009, airlines make less per seat. In order to wring more from the increasingly-cramped passenger, these airlines are slicing their cabins beyond first- and coach-class divisions.

United announced Nov. 15 that it will begin selling basic economy-class tickets in early 2017. Lucky passengers will pay the lowest fare possible but will be prohibited from using overhead bins and won’t be able to select their seats. They will also board the plane last. Delta and American are rolling out premium economy classes, as in passengers will pay a premium for a roomier seat area and amenity kits. Delta and United this year each unveiled revamped a business-first-class hybrid to lure more high paying passengers on board.

In September, Alexandre de Juniac, the director-general of the International Air Transportation Association, touted many airlines’ strong financial performance but cautioned: ”I don’t think that we should get too comfortable in our success.”

As he gets deep into the airline business, perhaps 2016 Buffett would do well to keep in mind 2007 Buffett, who in a letter to shareholders (pdf) gave a scathing review of the volatile airline business that rivals even the worst passenger comments on TripAdvisor:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.