If Buffett Is Buying Airlines, the Competition Is Over

(Bloomberg Opinion) -- In 1989, when Warren Buffett made his infamous purchase of USAir’s preferred stock, there were at least 20 major airlines operating in the U.S. — carriers with names like Pan Am, Eastern, Braniff and Continental.

He bought USAir’s stock, he later said, because the company had a long track record of profitability, and because he was a fan of its chief executive, Ed Colodny. What Buffett hadn’t counted on was the fierce competition for passengers among the carriers. Within a year Colodny was out, the airline was losing buckets of money and the stock went into a tailspin.

Although Buffett wound up making a small profit when he sold the USAir stock in the mid-1990s, the experience soured him on the airlines for the next two decades. In his regular letter to shareholders, and at Berkshire Hathaway’s annual meeting, he couldn’t say enough bad things about airline stocks. He used to describe airline competition, for instance, as “kamikaze pricing tactics.” And who can forget the time he remarked that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville [Wright] down”?

This little trip in the wayback machine is prompted by the news, posted Friday morning by Bloomberg, that Buffett now owns so much stock in the four remaining major airlines that people are speculating he might just decide to buy one of them outright. According to Bloomberg’s Katherine Chiglinsky, Buffett’s biggest holding is Delta Air Lines Inc., in which he has a $3.6 billion position — more than 10 percent of the stock. But he also has $2.8 billion worth of Southwest Airlines Co., $1.78 billion worth of United Continental Holdings Inc., and $1.38 billion worth of American Airlines Group Inc. Last month, when rumors circulated on social media that Buffett might buy Southwest, the stock rose 3.6 percent.

The Bloomberg story got me wondering about when, exactly, Buffett changed his mind about airline stocks. The answer turns out to be 2016 — which makes perfect sense. The previous October, US Airways, as USAir was then known, took its final flight before being merged into American Airlines. That deal was the last in a decade-long frenzy of airlines mergers, of which the two biggest were United’s 2010 merger with Continental, and Delta’s 2008 purchase of Northwest Airlines. With the completion of the American-US Airways deal, those 20-plus carriers had been reduced to four. And as the number of carriers fell, the competition between them was reduced.

Which is precisely what appealed to Buffett. Of course, Buffett doesn’t phrase it like that, and neither do other airline stock bulls. Instead, they say things like “The industry has become stable,” or “The airlines are behaving like adults,” or “They’ve learned to operate with more discipline.” The truth is that all four airlines set prices now that are more or less the same — consumer-friendly fare wars are a thing of the past. They all have learned to maximize seating capacity, so they’re not trying to poach customers from one another. And they all use the same galling techniques for raising ancillary revenue, like making travelers pay to check their bags. (Southwest is a little better on this front.)

While the government stood by, the airline industry became an oligopoly. That’s what Buffett understood. The four major airlines no longer have any incentive to compete — indeed, any effort to increase competition can only hurt profits for all of them. If Buffett believed that airlines still competed, he would still be avoiding the stocks. Or maybe he’d buy the one he thought would win. By buying shares of all four companies, he is signaling that he is no longer worried about airline competition. He knows the four of them will play nice, which will be good for his portfolio.

This same lack of competition has been terrible for consumers. Airlines were deregulated to inject competition into the industry; here we are 40-plus years later, and competition has been largely wiped away. Although prices are lower than they were during the era of regulation, in every other way, air travel is worse for the consumer than when carriers were regulated. The Department of Justice under President Barack Obama did not serve the country well when it waved through one big airline merger after another.

Which is another way of saying, just because something is good for Warren Buffett doesn’t mean it’s good for the rest of us.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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