I’ve contended that the business model of the major US airlines is broken. Traditionally businesses work to try to deliver the best possible product at the lowest possible price. United, Delta, and American are working hard to make their products worse in order to get customers to pay more money to avoid it.
To the extent it works it all it’s because consumers lack options, airlines are so heavily regulated that there’s little room to compete on anything other than price. And government protects airlines from new entrants that might make things better.
Even so airline stocks aren’t good growth investments. US airlines are buying back shares because they don’t have productive uses to deploy capital profitably. Even though Doug Parker says American Airlines will never lose money again Doug Parker ain’t E.F. Hutton.
When I predicted that United Airlines would lose money rolling out Basic Economy — offering less to consumers at the same price than other airlines were offering — several commenters told me I didn’t know what I was talking about. United lost hundreds of millions of dollars. And Warren Buffett lost over a billion dollars last quarter on his airline investments.
United will continue with Basic Economy, albeit no longer doing some stupid things like requiring a buy up to people paying $1000 one way fares in order to select a seat, because American is willing to play the Greater Fool and stop offering better value to customers. We’ll see if that’s enough, Southwest, JetBlue, and Alaska still offer more at the same price as United.
Warren Buffet once famously said,
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.
Later this month American Airlines will launch service with its Boeing 737 MAX aircraft, featuring the tightest seating ever offered by a major US airline in economy. They assure that we won’t feel the reduced room because seats will have less padding, offsetting leg room. And we’ll have more space at shoulder height too because of the lack of inflight entertainment screens. Other passengers won’t be leaning into your space as much either, because the seats recline less.
Warren Buffett recovered from his once upon a time investment in US Air debt long enough to invest in the airlines again. But his recent investment in major airlines, having lost over a billion dollars last quarter, is not at this point proof that they’re good investments, or validation that their managements are running good businesses.