On Airline Industry

Question: What do you think of the airline industry?

Buffett: “The big problem is not aggregate costs, but costs versus competitors.” Buffett recalled US Air’s difficulties competing against Southwest and concluded, “If your costs are out of line, you’re going to get killed eventually.”

[Munger: “Airline pilot unions are really tough. It’s interesting to see people paid as well as airline pilots to have such a tough union. No airline can afford a shutdown very long.”]

If you’re in a business that cannot take a long strike, then you’re playing a game of chicken with labor. Ironically, if you’re weak, you’re in a stronger negotiating position.

Source: 2001 Berkshire Hathaway Annual Shareholders Meeting

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To have the airline industry be a wonderful industry— you’d want one airline that was carrying 90 percent. As it consolidates, that helps to some degree. As they go through bankruptcy and they modify the labor contracts, it helps to some degree.

But for 100 years, airline transport has not been a good business. If you’ve got it down to few enough competitors, it could happen, and maybe four with 90 percent will get the job done. But the problem is with a seat on an airliner as a commodity to a great extent.

And the incremental cost of the last seat to the airline is virtually zero. Got these huge fix costs, so there’s this temptation always to try to sell that last seat. And unfortunately, when you sell the last seat cheap you may sell the first seat pretty cheap, too. Bill’s a very smart guy, and— the airline industry may have finally got to the point of concentration that enables it to become a decent return on capital.

Source: CNBC Squawk Box, May 6, 2013

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