Why Buffett Hates the Airline Business

BECKY: Okay. In terms of other things that came up this weekend— Andrew touched before on the question that Bill Miller asked— of Legg Mason. His question was again related to the airlines. He’s been on Squawk and talked about his investment thesis. He has bought into a lot of these airlines. And he points out that after the merger— the latest merger with USAir to go through with American, the top four carriers are going to be carrying 90% of the traffic. And he sees that as a great reason to be buying into these stocks right now. You were not as convinced. Your reasoning behind that?

BUFFETT: Well— to have the airline industry be a wonderful industry— you’d want one air— airline that was carrying 90%. 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% 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. But I’ve seen enough times where that’s been said before that— I’m skeptical myself and I’m— you know, I hope Bill’s right for his sake, and also for the airline’s sake. I don’t have the conviction.

Source: Warren Buffett and Bill Gates on Squawk Box, 8 May 2013