In his letter to Berkshire Hathaway shareholders dated February 2008, Warren Buffett described the kind of business he liked least. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money,” he wrote. “Think airlines.”
Then came the line people still quote: “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
He included himself in the joke. In 1989, he wrote, he “had Berkshire buy U.S. Air preferred stock.” As the ink was drying on the check, the company went into a tailspin, and before long the preferred dividend stopped. He got lucky: in 1998, during one of what he called the “recurrent, but always misguided, bursts of optimism for airlines,” Berkshire sold for a hefty gain. In the decade that followed, U.S. Air went bankrupt. Twice.
The numbers behind the joke were grim. In Harvard Business Review that same January, Michael Porter calculated that from 1992 to 2006, US airlines earned an average return on invested capital of 5.9 percent, the bottom row of his chart. The average US industry earned 14.9 percent. The economist Severin Borenstein later added up US airlines’ domestic operations from 1979 through 2009: a loss of $59 billion in 2009 dollars, most of it in the last decade.
Then the numbers changed. Years of consolidation through post-bankruptcy mergers and a fall in fuel prices, as CNBC described it, helped airlines earn record profits. In 2016 Berkshire revealed a surprise bet on the sector. By December 2019 it held shares in American, Delta, Southwest and United. That year US airlines posted their tenth straight year of profits.
From March 2020, demand for air travel plunged as the coronavirus spread. On May 2, at a Berkshire annual meeting held virtually that year, Buffett told shareholders Berkshire had sold its entire airline position.
According to Reuters, he said Berkshire had put around $7 billion or $8 billion into the four airlines. “We did not take out anything like $7 or $8 billion and that was my mistake,” he said. “I am the one who made the decision.”
He didn’t blame the people running them. “It turned out I was wrong about that business because of something that was not in any way the fault of four excellent CEOs,” he said, according to CNBC. He wasn’t sure people would fly as many passenger miles in three or four years as they had the year before.
“You’ve got too many planes.”