Free Attention All Passengers by William J. McGee

in which some believe flawed markets can be corrected by perfect regulation, while others believe perfect markets are marred by flawed regulation. The truth, he asserts, is that in reality we have only flawed markets and flawed regulation, and zealots on both sides place too much belief in the inherent powers of both markets and regulation.
    I pointed out to him what I’ve uncovered about airline maintenance outsourcing and the FAA’s failure to provide oversight. And Levine responded, “So your problem is you have found flawed markets and flawed regulation. And I’m not telling you that you haven’t found it. But I’m telling you that when you write about it, you need to ask, is it really going to be any better with more regulation? Or is [New York senator] Chuck Schumer just going to be able to stand up and have a press conference?”
    Point taken. Ultimately we may need to decide which entity we trust less —the U.S. government or Corporate America.
    The Best Airline Investment Advice: Don’t!
    The reregulation argument is bolstered by the industry’s dismal financial performance since 1978. Airlines make for rotten long-term investments, and with the singular exception of Southwest, U.S. airlines are particularly rotten over time. In fact, some argue that all forms of transportation have duped investors. Sir Richard Branson, the founder of Virgin Atlantic Airways and its sister carriers located around the world, as well as minority owner of Virgin America, put it best. When asked how to become a millionaire, the man who had earlier founded Virgin Records replied: “There’s really nothing to it. Start as a billionaire and then buy an airline.”
    An awful lot has been written about the economic state of the industry, and analysts crank out more material every week. It’s impossible to address virtually any aspect of the business—passenger service, labor, maintenance, safety, security—without providing an economic perspective. All roads lead back to airline costs, and what airlines are doing to cut those costs.
    Throughout its history, the industry has weathered economic peaks and valleys, but since deregulation it’s positively been a roller-coaster ride. For domestic airlines, there were losses of $23.7 billion in 2008 and $2.5 billion in 2009. Then a surprise return to profitability in 2010 due to increased demand and higher fares, followed by more losses for most U.S. carriers in early 2011. Along the way, fortunes have been made—and unmade. Travel pricing expert George Hobica points out, “All those many billions of dollars have been lost. Where did they go? . . . Who really has lost?” He counts employees, investors, and banks among the victims, and says, “It’s incremental. ATM fees probably went up half a cent because banks took a bath with airlines.”
    Many aviation pundits believe that any discussion of airline stocks begins and ends with Warren Buffett, arguably the world’s shrewdest buyer and seller of capital. In a letter to shareholders of Berkshire Hathaway in February 2008, he famously stated: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
    Buffett went on to detail his “shame” in buying preferred stock in USAir (later US Airways) back in 1989, just before “the company went into a tailspin.” He further noted, “The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”