Warren Buffett bought $358m of preferred shares in USAir in 1989. At one point he wrote down this investment by 75% and spoke of his bitter regret at having placed Berkshire’s money in an industry with such poor economics. He was smarting so much that two years into the investment he said, “Despite the huge amounts of equity capital that have been injected into it, the industry, in aggregate, has posted a net loss since its birth after Kitty Hawk... it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners” (1991 Letter to Berkshire Hathaway shareholders).
Three years after that, with things looking even worse: “I have an 800 number now which I call if I ever get an urge to buy an airline stock. I say, ‘My name is Warren, I’m an air-aholic’ and they talk me down” (speaking to students at Columbia University 1994).
Even into the twenty first century he was feeling the sting. In a 2002 interview with The Telegraph he said: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright.”
And yet a few years later, in the 2016, he went back into airlines in a big way, buying around 10% of the common stock of the four largest American airline companies, paying a total of between $7bn and $8bn. And he was caught out again – this time because the economics of the industry were hit dreadfully hard by the Coronavirus and its aftermath as the economics of the industry shifted dramatically when people refused to fly. (He managed to salvage about $6bn by selling all those shares in April 2020).
It would be harsh to criticise him for not allowing for the virus-affliction in 2020. But we can all learn lessons – as he did - from the mistake of investing in USAir in 1989. Back then, the appalling economics of the industry were widely known, with massive over-capacity and cut-throat pricing. And USAir was in a particularly weak position vis-à-vis its larger competitors. Why did he do it?
The making of USAir
In 1937 newly-formed All American Aviation was undertaking daring experiments swooping down its single engine high-wing monoplanes to grab mail packages suspended from ropes or cables strung across two poles (using a hook). By 1939 they were ready to roll out their airmail pick up service from their Pittsburgh hub, across the Allegheny Mountains and down the Ohio River. It wasn’t until 1949 that the firm offered a passenger service in the same region.
In 1957 a 31-year old lawyer joined the company, by then renamed Allegheny Airlines, as Assistant to the President and to act as staff attorney. Ed Colodny had spent three years with the regulator, the Civil Aeronautics Board, and so was a game keeper turned poacher; he knew his way around the rules in a highly regulated industry.
Over two decades the airline grew through mergers, encouraged to do so by the regulator which was keen to reduce subsidies handed out to industry. By the time Colodny was put in charge of the firm, as CEO, in 1975 the industry consisted of first, 12 major trunk airlines, serving larger cities and longer routes, and second, 12 local service airlines, including Allegheny, which served smaller cities.
Colodny quickly acquired the sobriquet “Uncle Ed” around the hangers and offices, as a well-liked and approachable chief. Both longstanding employees and those added through acquisitions appreciated their gene
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Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author.
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