“If a farsighted capitalist had been present at Kitty Hawk [the legendary place where the first powered airplane flights took place], he would have done his successors a huge favour by shooting Orville down.” The above sentence appeared in billionaire investor Warren Buffett’s 2007 Berkshire Hathaway shareholder letter and helped express his disdain for airlines as an investment. Thing is, it’s hard to disagree with Buffett. After all, airlines have horrible business economics; they often require significant capital investment (planes aren’t cheap) but yet find themselves earning very little returns as they can only offer a commoditised product…
“If a farsighted capitalist had been present at Kitty Hawk [the legendary place where the first powered airplane flights took place], he would have done his successors a huge favour by shooting Orville down.”
The above sentence appeared in billionaire investor Warren Buffett’s 2007 Berkshire Hathaway shareholder letter and helped express his disdain for airlines as an investment. Thing is, it’s hard to disagree with Buffett. After all, airlines have horrible business economics; they often require significant capital investment (planes aren’t cheap) but yet find themselves earning very little returns as they can only offer a commoditised product where there’s no pricing power.
Even Singapore Airlines (SGX: C6L), which has been one of the best run airlines in the world, has been at best a mediocre investment over the past 20 years. Since the start of 1994, shares of SIA have gone up by 38.5% from S$7.50 each to S$10.39 without accounting for dividends. In comparison, the Straits Times Index (SGX: ^STI) had just barely lost to the airline, itself gaining 35% from 2,426 points to 3,276.
The best share ever from 1972-2002
But here’s something extraordinary. When investment research outfit Ned Davis Research was tasked in 2002 to find the top five American shares over the past 30 years, it was the no-frills carrier Southwest Airlines (NYSE: LUV) that came out tops.
From 1972 to 2002, Southwest Airlines had delivered compounded annualised returns of 25.99%. Every $10,000 investment ploughed into the airline at the start of the period would have become $10 million by the end of it. When you consider that a company like Coca-Cola – a Warren Buffett favourite with superb economics – had only returned 13.5% a year compounded in the same period, Southwest Airlines’ experience is simply extraordinary.
So, what lessons can investors glean from this? How could a company, which is supposedly involved with an industry with terrifying economics, outperform every other business out there in the U.S.A. over a 30 year period?
Lesson 1: Management matters
Herb Kelleher was the co-founder of Southwest Airlines back in 1967. He became its executive chairman from 1978-2008, and was the company’s chief executive from 1982-2001. When he started the company, he had a mission – he wanted to improve society in his own little way; to democratise air travel and improve service standards.
“It was a crusade for the American people, to do right by them,” said Kelleher in a CNBC interview. He added, “The air service at that time in Texas was a very poor quality and the prices were very high. I also wanted to vindicate the system to show that you know, it would come out all right in the end in America. And you couldn’t suppress competition that was for the betterment of the people.”
But he did more than just that. Southwest is also well known for having a corporate culture whereby employees are truly treasured and cared for. “Employees first, customers second, shareholders third,” said Kelleher in the same CNBC interview. He went on, “If you treat the employees well, if you cared for them, if you value them as people, if you gave them psychic satisfaction in their jobs, that they would really do a great job for the customers and the customers would come back, which would be good for the shareholders.”
As a business leader, Kelleher had the drive to do something “for the betterment of the people” and was intelligent and savvy enough to have found the right focus on his employees as a means to deliver corporate success. Those traits helped him guide a company from an economically-horrendous industry into a smashing – albeit anomalous – success. Without a visionary leader like Kelleher, it’s likely that Southwest Airlines would fall by the wayside and be ‘just another airline.’
Lesson 2: Investing opportunities are everywhere
There’s a well-known joke that goes, ‘What’s the fastest way to become a millionaire? Start off as a billionaire and buy an airline.’ While generalisations can be dangerous, it’s certainly not misguided in this case.
Airlines generally make for poor investments and investors might do well to steer clear of them. But as the Southwest Airlines example shows, great investing opportunities can be everywhere. Sometimes, a gleaming diamond can still be found amongst a lump of coal for those with the ability to spot a true bargain.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.