What does Warren Buffett’s train investment say about airlines?

So, Warren Buffett has invested some $26 billion buying American freight operator BNSF, with news commentators hailing this as an ‘all-in’ bet on the future of the US economy. But there’s more to it than that – it is, of course, a huge leap of faith into the future of railways, even if lumping coal isn’t exactly as glamarous as swish new high speed train sets. But Buffett has never been about style over substance, and trains in Europe are usually associated with massive subsidies.

In typical long-term Buffett style, he has talked about growth potential of rail in the USA over the next 3 decades, and even if this investment is in freight railways, there is no doubt that passenger rail networks will also see substantial development over this period.

Compare this to Buffett’s attitudes towards airlines, after he lost 75% of his $385 million investment in US Airways back in 1995. He pointed out that the he didn’t think the US airline business had ever made money – and this was in an industry without the kind of state carrier subsidies which were common elsewhere in the world. Buffett is quoted as saying, in respect of the Wright brothers’ first flight:

“If there had been a capitalist down there, the guy would have shot down Wilbur. One small step for mankind, and one huge step for capitalism.”

Has anything changed in the airline industry since 1995? Well, there’s been plenty of deregulation across the pond, and plenty of former big names are no longer with us. In Europe, we have Ryanair’s Michael O’Leary echoing many of Buffett’s sentiments, describing the current situation facing European airlines as a ‘bloodbath’, and the ‘perfect storm’. Of course, Ryanair are one of the few airlines to buck the trend, whereas this morning’s announcement from Lufthansa that they can’t find a suitable bidder for bmi, and that consequently bmibaby are shedding jobs hardly comes as a surprise.

Despite all this, Warren hasn’t been put off from investing in flying alltogether, having ditched his own private jet, aka ‘The Indefensible’ back in 1998, in favour of buying private jet hire company NetJets.

As BMI scrap flights, is Heathrow’s loss just Amsterdam’s gain?

If ever there was a clear-cut argument in favour of Heathrow third runway, then it would be the fact that BMI have just scrapped their flights from Leeds Bradford and Durham Tees Valley to Heathrow. Anyone looking to transfer onto other flights will now have no option but to travel to Amsterdam with KLM instead, as neither of these airports offer hub feeder flights from any other airline.  

Proponents of Heathrow’s third runway argue that the extra capacity that would be created could be used to keep open domestic routes like these two, and also to connect other British cities with Heathrow which have lost their links due to the high taxes imposed on UK domestic flights. Obvious cities which might otherwise support flights into Heathrow would include Liverpool and Inverness in the north and Plymouth and Newquay in the southwest. Meanwhile, opponents argue that people should travel to Heathrow by rail, and that the overall number of flights should be reduced anyway, thus reducing the prospect of these routes from ever becoming viable again. 

Right now, the facts would appear to speak for themselves when it comes to connecting flights, but what about people who just want point-to-point travel between British regional cities and London? We would expect some passengers from Leeds Bradford and Durham to transfer to flights from Manchester and Newcastle respectively, but a far more significant number will travel by train. Both airports also talked about finding replacement airlines to open up new routes into London, but we heard the same rhetoric when VLM scrapped their Liverpool to London City flights. Perhaps Flybe could come onto the scene at Leeds Bradford, where they already have a presence, but I don’t see them operating Gatwick to Durham Tees Valley flights alongside their existing Gatwick to Newcastle route. 

When it comes to the economic arguments about losing jobs to Amsterdam, there is nothing new here. For many years, KLM have offered more feeder flights from UK regional airports than any other airline, and they are set to increase this further still when they open up their new Liverpool to Amsterdam flights at the end of this month. Naturally, this isn’t good news for the UK economy, but we shouldn’t forget that Heathrow’s third runway would come with considerable economic and environmental costs as well. Nor should we forget that the ‘hub and spoke’ model is an inefficient way of operating flights, even if there is always going to be a need for it on some routes.