Stay
grounded
U
ntil recently, no one could
have accused Warren Buffett
ofbeingafanofairlines.In
2007,hewentsofarastosay:
“Theworstsortofbusiness
is one that grows rapidly, requires significant
capitaltoengenderthegrowth,thenearns
littleornomoney.Thinkairlines.Here,a
durable competitive advantage has proven
elusive since the days of the Wright brothers.
Indeed,ifafarsightedcapitalisthadbeen
presentatKittyHawk,hewouldhavedone
hissuccessorsahugefavourbyshooting
Orville down.”
Afavournomore,apparently.Over
thepastyear,Buffetthaspurchased
largestakesinseveralairlinesforBerk-
shireHathaway.AsofMarch,thecom-
pany owned nearly $US10 billion ($13
billion)worthofUSairlines,including
thefourlargestcarriers:Delta,United,
American and Southwest.Moneymaga-
zine investors might be wondering why.
Tothebestofourknowledge,Buffett
hasn’t publicly explained this sudden
change of heart, but we suspect a big
partofithasbeentheindustry’sconsol-
idation and an explosion in profitability
thanks to loyalty programs.
DIVIDED LOYALTIES
In2014,QantasAirwaysmademore
money selling points than it did selling
flights. Though a turnaround at the air-
linedivisionmeantthatwasn’tthecase
in 2016, the loyalty division still throws
STORYGRAHAM WITCOMB
SHARES AIRLINES
Warren Buffett is suddenly in love with airlines
but falling for Qantas could end in tears
off cash. It boasts 11 million members
–nearlyhalfthepopulation–witha
thirdofAustraliancreditcardsnowin
partnershipwithit.Pointscanbespent
on everything from flights and hotels to
coffee makers, car hire, insurance or a
bottleofPenfolds.Aforeignermight
mistake Qantas points for Australia’s
defactosecondcurrency.
The funny thing about loyalty pro-
grams,though,isthattheydon’tmake
customers particularly loyal, at least
toQantas.Bookingflightsisstilla“com-
modity product”, where customers shop
around based on price. This explains
an average pre-tax profit margin of 3%
for Qantas’s airline division over the
past 10 years.
LoyaltyfromQantas’smerchantpart-
ners,however,isadifferentstory.Busi-
nesses use Qantas-branded credit cards
as a way to attract customers. Whether
ornottheyflyQantas,consumerslove
its reward points system, so retailers
suchasWoolworths,DavidJonesand
even online auction house eBay are fall-
ing over themselves to be associated
withtheprogram.HealthinsurerNIB
even awards points to its members for
walking more often.
Thebanks,inparticular,havebeena
honeypot. Of all the money spent using
credit cards in Australia, some 35% is
nowonaQantas-linkedcard.Credit
cardusehasgrownat6%ayearoverthe
past decade, which has been a strong