Saturday, September 7, 2019

Why is Warren Buffet investing in airlines?

For years, the airline industry was Michael Porter's classic example of a zero-out-of-five star industry (it had none of Porter's five forces going for it).  But now, it is earning profit (see graph below),

and Warren Buffet is investing in it.  What has changed?The WSJ suggests that the increase in industry profitability is driven by an increase in concentration:

But this increase in concentration occurs at the industry, not the market level (see my earlier post on this mistaken inference), where market power is exercised.  Instead, it is likely that the industry has rationalized routes, taking advantage of "network economies" in the industry to reduce costs and increase demand.  This would drive the increase in profitability and the increase in industry concentration.

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