Why ‘aeroholic’ Buffett avoids buses with wings
CityJet’s latest set of accounts illustrate why Buffett is wary of airlines
Swords-based CityJet made a loss of €209 million in 2012
Warren Buffett, probably the world’s canniest investor, has a long- standing aversion to putting his money into airlines.
He told Berkshire Hathaway shareholders in 2008 that if a “farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville [Wright] down”.
He told the Telegraph in Britain some years back, he said: “I have an 800 [free call] number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”
CityJet’s latest set of accounts illustrate why Buffett is wary of airlines.
The Swords-based company made a loss of €209 million in 2012, comprising an operating loss of €21.3 million and included exceptional charges of €185 million. It received a capital injection of €180 mil- lion by Air France Finance so that CityJet could repay its debt to its French parent.
It was a circular movement of money that has effectively resulted in Air France KLM writing off €180 million in its Irish subsidiary and was a tidying-up exercise to lubricate the CityJet sale process, which has been running for about a year. Air France has put another €12 million into CityJet this year to fund ongoing operations.
Even if you set aside the non- cash exceptionals, CityJet’s figures don’t make for good reading. It carried 2.1 million passengers in 2012. Based on its operating loss of €21.3 million, it effectively lost €10 on every ticket it sold.
In a note to staff this week, the operating losses were put down to the loss of wet leases on behalf of Alitalia, which resulted in a 10 per cent decline in activity and continued weak- ness in consumer demand.
Staff were told the financial restructuring would allow the airline to secure a better “platform” for the future by reducing its debt and improving its working capital.
Results to September 2013 were said to be “slightly better than budget” and it expects this trend to be maintained for the remainder of the year.
CityJet hasn’t made an operating profit since 2007, the year it acquired Belgian rival VLM. In the intervening period, its operating losses have topped €140 million.
The VLM deal bulked up CityJet and bolstered its position at London City Airport, where VLM was also a big player before the merger. On paper it looked like a good deal; in reality it has been a nightmare. The merger collided with the meltdown of the financial sector and the ripple effect it had throughout European economies.
CityJet Ltd took a writedown of €174.5 million on its VLM investment last year.
CityJet isn’t the only European, or even Irish airline that has struggled since 2008. Malev in Hungary and Spanair in Spain went out of business last year, our own Aer Arann was rescued out of examinership by Stobart and British airline BMI, a serial loss-maker, was gobbled up by British Airways.
Both Aer Lingus and Ryanair have issued profit warnings this year as austerity continues to affect consumer demand in Ireland and across Europe. Air France has had its own difficulties, resulting in a major restructuring plan that includes selling CityJet.
It looked as if a deal was in the bag in early summer when Intro Aviation of Germany entered “exclusive” talks to acquire CityJet. That exclusivity period expired without an agreement being reached. The sale process remains active and a deal is thought to be close, but there are no guarantees.
Is there a plan B if a sale can’t be agreed? The fallback option appears to be that CityJet remains as part of the Air France family, strange and all as that might seem.
Air France acquired CityJet in 2000 to act as a feeder to its Paris hub for long-haul traffic without incurring the costs embedded in French labour law. It has also operated point- to-point traffic from London City airport. We’ll never know how much Air France has made from the “flow-through” traffic that CityJet has provided over the years, but investors in the French-listed company would be well within their rights to question whether it was worth the bother, given the losses that have been racked up over the past five years.
Easier said than done
With 600 or so jobs in Ireland on the line, we should all hope that CityJet finds a new inves- tor who can put it on a flight path to profitability. This will be easier said than done, given the existing losses, high price of fuel, the costs of regulation and competition for what is now a commodity product.
Airlines are sexy. Their pitch to consumers is an escape from their dreary lives to some sun- kissed destination or one of the world’s great cities. The whiff of kerosene is enough to make many entrepreneurs go weak at the knees and write a cheque.
The harsh reality is that they are money-guzzling buses with wings that, with a few exceptions like Ryanair, are run more for the benefit of workers than investors.
It’s no wonder Buffett wants nothing to do with them.