Trying to understand a nation’s economy is not easy. There is so much to absorb. Whenever I feel unable to get my head around any particular matter, I try to reduce it to the raw basics of my own household economic management. It works most of the time although some aspects of a national economy go beyond simple household finances. Even so, there is much in common. So, with that in mind and fresh from hearing the news that Qantas boss Allan Joyce had gone to Canberra to ask the government to act as guarantor for some restructuring, I sat down and had a think about it. Firstly, I listened to someone I thought might have some idea of the relative merits of investing in the airline industry. It did not take long to realise that it is a tough place to make money.
Warren Buffett has a few opinions of airlines. He says, “As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.”
— Warren Buffett, billionaire investor, interview 1999.
Having read this I was trying to grasp why my government should help Qantas. Using my time honoured formula of applying the principles of household economics, I found I was able to rationalise it in the following way…
My son has come to me with a problem. Some years ago I sold him my van. I did not need it anymore. He paid far less for the van than it was worth on the condition that I would always own half of it. He used the van for personal things and was able to make some money out of it by doing deliveries for the local supermarket. After a while he decided it was too old and without any help from me he traded it in and bought a new one. That worked out well for a while but then things got complicated. He had started a new business and one van wasn’t enough so he bought more vans and then had to hire people to drive them and then he needed someone to answer the phones and before long things got very stressful because other people were doing the same as him and charging less. That meant he wasn’t making much profit anymore. Some years he even lost money.
So he came to me and said he needed to borrow a lot of money to restructure. He explained that all his assets were tied up in the business and he had no equity and so no one would lend him the money. He asked me to act as guarantor for a huge loan. Wow!
So before I agreed to this I needed to see his business plan to see how much I would be up for if things went wrong? Could I afford it? Was it a good idea? If I said no and his business crashed what would happen, and so on. Even though, technically, I still owned half of the original van, my equity in that deal was now worthless and I had no other financial interest in his business.
But over that time things had changed, even for me. My finances were not that strong anymore. I had a reduced revenue stream. I had my own basic needs to cover first. I also had other interests, other responsibilities. Then there were the outgoings; what I spent each week, each month and each year: food, electricity, water, rates, school fees, petrol and stuff like that. I realised that if I became guarantor I would be putting my house and my household at risk for no clear benefit. It may sound disloyal but I didn’t even use his services anymore. He was too dear. There were plenty of alternatives. Importantly, as guarantor I would be in danger of losing a lot of money if his plans failed sometime in the future and that would impact on everyone else in the family. So, what should I do?
My decision is to say sorry son, I cannot help you. Does this sound harsh? Yes. Might his business go to the wall sometime in the future because of my decision? Yes. Is that my fault? No. What are the ramifications for him and his family if it happens? Perhaps he won’t get another job and I will have to support him and his family in some way for a while. Can I afford that? Yes, up to a point but he will have to learn to walk on his own two feet sooner or later. And if I did help, what signal does that send to other family members?
This is what Joe Hockey has to decide with Qantas. So while he is chewing that over, here’s another Buffett quote:
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
— Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.
Warren Buffett never invests in airline companies. He learned his lesson the hard way. He is, however, a big fan of Solar Power.
Over to you, Joe.