Warren Buffet, arguably the world’s most successful investor, felt investing in the airline industry had been a big mistake.

“One small step for mankind, and one huge step backwards for capitalism,” was his remark about Orville Wright’s first flight in 1903. In fact, he went on to say that had he been at Kitty Hawk, he would have shot down Wright’s aircraft.
Despite putting in billions and billions of dollars, the net return to owners from being in the entire airline industry, if you owned it all, and if you put up all this money, is less than zero, notes Buffett.
Buffett knew from personal experience: he and his Berkshire Hathaway investment company got badly burned during the 1990s by a $350 million investment in what became US Airways — the company now launching the $8-billion bid for Delta Airlines.
More recently, when Richard Branson, the wealthy owner of Virgin Atlantic airways, was asked how to become a millionaire, he had a quick answer: “There’s really nothing to it. Start as a billionaire and then buy an airline.”
Nevertheless, the industry has made money, actually prior to 2000. It is expecting a profitable year in 2007 and some carriers may actually report a year-end profit for 2006.
But Buffett learned what many investors discovered: The airline industry, unlike many industries, is affected by many outside factors: oil, terrorism, consumer confidence, aircraft safety and others.
Any one of those issues could cause an airline’s stock to plummet.
With 57 years’ experience in the industry, Bahrain-based Gulf Air knows all too well what it is to keep planes in the sky.
Starting off with investments from Abu Dhabi, Qatar, Oman and Bahrain, Gulf Air had all the trappings of a regional carrier. However the union began to fall apart, when Qatar first left to start its own airline, the Qatar Airways. Abu Dhabi followed suit after deciding to set up Etihad, which is currently the official carrier of the United Arab Emirates. Oman, having established Oman Airways, may also separate.
Despite the head start and joint enterprise Gulf Air did not have many profitable years.
The company is currently “bleeding” and hence a “get well” plan has been initiated.
The company hired Andre Dose, a Swiss airline veteran, to nurse it out of its illness. And the prescription: Fresh cash injection, restructuring, job cuts, fleet reduction and above all a commitment to do the basics right, that is to run the airline as a commercial venture. All these could fetch a return on investment of about five per cent, good by airline industry standards.
But have the countries in the Gulf made a sound investment by each deciding to have its own airline? Even Mr Dosé thinks it might not have been a wise investment idea. A tremendous amount of overcapacity is being added and these have to be sustainable in the medium and long term. All the new seats ordered have to be filled, and obviously these cannot be filled over price. The industry here should be careful not to fall into the same trap as in the early days of the North Atlantic carriers.
How long would the individual airlines be able to survive? As long as the pockets are deep, says Mr Dose. Sooner or later you face economic realities. Bahrain is a step ahead of that with its forward-looking policy and the direction the country wants to go with its new economic strategy. 
In the past few years the world has seen that with mounting fuel bills and demanding unions, consolidation can help airlines trim costs.
Mergers have been more successful at generating cost savings. Air France-KLM has estimated that by fiscal 2011 it may generate one billion euros of synergies from combining the two airlines.
But one of the biggest hitches to consolidation is that governments want to see an airline carry their flag: Italy and Greece fight the European Commission to allow their taxpayers to pour ever more money into guzzlers called Alitalia and Olympic Airlines.
Few other industries could have expected the speed and scale of assistance that Congress offered America’s airlines after September 11.
All said and done, for most governments the airline industry is a non-negotiable, special case. That is why enormous subsidies go to it just to have a national flag-bearer in the sky.
How can the airline industry make billions of dollars every year and still have a cumulative profit margin of less than one per cent? The answer lies in the industry’s vast complexity.
Airlines have many different problems they have to solve at once including high labour costs, varying seasonal demand, and vulnerability to weather conditions. Most industries have to deal with only one or two of these issues.
With the traditional business model, airlines have tried to be all things to all people. A better strategy is to pick a niche, such as budget travel (like Sharjah’s Air Arabia and Kuwait’s Jazeera), regional business travel, or global travel — and be the best airline in that niche. Bahrain has decided to cut many unprofitable long-haul routes and instead focus on one unique service, catering to the regional customers.
Transparency and tough decision-making are the next vital aspects.
Restructuring would cut red tape, fleet reduction and job cuts would save money and operational efficiency would help retain customers for Gulf Air. It would also be worthwhile to target the large number of expatriates in the region with a low-cost package. 
But in the long run, wouldn’t it be better if the Gulf countries thought about an airline union or pool in the resources to start a single, big GCC airline rather than undercut each other to keep market share?

talking business
K S Sreekumar