Buffett and the FAA

http://www.futureofcapitalism.com/2011/02/buffett-and-the-faa

Berkshire Hathaway chairman Warren Buffett is out this weekend with his annual letter to shareholders. While there's plenty of material to comment on, one passage, about the private jet business that Mr. Buffett describes as having been "Berkshire's only major business problem," struck me as particularly worth noting:

Dave has meanwhile maintained NetJets' industry-leading reputation for safety and service. In many important ways, our training and operational standards are considerably stronger than those required by the FAA. Maintaining top-of-the-line standards is the right thing to do, but I also have a selfish reason for championing this policy. My family and I have flown more than 5,000 hours on NetJets (that's equal to being airborne 24 hours a day for seven months) and will fly thousands of hours more in the future. We receive no special treatment and have used a random mix of at least 100 planes and 300 crews. Whichever the plane or crew, we always know we are flying with the best-trained pilots in private aviation.

The one paragraph that Mr. Buffett devotes in his letter to pitching NetJets is devoted not to the luxury or convenience of the service but to the safety — the idea that his private company can do a better job of assuring safe flying than can the government agency devoted to it.

This is somewhat unusual, because often the effect of strong government regulation is to eliminate the regulated aspect as a point of competition. So the presence of federal deposit insurance means that banks don't compete much for consumer business on the basis of their financial soundness, or the presence of restaurant health inspections means that restaurants don't compete much for consumer business on the basis of the cleanliness of their kitchens. What's more, the presence of a government safety standard encourages consumers to look at services in a binary way — it either meets government standards and it is safe or it fails and it's not safe — rather than as a continuum in which additional safety can be purchased for an additional price. In these situations, the consumer has essentially delegated the job of judging safety to the government, and, having done so, ceases to use it as a buying consideration.

Advocates of private regulation of safety or health often meet with some objections. The first involves expertise. Ordinary consumers aren't highly trained airplane safety experts. How is an ordinary consumer supposed to know if NetJets is safer than People Express? The second involves price and equity. It's one thing if NetJets or Mercedes want to advertise their advanced safety features for people who can afford them. But for those who can't afford private jets, side-curtain airbags or onboard computers that prevent cars from crashing, the government regulation provides a minimum level of safety, the argument goes.

At a certain point, these discussions reach to almost theological personal preferences and opinions about the proper role of government and how much risk and responsibility should fall on individuals. Mr. Buffett, who's a smart guy, is clearly betting that quite a few customers with money will feel safer getting on a plane knowing that the company running it is competing to attract customers by maintaining stricter safety standards than the government-imposed minimum. He'd rather compete on that than on, say, the niftiness of the seat-back entertainment system. Anyway, it's just a neat little counterexample, courtesy of Berkshire Hathaway, for those who ridicule the idea of private health and safety regulation or say that they can't work.

by Ira Stoll  |  Feb 27, 2011 at 9:38 am Related Topics:  Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list