In his annual letter to shareholders published early last month, investment mogul Warren Buffett said earnings improved last year at Berkshire Hathaway’s flight services division, which includes FlightSafety International (FSI) and NetJets. Last year the unit saw its pre-tax profits rise to $191 million on revenues of $3.24 billion, up substantially from the previous year’s $72 million profit on revenues of $2.43 billion.
The letter attributed more than 90 percent of the $810 million year-over-year revenue increase at Berkshire’s flight service division to NetJets. The fractional provider’s flight operations revenue rose by nearly $400 million and revenues from aircraft sales jumped about $360 million. According to Berkshire Hathaway’s annual report, the increase in flight operations revenue was due primarily to higher usage, a larger percentage of hours being on larger aircraft and a slight rate increase. Fractional aircraft share sales climbed due to an approximately 10-percent increase in aircraft sold and a higher percentage of sales being more expensive large-cabin business jets.
Noted Buffett, “Last year NetJets again gained about 70 percent of the net new business (measured by dollar value) going to the four companies [NetJets, Flight Options, Flexjet and CitationShares] that dominate the [fractional aircraft] industry.” Buffett attributed a portion of NetJets’ growth to the 25-hour card offered by Marquis Jet Partners, an independent company that buys shares in NetJets aircraft and resells them in blocks of time.
It appears the fractional provider made an overall, if slim, profit last year: “NetJets earned a modest amount in the U.S. last year. But what we earned domestically was largely offset by losses in Europe.” It’s possible that the investment mogul tempered his statement on NetJets’ profitability given that the company’s management and 2,100 pilots are still in contract negotiations, with pay being one of the main sticking points.
NetJets’ U.S. contracts, including Marquis customers, grew from 3,877 to 4,967 last year. This compares with approximately 1,200 contracts when Berkshire Hathaway bought NetJets in 1998.
In Europe, contracts increased from 364 to 693. Last year, U.S. owners made 2,003 flights in Europe, up 22 percent from the previous year. NetJets Europe owners made 1,067 flights in the U.S., up 65 percent from 2003.
At FlightSafety, Buffett said, year-over-year profits rose by $57 million thanks to a rebound in the corporate aviation market and an increase in the training company’s business with regional airlines. Higher revenues from simulator sales represent about 65 percent of the increase, while training revenues accounted for the remainder. Pre-tax earnings from FlightSafety’s training business, excluding $69 million in asset write downs, rose about $33 million.
Buffett said FSI has 283 simulators, with an original cost of $1.2 billion. “Pilots are trained one at a time on this expensive equipment,” he added. “This means that as much as $3.50 of capital investment is required to produce $1 of annual revenue. With this level of capital intensity, FlightSafety requires very high operating margins to obtain reasonable returns on capital, which means that utilization rates are all-important.” Fortunately, FlightSafety saw a 13-percent increase in simulator usage, primarily from corporate aviation and regional airline customers.