Profits soared last year at Warren Buffett’s holding company, Berkshire Hathaway, though not all of the company’s divisions did well. In his annual letter to shareholders released last month, the investment mogul summarized the reduced performance of FlightSafety International and NetJets– the two largest companies in their respective fields of simulator training and fractional ownership.
FlightSafety experienced a drop in “normal” operating earnings from $183 million to $150 million. Said Buffett: “The abnormals: In 2002 we had a $60 million pre-tax gain from the sale of a partnership interest to Boeing [FlightSafety Boeing Training International, a joint venture to provide training in Boeing airplanes that lasted five years], and in 2003 we recognized a $37 million loss stemming from the premature obsolescence of simulators.”
The corporate aviation business has slowed significantly in the past few years, he noted, “and this fact has hurt FlightSafety’s results.” The company continues, however, to be far and away the leader in its field. “Its simulators have an original cost of $1.2 billion, which is more than triple the cost of those operated by our closest competitor.”
NetJets lost $41 million pre-tax in 2003, according to Buffett. The company had a modest operating profit in the U.S., but this was more than offset by a $32 million loss on aircraft inventory and by continued losses in Europe. “NetJets continues to dominate the fractional-ownership field, and its lead is increasing,” Buffett said. “Prospects overwhelmingly turn to us rather than to our three major competitors. Last year, among the four of us, we accounted for 70 percent of net sales (measured by value).”
An example of what sets NetJets apart from competitors, he referred to NetJets’ Mayo Clinic Executive Travel Response program, “a free benefit enjoyed by all of our owners. On land or in the air, anywhere in the world and at any hour of any day, our owners and their families have an immediate link to Mayo. Should an emergency occur while they are traveling here or abroad, Mayo will instantly direct them to an appropriate doctor or hospital. Any baseline data about the patient that Mayo possesses is simultaneously made available to the treating physician. Many owners have already found this service invaluable, including one who needed emergency brain surgery in Eastern Europe.”
The $32 million inventory write-down NetJets took in 2003 occurred because of falling prices for used aircraft early in the year, Buffett said. “Specifically, we bought back fractions from withdrawing owners at prevailing prices, and these fell in value before we were able to remarket them. Prices are now stable.”
Buffett described the European losses as “painful. But any company that forsakes Europe, as all of our competitors have done, is destined for second-tier status. Many of our U.S. owners fly extensively in Europe and want the safety and security assured by a NetJets airplane and pilots. Despite a slow start, furthermore, we are now adding European customers at a good pace. During the years 2001 through 2003, we had gains of 88, 61 and 77 percent, respectively, in European management-and-flying revenues. We have not, however, yet succeeded in stemming the flow of red ink.”
According to Buffett, Richard Santulli, NetJets’ “extraordinary CEO, and I expect our European loss to diminish in 2004 and also anticipate that it will be more than offset by U.S. profits.” In his own folksy way, the Oracle of Omaha expressed how he believes his owners love the NetJets experience: “Once a customer has tried us, going back to commercial aviation is like going back to holding hands.” NetJets will become “a very big business over time and will be one in which we are preeminent in both customer satisfaction and profits. Rich will see to that.”