Buffett unfazed by a soft year for NetJets and FSI

 - January 17, 2008, 6:23 AM

As he does every year in his annual report, Berkshire Hathaway CEO Warren Buffett gave his frank and folksy description of how his company’s many holdings performed in the previous year, including FlightSafety International and NetJets.

Earnings last year from flight services increased, but only because the company realized a special pre-tax gain of $60 million from the sale of its 50-percent interest in FlightSafety Boeing. Without this gain, earnings at FlightSafety International would have fallen “slightly” in concert with the slowdown in business-aviation activity, Buffett said. But he praised the business, saying FlightSafety continues to be the “gold standard” for the aviation-training industry, “and we expect growth in the years to come.”

At NetJets, the company’s fractional airplane ownership operation, Buffett claimed “we are the runaway leader.” He said FAA records indicate that NetJets’ share of the fractional industry is 75 percent, “meaning that clients purchased or leased airplanes from us that were valued at triple [the rates of] those recorded by our three competitors combined.” According to the investment mogul, the NetJets fleet flew 132.7 million nautical miles, taking clients to 130 countries.

Again, as he has done in previous reports, Buffett singled out his top managers for special praise. He attributed NetJets’ preeminence directly to Richard Santulli, NetJets CEO. “He invented the business in 1986,” Buffett said, “and ever since has exhibited an unbending devotion to the highest levels of service, safety and security.” NetJets has obviously gained the complete trust of Buffett because he said he regularly puts his own family members on NetJets airplanes.

Record Revenues, Overall Losses

While NetJets may provide safe, secure and efficient transportation, it was not profitable last year. Though its revenues set a record, the company again lost money (as it did in 2001). A “small profit in the U.S. was more than offset by losses in Europe,” Buffett said. “Overall, the fractional-ownership industry lost significant sums last year, and that is almost certain to be the outcome in 2003 as well. The bald fact is that airplanes are costly to operate.” (NetJets reportedly has canceled some Cessna Citation orders and deferred delivery dates of some others.)

Buffett believes that, over time, this economic reality should work to Berkshire’s benefit, given that for a great many companies, private aircraft are an essential business tool. “And for most of these companies, NetJets makes compelling sense as either a primary or supplemental supplier of the aircraft they need,” Buffett said.
Buffett couldn’t resist a sales pitch. “Many businesses could save millions of dollars annually by flying with us. Indeed, the yearly savings

at some large companies could exceed $10 million. Equally important, these companies would actually increase their operational capability by using us. Fractional ownership of a single NetJets airplane allows a client to have several airplanes in the air simultaneously. Additionally, through the interchange arrangement we make available, an owner of an interest in one airplane can fly any of 12 other models, using whatever airplane makes sense for a mission.”

Buffett said the roster of NetJets users “confirms the advantages we offer major businesses.” He singled out General Electric, which has its own large fleet but is also “our largest customer.”

As has been his style, Buffett credits his CEOs for their acumen. He said in the annual report that “Berkshire’s operating CEOs are masters of their crafts and run their businesses as if they were their own. My job is to stay out of their way and allocate whatever excess capital their businesses generate.” What’s more, he said many of his CEOs  “haven’t the slightest financial need to work.” They stick around, nevertheless. According to Buffett, “In 38 years, we’ve never had a single CEO of a subsidiary elect to leave Berkshire to work elsewhere.”