NetJets is heading back to profitability?
In a recent meeting of shareholders, Berkshire-Hathaway executives reported that NetJets has returned to profitability after big losses in 2009. The company reports that NetJets had a pretax profit of $ 57 million (US) in the first quarter of this year which is compared to a $ 96 million (US) loss last year.
Warren Buffett attributes the turn around to putting David Sokol in charge. David Sokol also runs the company’s energy – utility business, MidAmerican, and is a candidate to take over Berkshire Hathaway’s operating businesses as a successor to Buffett.
We have posted a couple articles on NetJets over the past few months regarding the viability of their business model built on fractional jet operations. NetJets is a key leader in our industry and how they fare will make a big difference in the future of private jet travel.
The key will be if the company can sustain profitability over the long haul. If they can, then it proves they have a working business model. One quarter of profit or even one year of profit does not make a business. You can cut overhead and get most any business profitable if there is some present sustainable revenue stream, but can you grow it in the new economy? Will more people line up to buy fractions of business jets as they did in the last 15 years?
A lot of new business jet orders were canceled in the downturn of the economy. Will NetJets start ordering new aircraft again? Will they operate under a similar business model as they have in the past or will they have to come up with a new way of structuring their fractional business to make it work in the future?
It costs a lot of money to own and operate a business jet and there are fewer companies today than there were two years ago who are willing to spend the money, whether it is a whole aircraft or a fraction. NetJets may get new business from companies who overreacted by shutting down their flight departments last year; but, that will be limited.
Unless business jet travel innovates to the point where the occupied seat cost is brought down significantly, the NetJets client will remain the high end business user and elite traveler. That market is small in comparison to the rest of the travel market.
So where does the new client for flying on a business jet come from?
7 Responses
to “NetJets is heading back to profitability?”
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- May 19, 2010: Clint White
- May 19, 2010: Lufthansa Fills First A380s, Boosting Profit to Asia (Update2 | World Cup 2010)
- May 19, 2010: nyknk
There is no doubt that the fractional industry suffered tremendous upheaval in the last 3 years. With the collapse of the new and resale jet market, the fractional model simply didnt make sense if shares could either not be sold on new aircraft that were rapidly depreciating or new shares were being sold at or below cost. As you look at each of the fractional players, fundamental changes have or will be made.
On NetJets side, it was obvious that the company had simply overexpanded. Even into early 2008 the company was still persuing a rapid growth policy that was simply not going to be sustainable with the economic downturn. With the replacement of their CEO, NetJets was forced to shrink to its client base. While painful to do, the company was bleeding 10 of millions of dollars last year. Right now much of their current profitablity is due to cost cutting rather than business growth.
Where new clients are going to be found is to look beyond the traditional fractional model. With the current clientel pool rather small and the fractional market rather saturated, new and progressive ideas need to be implimented in order for the major players to grow. Here are some ideas:
Companies like CitationAir have decided to deemphasize the fractional business. They have moved into the more traditional charter, “jet card” and aircraft management business. The only problem with this current strategy is that much of their new business will STILL come from new aircraft sales which are still rather depressed and contrained by available credit issues. Perhaps its time to move in a different direction.
A simple idea would be to utilize the power of the social media world to either have a central area for charter brokerage (rather than the current cutthroat competition of the current model) and/or selling shared legs with multiple clients at the same time with each reaping the cost benefit. It is also important that fractional and other players can market to less traditional areas and businesses and show the true advantages of business jet travel something they have yet to do.
I still have yet to see ANY of the fractionals use the power of social media in their business model. Go on Twitter or Facebook. While they many have a presence on these sites. What are they doing with that presence? Are they selling or marketing their business effectively? Not that I can see? I dont think that they truly yet appreciate the tremendous power that is available to them for business growth. Thier failure to ultilize this power has allowed other, more progressive players, to emerge even in a tough market. Are they paying attention?
It is imperative that the fractionals look beyond the high end market and of course continue to have the highest levels of customer service and quality. There is no doubt that the fractional model is broken, but an infusion of new and different ideas and a slower growth strategy can start to generate real profits from business growth.
Clint:
As always I appreciate your comments and insight into the issues.
It is especially interesting to note your comments on the lack of use / understanding by the big guys of the power of social media to reach new markets. It seems that they are doing the same old things over again and I wonder if they expect a different result.
At what point do they start paying attention?
Thanks for continuing to read and comment on our site.
Allen
WOW ! What a turn around for NETJETs.
Hello Clint,
Blue Star Jets is a charter brokerage utilizing technology to harness a competing network of jet charter operators. We also sell shared legs under our Share a Jet program. We are the solution you suggest!
Christine@bluestarjets.com