Plane Conversations

A Saturday, February 27th article in the Columbus Dispatch, by  Marla Matzer Rose covers the story on NetJets and Warrens Buffett’s letter to the stockholders regarding the company’s performance.

I posted on November 17 about the announcement of NetJets pilot layoff. At that point, revenues were off 41% and new aircraft sales were off 79%. Since that post, more layoffs have happened and in this article, the following is stated by Warren Buffett about the financial situation at NetJets:

“In the eleven years that we have owned the company (NetJets), it has recorded an aggregate pre-tax loss of $157,” Buffett said in his letter. “Moreover, the company’s debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, Net Jets would have been out of business. It’s clear that I have failed you in letting NetJets descend into this condition.”

Buffett said he had been “bailed out” by David Sokol, whom he appointed CEO of NetJets in August after the abrupt resignation of longtime CEO Richard Santulli.

Buffett praised Santulli for instituting “top-of-the-line standards for safety and service” at the company that are being continued, but said that the leadership of Sokol, who is chairman of Berkshire-owned MidAmerican Energy, and considered one of Buffett’s likely successors has been “transforming: Debt has already been reduced to $1.4 billion, and, after suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.”

Buffett echoed what Sokol has said about NetJets, that it is “likely to operate at a profit in 2010, assuming there is no further deterioration in the U.S. economy or negative actions directed at the ownership of private aircraft.” For 2009, NetJets posted a $711 million loss. The losses were largely due to write-downs on the value of aircraft, with a smaller amount attributable to the cost of laying off workers.

Much like the financial performance of the airline industry, NetJets has not made a profit in aggregate for the past 11 years.

Something is wrong with a business model that has an aggregate loss over the long haul and we are plagued with it in both the airline and private aviation industries. More money has been lost than has been made, and because the industry is glamorous, more money will pour into bad business models in the future.

According to Mr. Buffett, the company is now solidly profitable since all of the cuts in both pilots and overhead. So what has changed about the business model to fix it? Do they shrink their way to profitability?

What created the situation in the first place? Was the model broken to start with and just needed a deep recession to make it obvious? How do you lose more in one year that you can make in 10 years? 

On this site we talk about the airlines and their broken system but private aviation has its fair share of issues and financial problems. Something has to change if we are to sustain long term viability as an integral part of the national transportation system.

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In a November 12 article on AIN Online Matt Thurber reports the following:

“Revenues at NetJets, Berkshire Hathaway’s fractional jet share company, dropped $471 million (41 percent) in the third quarter of 2009 and $1.495 billion (42 percent) for the first nine months of 2009, compared with 2008 results, according to the parent company’s November 6 quarterly report. The decline in revenues stems from a 79-percent drop in aircraft sales, according to the report, and a 24-percent reduction in flight revenue hours.”

Other recent news on NetJets says that they are firing 495 pilots out of 3000 employed worldwide.

The numbers are staggering:  42% loss in revenue and 79% drop in aircraft sales year over year. Will the revenue and new aircraft sales for this company bounce back to what it was?

NetJets hopes to make a profit in 2010 but only through severe cost-cutting measures which includes the loss of a lot of jobs.

I see no vision from the management about how they are going to grow and prosper in the next 10 years. There is no economic recovery news here that shows new jobs. Without new jobs we don’t have an economic recovery in business and general aviation! 

I was hoping we had hit the bottom in business aviation but it seems there may still be some room below, at least in some segments of our industry.

I hear mixed comments out there from our peers in the business with some saying they are seeing a trend back up in sales activity and flying while others are saying that they wish the phone would ring. Is the glass half full, half empty, leaking like a sieve, or filling back up?

The old ways of doing business and especially the old pricing models are not going to work in the new economy. It seems to me there has been a complete reset. 

There will still be people and businesses around who will pay the high prices for business jet flying but not as many as there were 18 months ago. You can bet that those who sold their jets or quit flying by private aircraft for economic reasons are going to be looking for new pricing models before they jump back in. And to add to the problem, it appears to me that many who lead in our industry are thinking in terms of the scarcity of the existing market and not the abundance of a whole new market created by innovation.

I believe those whose glasses will start filling back up from the half-full state are the ones who aggressively seek ways to change the business model of private air travel.  Those who don’t may wake up with an empty and broken glass.

I want the full glass again. How about you?

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