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More On NetJets – Can they make it work?

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Joined: 19 Feb 2010
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Location: Smyrna, TN, USA

PostPosted: Mon Mar 01, 2010 10:37 pm    Post subject: More On NetJets – Can they make it work? Reply with quote

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 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 – something we are plagued with in both the airline and private aviation industries. More money has been lost than has been made, and I guess because we are in a glamorous industry more money will pour in to 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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