Berkshire Hathaway shareholders, as owners of NetJets, probably have been thinking about a famous quote by Warren Buffett regarding the economics of the aviation industry:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

– Warren Buffett, 2007 Letter to Shareholders

Of course, Mr. Buffett was not suggesting that NetJets is a lousy business. However, NetJets has posted very poor results during the recession and has bled over $500 million in red ink over the first nine months of the year based on Berkshire’s third quarter report which was discussed here earlier this month.

In addition, NetJets has had management turnover with the abrupt resignation of Richard Santulli in August which was followed by David Sokol assuming the Chairman and CEO roles.  Mr. Sokol has also been mentioned as a potential future CEO at Berkshire Hathaway.

In a lengthy interview with The Columbus Dispatch, David Sokol has provided new details regarding the management transition and prospects for NetJets in 2010.  The following excerpts are particularly interesting.

Prospects for 2010

Q: You’re anticipating at least breaking even in 2010?

A: Yes. I think barring one country bombing another country and setting off a set of economic catastrophes that I’m not anticipating, I believe based on the way the business has been reset cost-wise and the planning that we’ve done, we’ll be able to be (at) break-even at least, and hopefully profitable in 2010.

Management Transition and Cost Structure

On the business side, though, what I think became exposed from the economic downturn was that transitional need to get from an entrepreneurial-management growth style to a professional-management growth style. Probably the element that shows (up) the most in that is long-term planning.

When you’re growing a business in a startup style and slightly beyond, in a business like this where no one had ever done it before, long-term planning is difficult to do because you’re appropriately guessing to some extent about how broad the market will be. …

Our cost structure was not in line with what the economy could support. We ended up with excess aircraft in a significant number. But the good news about both of those is that they’re not fundamental to the business model. They’re just things that have to be corrected. We’re just in the process of creating a five-year plan that will allow us to make sure that we are getting our fleet size where our owners want it to be.

Politics

We have discussed the political attacks on private aviation on The Rational Walk in the past.  Mr. Sokol comments on this issue and makes the case for private aviation as a legitimate business tool:

Q: Going forward, do you think there’s any fundamental change in the way people are looking to use private aircraft?

A: I’d say that the market has shifted. There was some government demonization that private aircraft are a luxury and shouldn’t be used. The Big Three auto companies were the poster child for getting abused for that. I think that’s unfortunate. As I said, I’ve used private aircraft for 25 years. I’m certain I’ve accomplished twice as much. About 80 percent of our owners are businesses, and on that side, I think the long-term demand is probably higher than it has been in the past. …

For well-run businesses . . . private aviation is kind of the business manager’s pickup truck. You wouldn’t try to build a major construction project and not have pickup trucks. I mean, you could walk instead. You could argue that they’re an extravagance. But the reality is they are an important tool.

To read the full interview with David Sokol, please click on this link.