NetJets Faces Economic and Political Headwinds

Published on May 12, 2009

In today’s economic and political climate, few businesses seem less attractive than fractional aviation.  Companies are under constant pressure to cut costs particularly in areas that could be perceived as frivolous executive benefits during a deep recession.  Executives everywhere have noted the political criticism facing those who would dare to fly on corporate aircraft to Congressional hearings.  Who in their right mind would purchase a corporate jet or even a fractional share in this environment?

Like many other controversial economic issues, the debate over private aviation has been largely emotional and uninformed.  The reality is that when a company is paying executives millions of dollars per year in compensation, it is important to ensure that these individuals are as productive as possible and can travel quickly and efficiently.  It does not make much sense to require an executive who costs a company $5 million per year to fly commercial aircraft if that would consume an excessive amount of time and prevent the executive from reaching as many destinations as possible in the shortest amount of time.  At a certain point, the economics favor private aviation.

NetJets Faces Headwinds

Berkshire Hathaway’s NetJets subsidiary has been a leader in fractional aviation for many years.  Berkshire’s first quarter results indicate that there has been a major downturn in the business as the recession has deepened:

Revenues of NetJets in [Q1] 2009 as compared to 2008 declined significantly as a result of an 80% decline in aircraft sales as well as lower flight revenue hours. The decrease in revenues and pre-tax earnings reflects the negative impact of the global recession on substantially all of Berkshire’s other service businesses and in particular, NetJets’ fractional ownership business which reported a pre-tax loss of $96 million (includes writedowns of aircraft of approximately $55 million) as compared to pre-tax earnings of $45 million in 2008.

NetJets and other fractional operators are not only suffering the impact of lower sales volume and fewer new customers but existing customers are also flying far less than they were a year ago.  Apparently NetJets also had to recognize a loss on write downs of aircraft presumably because the market value for used aircraft has declined due to lack of demand.

According to a recent article in the Financial Times, Warren Buffett made the following comments about NetJets at the recent Berkshire Hathaway annual meeting:

Mr Buffett, referring to the annual Berkshire get-together in Omaha, Nebraska, said: “We had a record number of NetJets planes come out here. But at the Super Bowl, we were down. At the Masters tournament we were down. Overall, even though we’ve got about the same number of customers, they’re just not flying as much.”

Longer Terms Trends are Bullish for Fractional Operators

Despite the short term challenges facing the industry, many observers believe  that the long term trend favors fractional operators.  According to the Financial Times, the fractional business only accounts for 10 percent of the aircraft in the private aviation industry and represents a middle ground between ownership of a jet and retail charters.  As companies cancel or defer corporate jet orders due to economic or political considerations, fractional ownership becomes more attractive in comparison.  In addition to the cost benefits, fractional owners typically enjoy more flexibility given that they are purchasing a share of a certain class of aircraft rather than a specific plane.  This allows for more rapid deployment of a plane on short notice and the fractional operator takes responsibility for airplane maintenance, scheduling, and logistics.

Warren Buffett has said on many occasions that his lifestyle is not that different from a typical upper middle class existence with the exception of private aviation.  In many respects, private aviation is a great competitive advantage in business if the opportunity costs associated with the wasted time and hassle of commercial aviation outweigh the higher cost of private aviation.  Despite the high price tag of fractional shares and the seemingly shocking per hour charges for private aviation, the math can work out in a company’s favor if the time of the individuals involved is sufficiently valuable.  This may not be a politically correct position to take in the current economic environment, but the economics of fractional aviation remain compelling in the long term regardless of the political climate.

NetJets Faces Economic and Political Headwinds