“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 Berkshire Hathaway Shareholders
Berkshire Hathaway’s NetJets subsidiary is not a commercial airline, but after experiencing the poor financial results during the recession as well as aggregate losses during Berkshire’s eleven years of ownership through the end of 2009, shareholders may wish that Warren Buffett had taken his own advice and not purchased the company to begin with.
While very serious, the financial situation at NetJets is only one part of the story given the controversy surrounding management changes that were made in August 2009. Mr. Buffett delegated the task of restructuring NetJets to David Sokol who has often been mentioned as a leading candidate to eventually take over as CEO of Berkshire Hathaway. While Mr. Buffett seems very satisfied with Mr. Sokol’s performance based on comments in his latest letter to shareholders, the response of many NetJets employees has been extremely negative. Mr. Sokol has complained about “rumor mongering, deceit, and other forms of unethical behavior” that threaten to undermine the brand. Corporate restructuring is never pleasant and often ugly, but the drama at NetJets seems far worse than a typical shake-up.
We have covered NetJets in much detail over the past several months (click here for an archive of past articles) and will not attempt to discuss all of the events of the past year in this article. Instead, we will focus on whether the downsizing activities at NetJets have caused irreparable harm to the brand, as many employees or former employees of the company have claimed.
Has Restructuring Harmed the NetJets Brand?
Much of the criticism has been related to Fortune Magazine’s profile of the turnaround at NetJets which we discussed in early August. Several NetJets employees, many posting on an anonymous basis, have commented on Alice Schroeder’s website which has included extensive coverage of recent developments at NetJets. A common sentiment among the employees seems to be that Mr. Sokol has reduced the focus on safety and the customer experience which could have a long term detrimental impact on the NetJets brand.
Here is one comment made by an anonymous writer regarding customer satisfaction:
Without question there has been a change at NetJets, which has been perceived by most of its employees and many of its customers. Unfortunately, some of this change does not seem to have been positive when it comes to the brand. Many customers have and will continue to vote with their feet and that’s probably the best survey of their satisfaction.
Here is another comment alleging that Mr. Sokol is not taking safety seriously:
The fact Sokol snubbed a safety concerns meeting and then threatens everyone with a shutdown right after the meeting indicates safety is not a priority to him.
There are several other similar comments making the same general point. Are these allegations true? It is impossible to know for certain since the writers refuse to identify themselves, perhaps for understandable reasons if they are still employed by the company. However, the comments seem to directly contradict Warren Buffett’s statements regarding the turnaround at NetJets and also call into question the statement made in Berkshire’s second quarter earnings press release in which the company says that customer satisfaction scores at NetJets are at “record levels”.
NetJets Customer Satisfaction Survey: Exclusive Details
While customer satisfaction surveys are obviously not a perfect way to determine whether a company’s brand value remains intact, a consistent program of seeking feedback from customers can provide warning signs of a change in attitude. NetJets is a major financial commitment for most customers and not one that is likely to be abandoned due to one or two poor experiences. However, an accumulation of negative experiences can prompt a loss of business and negative word of mouth that could damage the brand.
Berkshire Hathaway did not provide details regarding the survey in the press release, but The Rational Walk was able to obtain exclusive information regarding the survey methodology from a NetJets representative. The company conducts surveys through an in-house quality control department. Surveys are randomly distributed to NetJets owners within three days of a flight. Approximately 250 surveys are completed each month.
The following information was provided by a NetJets representative in response to an inquiry:
The survey questions vary for each Owner depending on the services provided. Owners who arranged catering or ground transportation will receive questions relating to those topics while Owners who did not utilize those services will not. Most questions are either rated on a scale of one to five or positioned for a yes or no response. There are several opportunities for providing comments regarding the Owner’s experience in each category. Sample questions include:
* Over the past 12 months, how would you rate your overall satisfaction with NetJets? (Extremely satisfied to not satisfied)
* How likely are you to continue your relationship with NetJets in the future? (Extremely likely to not likely)
* How satisfied are you with NetJets’ performance on this specific flight? (Extremely satisfied to not satisfied)
The surveys have been distributed for nearly 10 years and have been a way to measure our performance and make corrections to meet the Owners’ needs where necessary. Some of our highest rates have been reported in our Owners’ overall satisfaction with NetJets (95 percent last quarter) and their likelihood to recommend NetJets to friends and colleagues (93 percent last quarter).
Assuming that the surveys are distributed to NetJets customers in a random manner and standard methods of statistical sampling are used, we can at least draw the conclusion that the overwhelming majority of customers remain satisfied with the service. Furthermore, from a trending perspective, the fact that overall satisfaction is at the highest recorded level over the past ten years indicates that no dramatic turn for the worse has occurred over the past year.
We should note that many of the accusations regarding safety and service quality may only surface after a longer period of time. For example, lax safety practices would not be immediately apparent and may not have any impact on customer satisfaction in the short run.
Bottom Line: Story Continues to Play Out…
The bottom line is that the NetJets story has not fully played out yet. While the company has returned to profitability this year, only sustained profitability over a period of several years (including one or more economic downturns) will tell us whether the business model has been properly rationalized.
Berkshire Hathaway shareholders are correct to evaluate developments with a critical eye based on past results. In order to succeed in the future, NetJets must above all maintain its reputation for quality and safety. The recent customer satisfaction survey is not “proof” that the brand is intact, but it is a piece of evidence that casts some serious doubt on anonymous reports of the brand’s imminent demise.
What about Berkshire’s Brand?
One additional factor to consider is that ugly situations of this nature are very uncommon at Berkshire Hathaway and could have a negative impact on future acquisitions. Fairly or not, if owners of businesses who may be interested in selling to Berkshire believe that their companies may later be restructured in a brutal manner, they will be less likely to give Berkshire the kind of terms that have been common in the past (see our book review of The R.C. Willey Story for a good example). For this reason, further reporting and analysis of the situation at NetJets is critical and has much broader implications for Berkshire as a whole, particularly when it comes to Berkshire Hathaway’s brand in the market for acquisitions.
Disclosure: The author of this article owns shares of Berkshire Hathaway.