Owners, Profits Return to NetJets

 

NetJets added 100 net fractional share owners in 2010, and company CEO David Sokol is optimistic that the demand for fractional operations remains strong, particularly among corporations that want to keep flying privately. In an interview with Aviation Week editors William Garvey and Joseph C. Anselmo, Sokol notes that the fractional ownership provider lost 82 net share owners during the downturn in 2009, but since has made that back “and them some.” He also notes that corporations have been a driver of that growth.

“The late 2008 shock that corporate America took when survival was in question caused boards to look at every line item in their budgets. And that’s been a real positive for us,” he says. “The boards want the CEO to continue flying privately, but they want it done efficiently, and safely. So in 2010 our strongest segment was corporate share sales. I think it’s going to be true going forward.”

Sokol, who took over for fractional pioneer Richard Santulli in August 2009, faced mounting losses, with large orders on the books for numerous aircraft types. He took a number of swift actions to help improve the financial outlook of the company, including laying off 1,000 employees and canceling many of the aircraft orders. The company plans to retire 40 aircraft this year alone.

“Starting in late 2006 and early 2007, you could see that the capital being expended was exceeding the returns coming in,” he notes. “There were commitments to acquire too many airplanes when you’d already seen a leveling off of the industry. We honored every contract and paid damages to cancel those airplanes in significant numbers. But to me, that was an investment in allowing us to go out and get the business stabilized and profitable and then buy aircraft for the future.”

NetJets, however, also has been engaged in negotiations with the manufacturers to discuss the fleet of the future. “The goal is to take the number of different types down and to buy new-generation aircraft that we specify versus just what the manufacturers have,” he says.

NetJets announced an order of 125 Embraer Phenom 300 jets in October, and is currently evaluating possibilities for a large-cabin fleet. A decision on a large-cabin aircraft should be announced in about three months, Sokol says.

He is confident that the moves will pay off and that the result will be a profitable NetJets in the future. He estimates that the after-tax margin will be between 4-5%, or around $200 million pre-tax.

Despite the past performance, NetJets parent Berkshire Hathaway is committed to the business, says Sokol. “I think it’s a business that Warren [Buffett] believes has a real place, particularly for Berkshire. Our 4,000 customers are among the most important, wealthiest, most powerful people in the world,” he says. “And that’s a group of people Berkshire does a lot of work with in different ways. But I think fractional aviation is going to demonstrate itself as a more important product long term than it was even perceived to be before the downturn.”

He acknowledged the difficult decisions and steps that the company has had to take. “When you have a major economic shift such as in the fall of 2008, you have to reinvent yourself,” he says. “Five years from now, I’ll wager all of us will look back at 2008 and say it was the best thing that ever happened to the aviation industry because it’s forcing innovation that wasn’t going to happen.”

And, once NetJets is on solid footing, Sokol predicts his role with the company will change. He notes that he promoted Jordan Hansell to president in November. “Some time in the future the CEO’s title will transfer and I’ll stay chairman. It could be in the first quarter or it could be a year and a half from now,” he says. “I’ve done this enough times now to know when it’s time. You can see it; you can feel it. I won’t keep it [the title] a day longer.”

Photo credit: Midamerican Energy

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