Why NetJets Matters

There has been a lot of back-and-forth on this blog over NetJets but rarely have I been able to pull the big picture together. It's worth taking a step back and asking, why does what is happening at NetJets matter?

> NetJets is a flagship business for Berkshire; its customers are some of the world’s richest, most famous and influential people. Similar to Berkshire’s insurance businesses, but on a more dramatic and public scale, what NetJets really sells is trust. See’s, GEICO, and the like are associated with Berkshire, but these businesses could be sold and they would remain immensely successful and profitable. That is not true of NetJets.

> NetJets is even more closely associated with Buffett himself because he has been more involved in marketing its product, personally, as a user, and in advertising, than any other Berkshire brand.

> NetJets’ sale contracts extend for five years, although they are puttable after 24 months. NetJets also leases aircraft and has long-term contracts with OEMs, FBOs, and partners such as Marquis. The business is leveraged, the industry is considerably more sensitive to the economy than average, and the long-term nature of its manufacturing and contracting has serious consequences to both the company and its business partners if plans and forecasts are badly executed.

> Berkshire has made something of a public “stand” on NetJets. It has drawn a sharp line between results in 2009 (prior management) and 2010 (current management). The senior management of NetJets is now made up largely of people who either received major promotions from within or who were brought in from MidAmerican; Sokol has referred to this as his “young” team. The economy is in disarray and the business jet industry is moribund.  There has probably never been a more challenging time to run a fractional aviation company. Anyone who is interested in business ought to be fascinated by the outcome of this story. Either this team of underdogs will pull off an amazing feat, in which case they are due a great deal of applause, or shareholders are going to be disappointed.

> The man who is running NetJets, David Sokol, is considered the front-runner as Warren Buffett’s successor. Buffett credited him with a turnaround after six months, and is making earnings forecasts rather than underplaying and downplaying the future as he usually does. Others have alleged that Sokol’s management decisions have harmed NetJets’ franchise. Whether he has turned around NetJets undoubtedly will influence whether he runs Berkshire Hathaway someday. No more important question could exist for shareholders of the company.

> What is happening at NetJets undoubtedly is contentious. Every Berkshire shareholder should be curious about learning the truth of the matter, as opposed to making uninformed guesses, because this situation is the only available window into the current management style of the man who might replace Warren Buffett in running Berkshire Hathaway.