In a recent interview with Aviation Week, NetJets Chairman and CEO David Sokol stated that he is “comfortable” with his previous prediction that the company will post pre-tax profits of $200 million for 2010 and that “the business should always be profitable” in the future. However, Mr. Sokol also indicated that NetJets is likely to evolve into a fundamentally low margin business that may deliver 4 to 5 percent net profit margins in a “steady state, long term” environment. Berkshire Hathaway paid $725 million to acquire NetJets in 1998 and incurred cumulative pre-tax losses of $157 million from the time of the acquisition through the end of 2009. Read this article for more details.
Berkshire Hathaway posted significantly higher operating profits for the third quarter of 2010 mainly due to the contribution of Burlington Northern Santa Fe, which was acquired in February, along with improved results in the company’s diverse collection of economically sensitive businesses which have seen improved conditions this year. However, while operating earnings increased 35.6 percent from the prior year period to $2.8 billion, net earnings declined to $3 billion for the quarter which represents a 7.7 percent drop from the prior year period. The decline in net earnings was due to a small loss in Berkshire’s overall derivatives portfolio compared to a large gain in the third quarter of 2009. Berkshire’s book value per share increased to $90,823 representing a 4.8 percent increase for the quarter. Read this article for more details and analysis.
NetJets has announced a significant purchase agreement with Embraer that will add up to 125 Platinum Edition Phenom 300s to the NetJets fleet. According to a press release issued this afternoon, the agreement with Embraer is the first step in the execution of a ten year fleet plan intended to satisfy the demands of NetJets customers. The company indicates that today’s announcement is the first of several to come in the next few years and that future plans will include midsize and larger fleets in addition to orders already on the books to acquire $2.95 billion worth of aircraft. Read this article for more details.
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 typical shake-up. Read this article for more details.
Alice Schroeder has posted a letter that NetJets Chairman and CEO David Sokol sent to company employees yesterday in which he indicates that actions will be taken if “rumor mongering, deceit, and other forms of unethical behavior” persist in damaging the NetJets brand and business model. Read this article for commentary regarding Mr. Sokol’s letter.