NetJets....Going up, anyone?

NetJets, the original and by far the largest fractional aircraft operation, was founded by Richard Santulli in 1986 and acquired by Warren Buffett's Berkshire Hathaway conglomerate in 1998 for $725 million. A decade later, the company operated some 800 business jets in the United States and Europe for thousands of share owners. However, once the global recession struck, new share sales slowed dramatically, existing owners began cashing in their shares and the company began hemorrhaging money — Buffett put its 2009 losses at a "staggering" $711 million.

Santulli resigned and in August 2009 Buffett installed as CEO David Sokol, a favorite problem solver who also heads Mid American Energy, another Berkshire company. Sokol quickly canceled orders for all new aircraft, a move that eliminated billions of dollars from OEM order books; oversaw sweeping changes in the executive suites; consolidated operations; sold off dozens of aircraft into an already flooded market; and furloughed 1,000 employees including nearly 500 pilots.

Then last year, the company acquired Marquis Jet, which sold "jet cards" using the NetJets fleet, and in October announced it was purchasing as many as 125 Phenom 300 jets from Embraer, an OEM new to NetJets. Those moves created hard feelings, worry and controversy, but seem to have had a positive effect on the bottom line. NetJets operations were predicted to end 2010 with a comfortable profit, and to continue in the black.

Long the subject of speculation and controversy within the business aviation community, NetJets has grown to be largest single business jet operator and a significant force within the industry. Its course impacts many.

Consequently, we traveled to NetJets headquarters in Columbus, Ohio, in mid-January to interview Sokol and get his assessment of the state and future of his company.

BCA: Was this assignment a surprise?

Sokol: When Warren called and said, "David, can I get you to handle a couple of things at NetJets?" I asked, "What are my qualifications?" And he said, "You've been an owner for 10 years." And actually, it's been very useful.

BCA: You must have had some sense of what was wrong.

Sokol: The thing about NetJets that was becoming somewhat obvious was that it was a great concept, but oftentimes entrepreneurs struggle to transition to the professional management side, and that was really the case here.

BCA: Buffett told shareholders, "I failed you in letting NetJets descend into this condition." But what could he have done differently? Nobody saw a downturn of this magnitude coming.

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