Buffett's fast growing business, making losses year after year

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With Berkshire Hathaway behind them the managers at Netjets really went for growth after the 1998 merger. Within two years revenue had more than doubled and customers held $2bn worth of planes. As early as 1998 Buffett asked Santulli “Who’s the competition in Europe?” to which he replied “No one.” Then Buffett pointedly said, “What do you need to make it stay that way?” (Aviation International News October 1, 1998)

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Money flowed from Berkshire to achieve the ambition of dominating fractional ownership in both the USA and Europe.

The task of building critical mass in Europe was well under way in 1999. Buffett wrote that he intended to support NetJets’ expansion all round the world “Doing that will be expensive — very expensive — but we will spend what it takes. Scale is vital to both us and our customers: The company with the most planes in the air worldwide will be able to offer its customers the best service. ‘Buy a fraction, get a fleet’ has real meaning at EJA.” (Buffett’s 1999 letter to shareholders)

The accelerator pedal was pushed even harder in 2000 with $4.2bn new planes on order. NetJets’ managers would have signed up for even more, but they were already taking about 8% of all business jets manufactured in the world and the makers could not keep up.

The fast-talking salesman

Buffett became NetJets’ number one salesman. From the off there was a fully fitted out cabin on display at the May Berkshire annual meeting (in 1998 it was a 737 Boeing Business Jet complete with bedroom, two showers, 14-hour range and 19 passenger seats). The scores of billionaires and hundreds of millionaires enjoying the Berkshire weekend events each year are prime targets for the NetJets sales teams. And Buffett started a tradition of always giving a mention in his annual letter.

In 1999 he persuaded two of Berkshire’s outside directors to buy fractions. Then he announced a breakthrough, “And now, brace yourself. Last year, EJA passed the ultimate test: Charlie signed up. No other endorsement could speak more eloquently to the value of the EJA service.” (1999 letter) Munger, renowned for being careful with money, used to fly coach class, even when wealthy, so jumping to private jet travel was quite something.

Buffett was bold enough to include in his letter a free-phone number “Give us a call at 1-800-848-6436 and ask for our “white paper” on fractional ownership” (1999 letter). The May 1999 meeting had initiated the sale of at least eight fractions. To promote NetJets Buffett would speak at dinners or business forums in places like Hollywood or London. And there was a famous advertisement with Bill Gates and Warren Buffett lounging on a jet enjoying a joke. Priceless publicity.

Go for it

In October 2000 Santulli spoke of Buffett’s attitude to growing the company, “One of the nicest things about being part of Berkshire is that if I said to Warren, ‘I’m going to go buy $1bn worth of planes,’ he would say, ‘Why are you asking me? Go do it.’” (Richard Santulli speaking to Robert P. Miles (2002) The Warren Buffett CEO).

Planes were bought at scale – with large discounts on list prices – and fractions sold; in 2001 customers took delivery of more than 50 new jets, 7% of world output.

But rapid growth was coming at a cost to profitability as the operating costs in the infant European market ran ahead of revenues and chasing after growth in the US raised operating costs there. In 2001 the chickens came home to roost. While revenues rose over 20% the business made a loss, despite an uplift of interest private jet flying after the 9/11 attack on the Twin Towers.

By then NetJets looked after 300 planes in the US alone. But rivals’ shares, when added together, accounted for almost half the market, and they were determined to remain price competitive, which left little room for profits. Buffett wrote that he expected “for a few years” only “modest profits” (2001).

Despite this gloomy prospect Buffett insisted that the strategy was correct: “Maintaining a premier level of safety, security and service was always expensive…No matter how much the cost, we will continue to be the industry leader in all three respects. An uncompromising insistence on delivering only the best to his customers is embedded in the DNA of Rich Sa

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