Warren Buffett's $725m investment in NetJets looked like a waste in 2009

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Buffett’s 2009 letter included a mea culpa, “It’s clear that I failed you in letting NetJets descend into this condition”. It lost $711m in 2009 and the aggregate loss over Berkshire’s eleven years of ownership was $157m. And the Great Recession was only just getting going. There was plenty of room for regretting this investment decision.

His solution was to call in a Berkshire executive known for taking tough decisions, especially cutting back costs and staffing, David Sokol, who Buffett described as “the enormously talented builder and operator of MidAmerican Energy”.

Sokol became CEO of NetJets in August 2009 when Richard Santulli, the founder, resigned. In Buffett’s 2009 letter Santulli was briefly mentioned as the “previous CEO”, as a stickler for safety and service and the “father” of fractional ownership, but no detailed explanation of Santulli’s resignation was given. Was he pushed after a period of massive losses?

But note, while he had resigned as CEO he had agreed to stay on for a year as a consultant, so that didn’t sound like a “don’t darken the door again” type of resignation.

On the other hand, there were rumours that Santulli had been resistant to downsizing the business and the redundancies that would entail. “Sources tell us he was forced out for failing to move aggressively enough to stem financial losses at the fractional-ownership giant. Others say he fell out of favor after rejecting calls to let go of senior managers who’d worked alongside him for years.” wrote Stephen Pope in Business Jet Traveler.

Aviation International News’ Chad Trautvetter caught a whiff of the gossip “The speculation about whether or not the company founder left of his own volition was rampant in the immediate aftermath of the announcement, and several sources told AIN at the time that NetJets’ finances might have been a factor.”

The speculative fever was not helped by Santulli’s use of the time-honoured phrase used in resignation statements, the one usually received with scepticism, “to spend more time with my young family and pursue other interests”.

But there were plenty of people who were willing to take Santulli at his word. He had a passion for thoroughbred horses, three children and three dogs. So there were plenty of other aspects to his life which he had been sacrificing to some degree while struggling to turn NetJets to profits.

Buffett seemed regretful and friendly in his August 2009 the release. “It is with reluctance that I accept Richard’s decision to step down. Richard Santulli is synonymous with the fractional jet ownership industry and his vision and energy has made NetJets the leader that it is today. All of Richard’s friends at Berkshire Hathaway wish Richard well in this transition.”

In December 2009, Santulli became chairman of Loan Value Group (a mortgage market company) and in August 2010 he launched Milestone Aviation Group, a helicopter and business jet leasing company. He also further developed philanthropic activities, focusing on individuals with developmental disabilities; supporting public education for underserved youth; military personnel suffering the effects of a traumatic brain injury and post-traumatic stress, and the Andre Agassi Foundation for Education. He avowed “everything I have will be given away while I am alive, minus enough for my wife to live.”

Can the business be saved?

There was much comment around the question of whether the fractional business model was broken. Had it become too expensive relative to the alternative facing an executive of simply chartering a plane as needed? Were there too many planes chasing too few clients?

Michael Riegel of AviationIQ, an advisory firm, declared in 2009 the fractional business model to be broken, “there are a lot o………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1


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