NetJets: Ready for takeoff?

By Colin Barr, senior writer


NEW YORK (Fortune) -- If it's possible, Berkshire Hathaway's NetJets unit seems to have troubles rivaling those of longtime pitchman Tiger Woods. But Berkshire chief Warren Buffett says the company's rehabilitation is well under way.

NetJets, which sells fractional ownership shares in private planes to well-to-do travelers, was "the major problem for Berkshire (BRKA, Fortune 500) last year," Buffett wrote in his annual letter to Berkshire shareholders, released Saturday.

NetJets lost $711 million for the year, Buffett wrote, wiping out previous years of profitability and leaving the business $157 million in the red, before taxes, since Berkshire acquired it in 1998.

Back then, Berkshire forked over $725 million in cash and stock for the company, then called Executive Jet. In an interview with Forbes magazine, Buffett made clear that he had big plans for the company, likening it to a startup that revolutionized the package delivery business.

"FedEx (FDX, Fortune 500) started small and is now huge," Buffett said. "Same thing will happen with Executive Jet."

Executive Jet, now called NetJets, has indeed gotten huge. The value of its jet fleet exceeds that of its three top competitors combined, Buffett wrote in this year's letter.

But those gains came at considerable cost. NetJets' debt load, just over $100 million when Berkshire bought the company a dozen years ago, surged to $1.9 billion last April.

Only through the backing of Berkshire Hathaway -- a privilege Berkshire doesn't often extend to its subsidiaries -- did NetJets avoid a bond market debacle like the one currently plaguing Greece.

"Without Berkshire's guarantee of this debt, NetJets would have been out of business," Buffett said in his letter to shareholders.

NetJets' problems prompted Buffett last July to tap Dave Sokol, who built Berkshire's MidAmerican Energy unit, to turn around NetJets. He has emerged as a sort of executive fix-it man for Berkshire and is widely seen as a possible eventual successor for Buffett atop Berkshire itself.

The decision to bring in Sokol wasn't painless. NetJets has cut 350 jobs since Sokol took over, and nearly 500 pilots recently went on furlough as part of a cost-cutting push. He closed the company's administrative offices in New Jersey and consolidated operations in Columbus, Ohio.

The rank and file haven't been the only victims. Richard Santulli, a former Goldman Sachs (GS, Fortune 500) executive who later sold NetJets to Berkshire but had stayed on to run the company since the acquisition, departed soon after Sokol took over. A New York Times report said some former NetJets execs viewed Sokol's approach as too aggressive.

Nonetheless, Buffett said the change has brought results. NetJets is now "solidly profitable," he said in this year's letter, and Sokol has been whittling the company's once-burdensome debt load down.

It was down to $1.4 billion by year-end and Sokol expects to trim an additional $300 million in debt by the end of 2010, he told the Columbus Dispatch last month.

Buffett, for his part, seems certain that NetJets will not only survive under Sokol's leadership, but thrive.

"It's clear that I failed you in letting NetJets descend into this condition," he wrote in the shareholder letter. "But, luckily, I have been bailed out." To top of page

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