Berkshire Hathaway 2003 Annual Meeting Audience Question # 1

NetJets will not make a profit this year but is still a good business

Warren Buffett:

OK we’re going to start around and we… as we’ve added two microphones to the Music Hall… and let’s start with zone 1, which is over on my right. And do we have the first question?

Audience Member:

Good morning. I’m George Brumley from Durham, North Carolina.

My first question is related to Executive Jet. It’s been almost five years since the acquisition of Executive Jet, a purchase in a much different economic and geopolitical environment.

What business metrics do you use to measure success in an industry with as much flux as this one, and what has changed in those metrics since the time of acquisition?

What are the prospects for Europe, and have those prospects changed?

While none of the competitors approach Executive Jet in terms of scale and scope, what impact are they having on the competitive environment?

And lastly, would you please explain the long-term aspect of the business model, as many of the jets age out of the program?

Warren Buffett:

OK George, I got through college answering fewer questions than that.

But George’s uncle was best man in my wedding, so he gets all he wants.

The… NetJets, as you will see in the first quarter, had a significant loss. A large portion of that loss was caused by the write-down of planes because there… of…

I love it, they call it in the trade, they call them pre-owned planes. I call them used planes. But the… they did the same thing in manufactured homes, so they call them pre-owned homes instead of used homes.

But in any event, putting aside the euphemisms, there… the used plane market, well the entire business aircraft market, is very soft. The used plane market has far more planes for sale than, say, three or four or five years ago.

That’s going to affect the production of new planes… already has. And it affects pricing in used planes, and we have bought back planes from people leaving the programs, which we do and will continue to do.

But we have bought during a declining market, some of those, and we have had write-downs in connection with those planes. And you will see in our first quarter report, I believe that that’s probably the only operation we have that’s losing money.

And we have… it’s a popular product, it’s a growing business, it’s going to be a very big business in my opinion over the years.

And we see it every day. I mean, we write a lot of business, and customers are joining us.

There are three main competitors. I think it’s fair to say that they’re losing significant money from operations, forgetting about any markdowns they might have on their own inventories.

Our market share, we get figures from the FAA as to registrations and as to people that are selling their planes.

And our share of market, which was always the largest, has gone up dramatically in the last couple of years. It’s gone up to roughly 75 percent, in terms of value of planes. And we’re talking 75 percent of the four-company market. It’s gone up even higher than that, in terms of net planes. In other words, new planes sold, less planes coming back.

But the pricing we are receiving does not… in the U.S. it would be… absent this one write- down… it would be very, very modestly profitable.

In Europe, we have lost and we are losing significant amounts of money. Business jets in Europe, the total is about one… and I’m not talking about ours, I’m talking about all… are about roughly 1/10th the number as in the United States, even though the population is similar.

So we have grown from a small base quite rapidly over there. Nobody else will be taking us on. It’s part of a service that will be part of a very big business worldwide, in my view, over the years. I don’t think anybody else can come in after us.

So I think it’s integral, and it is integral, to our operation. Half the… roughly half the miles flown in Europe arise from American owners. And that will just do nothing but get bigger over the years, because our number of… every month our number of owners goes up, goes up significantly.

We have people here from Marquis, who have essentially… they’ve become a customer of ours, and then they resell cards for 25 hours. And they have added 40 or 50 customers a month in recent months. So it’s a popular service, it will be a much bigger business.

I think there will be a shakeout at some point, and maybe fairly soon. You can look at the Raytheon prospectus and… or the Raytheon 10K, and you will find some interesting information about their operation. And you can… it’s not hard to figure out what’s going on.

I don’t know the answer as to when the shakeout will occur. But I can assure you that we will not be one of the shook.

Charlie, do you want to comment on it?

Charlie Munger:


Warren Buffett:

He’ll comment on the profitable operations. He gives me the one…

The long-term business model is that, basically, we believe that, you know, perhaps 10 times the number of people that are now flying with us will be flying with us some years in the future.

That having the best service, the best record, and the best policies for safety and security, will leave us very dominant in the field, and that people will pay an appropriate price for the service.

And we see all kinds of evidence of that. But we do not see a profit this year, in my view, at NetJets.

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