NetJets, the aviation business of Warren Buffett’s Berkshire Hathaway Inc., said its newest contracts with plane makers will help avoid another aircraft glut even as it renews its fleet with jets valued at $17.6 billion.
The fractional-jet company, whose clients take a stake in planes in exchange for flight hours, has struck deals since 2010 to buy as many as 670 aircraft from Bombardier Inc., Textron Inc.’s Cessna unit and Embraer SA. Deliveries began Thursday and will stretch over the next decade as NetJets retires older planes.
“What makes this business interesting and difficult is that you have to make relatively large capital determinations on what you expect the world to look like several years hence,” Chief Executive Officer Jordan Hansell said in an interview in Columbus, Ohio, where NetJets is based. The contracts provide flexibility, allowing NetJets to “respond where we’re inevitably going to be off one way or the other.”
Hansell is helping to turn around a business that Buffett once called his “No. 1 worry.” NetJets lost money for the Omaha-based firm from its purchase in 1998 through 2009 and would have gone broke without the parent’s support, the Berkshire chairman has written in his annual letters to shareholders. The unit had more jets than it needed, Berkshire said in a 2010 filing.
Hansell, 42, became CEO last year after serving as general counsel and president. Buffett, 82, has credited him and former Berkshire manager David Sokol with returning the company to profit through cost cuts and by trimming the fleet, which shrank by about a fifth from the end of 2008 through 2011.
Before Thursday’s scheduled delivery of a Bombardier Global 6000, NetJets had about 520 fractionally owned planes and 170 more under management. The latest contracts include orders for 225 planes and options to purchase 445 more.
“It’s very hard to say how big the fleet is going to be at the end” of the orders, Hansell said. “We’ve built sufficient flexibility in the agreements to allow it to grow, allow it to stay the same, allow it to be smaller” as needed.
The Global 6000 being handed over to NetJets is part of a March 2011 deal for as many as 120 planes, including 50 firm orders. The aircraft will join the company’s fleet of large-cabin jets to help meet demand for longer-range models.
Bombardier has benefited from those changing tastes. The plane maker won a contract this week with luxury air-charter service VistaJet Holding SA for 56 Global-series planes and options for 86 more, for a value of $7.8 billion at list prices.
“We’re finding that the market is a little more resilient on the larger side,” Hansell said. VistaJet’s order confirms “the aircraft choice we made.”
Sales of ownership shares in the new aircraft may help buoy a business that Hansell said is “picking up” in the U.S. In Europe, sales are “softer,” he said, as the region grapples with a debt crisis that has cut spending.
NetJets is also looking for growth in China, where Boston Consulting Group says the number of millionaire households soared 16 percent in 2011 to 1.4 million to trail only the U.S. and Japan. The Berkshire unit formed a joint venture with China investors to focus initially on aircraft-management services while it studies whether a fractional model makes sense in the country, Hansell said.
As NetJets competes for China’s business, Hansell is relying in part on the company’s connection to Berkshire.
“People in China love Warren,” Hansell said. “Having his picture on an advertisement at one of our functions ... is a good thing.”
Hansell is optimistic about the prospects for the U.S. economy three to five years from now, he told Bloomberg Television’s Betty Liu in an interview Thursday.
“We’re going to be in good shape at that point,” he said. “We’ll come through this, what’s been kind of a sluggish period, and I think we’ll be seeing some robust growth.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.