Sunday, November 22, 2009

Course correction: Net Jets

Great Interview with David Sokol.

NetJets still has plans to grow in Columbus, new CEO David Sokol says. It'll just take a little longer.

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David Sokol has had to make painful decisions in his first three months as chief executive of NetJets, the Columbus-based company owned by Warren Buffett's Berkshire Hathaway.

Sokol laid off more than 800 employees -- 495 pilots, who could be recalled as needed, and 350 others -- in the face of millions of dollars in losses associated with the recession. He also disappointed local officials, who had successfully lobbied the company to undertake plans for a $200 million expansion in Columbus, with news that any expansion would be more limited and take longer than anticipated.

However, Sokol sees great value and potential in NetJets, which is the largest fractional-ownership private-jet company in the world. He expects the company to break even or see a profit next year. The challenge, he says, is to transition NetJets from an "entrepreneurial" company -- a reference to its style under his predecessor, Richard Santulli -- to one that's being "professionally managed."

Considered a possible successor to Buffett at the helm of Berkshire Hathaway, Sokol sat down recently to discuss NetJets and where he sees it going.

Q: Your background isn't in aviation. What experience do you bring to this position?

A: I've had companies that have had our own planes (since 1984) and have had NetJets shares for years. So I come into this company with an owner's perspective. I don't know that I really thought when Warren (Buffett) asked me to do this that that would necessarily bring me much expertise. The interesting thing is that I'm probably the only person in the company who comes to it from that standpoint.

In many ways, significant, operating businesses have major similarities. Whether it's the energy business, the consumer-products business or a very high-end service business like this, there are fundamentals to running a business that are the same. One of the things we needed to do was complete the transition of the business from an entrepreneurial one to a really professionally managed, long-term phase.

Q: What things did you identify when you came in as needing to change at NetJets?

A: Well, first, I'll speak to the strengths. We manage a total of 800 aircraft at the company -- most of them NetJets, and about 180 with our Executive Jet Management out of Cincinnati. There's no one even remotely our size. If you take the next five competitors, there's not even a sizable second place. That's a huge moat, a great businesses advantage.

Secondly, the safety culture and the owner-services culture is the best I've ever seen. I come from a culture where safety is a priority in everything we do, and this company is even better. In this industry, they not only lead the industry, they set the benchmark. . . .

Plus, I think we have a very high-quality product and a service owners want. Our customer service is unparalleled. Here's a great example I couldn't have been more proud of:

Last Sunday, I was to get on a NetJets plane. . . . I was driving to the airport when my phone rang. It was the customer-service department. The man said, "Uh, Mr. Sokol, a customer just had a problem on their plane leaving Omaha and called and wanted to know. They have a time-sensitive meeting to get to. Can we get them to where they're going? Their plane had to return and has a mechanical (problem). We hope you're OK with this, but we just let them take your plane."

What a perfect answer. Because they were able to get me where I needed to go with only about an hour-and-a-half delay. . . . I don't think there's many companies that would just bump their CEO without talking to him first, but I have to say, I couldn't have been more proud of them. The customer has to come first in every organization. There are very few companies where they really mean that. Here, they do.

On the business side, though, what I think became exposed from the economic downturn was that transitional need to get from an entrepreneurial-management growth style to a professional-management growth style. Probably the element that shows (up) the most in that is long-term planning.

When you're growing a business in a startup style and slightly beyond, in a business like this where no one had ever done it before, long-term planning is difficult to do because you're appropriately guessing to some extent about how broad the market will be.

We're buying aircraft as much as 10 years in advance. We have to set up infrastructure to be able to accept those aircraft and crew them and things. That's probably the one area that we were the most deficient in.

Our cost structure was not in line with what the economy could support. We ended up with excess aircraft in a significant number. But the good news about both of those is that they're not fundamental to the business model. They're just things that have to be corrected. We're just in the process of creating a five-year plan that will allow us to make sure that we are getting our fleet size where our owners want it to be.

Q: You've said that the majority of NetJets' losses this year have been in aircraft write-downs.

A: That's right. . . . This year, that will be 70 percent of the losses, just in impairment on the aircraft we own.

We'll continue to have those impairment losses in the third and probably the fourth quarter. But that's a function of the market value of aircraft. That does not imply any future layoffs. We believe we've got the cost structure now where we need it to be on a long-term basis, and I don't anticipate further reductions.

Q: How do you view the layoffs you've had to make since coming in: about 350 workers, or 5 percent, of the work force in September, then 495 pilots this month?

A: In my view, it's management's job to run the company in such a way that such large reductions in force should not be necessary. To me, that's the worst thing that a manager has to do . . . a significant reduction in work force. It affects people's lives. We should spend our time making sure we don't allow that to happen. It's not a pleasant thing for anybody.

Q: You're anticipating at least breaking even in 2010?

A: Yes. I think barring one country bombing another country and setting off a set of economic catastrophes that I'm not anticipating, I believe based on the way the business has been reset cost-wise and the planning that we've done, we'll be able to be (at) break-even at least, and hopefully profitable in 2010.

Q: Going forward, do you think there's any fundamental change in the way people are looking to use private aircraft?

A: I'd say that the market has shifted. There was some government demonization that private aircraft are a luxury and shouldn't be used.

The Big Three auto companies were the poster child for getting abused for that. I think that's unfortunate. As I said, I've used private aircraft for 25 years. I'm certain I've accomplished twice as much. About 80 percent of our owners are businesses, and on that side, I think the long-term demand is probably higher than it has been in the past.

There also has been a focus on cost-effective utilization of aircraft. If you need less than a full aircraft, there's no question what we offer is far superior both economically and in terms of quality than keeping your own plane that you only use half the time. Many of our customers have a flight department with two or three aircraft, then they have three different one-quarter ownerships with us. That side of the business, I think, will come back and be even stronger.

I think the area that the demonization has really affected is the luxury use of airplanes, which is only 20 percent or less of the business. . . . It used to be that we praised success, and we've gotten in a mode of criticizing it. The other effect that the economy has had is, quite honestly, there were probably people using a card program or something that was a bit of an extravagant expense for their economic standpoint. They're probably not likely to return very quickly. . . .

For well-run businesses . . . private aviation is kind of the business manager's pickup truck. You wouldn't try to build a major construction project and not have pickup trucks. I mean, you could walk instead. You could argue that they're an extravagance. But the reality is they are an important tool.

Private aviation allowed itself to get a bad name in terms of being a luxury. There's no question it is, don't get me wrong. . . . But properly used by corporations, it's 90 percent tool and 10 percent luxury at most. And I think our industry needs to be more proud of that, and not shy away from it.

Q: How would you characterize the company's relationship with Columbus?

A: The headquarters are here, and I can say, because Mr. Buffett has said it twice and he's the boss, it's here and it'll always be here.

Berkshire also has another 3,000 employees in Ohio, including two other headquarters: Fechheimer (Fechheimer Brothers, a Cincinnati-based uniform maker) and Scott Fetzer (a holding company for industrial and commercial-product companies, based in the Cleveland area). Ohio's been a great state for us to do business.

Q: Will you continue the kind of high-profile parties they were organizing out of the New Jersey office of NetJets before it was closed this month? (The company's headquarters had been in Woodbridge, N.J., although the operational headquarters has always been in Columbus. NetJets had become known for sponsoring lavish events for clients, including Las Vegas poker tournaments and an annual art show in Miami Beach.)

A: We're going to reduce those. We've talked to the owners about whether that's valuable from their perspective. Some . . . say, "That's real nice, but I don't live in Miami or New York. I live in Tulsa. So I can't take advantage of it." The bigger problem is the follow-on question, which is: "But am I paying for that?"

Most of our customers are those that use NetJets for business transportation, so their companies wouldn't let them go to these events, which is appropriate and understandable. I think some things we were doing were to the level where they assumed they were paying for it. The reality is, they weren't -- we were.

About half of our customers concentrate around four or five major cities in the U.S. The other half are spread out everywhere. We certainly want to do appropriate things to thank our customers, but we need to make sure we're thanking all of our customers, not just those that live in certain areas.

Q: In terms of any plans for expansion or the new campus that was announced previously, are you thinking that's at least three or four years down the road?

A: In terms of expansion, yes. We will always be looking at whether we should own our own building or lease space. If we were to decide that economically it makes sense to have a building to house our folks, it would be over by the Bridgeway facility (next to Port Columbus).

About one-third of our employees now are over there, with two-thirds here at the (leased) Easton offices. In general, having everyone in one place is better than having them in multiple places. We'll look at our options as our leases come up.

But as far as the campus concept . . . from my perspective, I'm not even sure it makes sense. Our sister company, FlightSafety, really should be separate from us. They service us, but they also service other customers from around the globe.

They're the largest training organization of their kind in the industry. They're different businesses. I want them to train our pilots independently. I think they need to be at arm's length. I think it's actually better to keep them there. There's no reason for them to be co-located.

Q: Where do you see the company five years from now in terms of size or focus?

A: I'll be very disappointed if we're not substantially larger in five years than we are today. I think certainly within that time frame, we'll see the economy rebound significantly. Our expectation is we probably have another 12 months of kind of a flat economy, then hopefully the housing excess and the commercial-real-estate excess will at least have become more neutralized. Then we should see the U.S. and the European economy pick up to a more traditional level. And we would certainly hope to see NetJets benefit from that.

I think you'll probably also see us enter at least one more major market, which would be mainland China, in that time frame. That appears to be a natural market for us. The key to that will be finding the right partnership relationship to do that. At Berkshire, when we get into something, we plan to stay in it, so we want a partner who's planning to stay in it, too.

Other than that, I think we just keep growing and doing what we do and just keep trying to do it better.

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