High-Flying Buffett: Pitchman for a Niche Market
by Barry James
FARNBOROUGH, England Who is that vaguely familiar
rumpled man with a Cherry Coke in one hand a basket of
crackers in the other luxuriating in a large chair of buttery cream
leather aboard a $48 million Boeing business jet?
It's Warren Buffett, the incredibly wealthy but parsimonious
investor with the Midas touch, otherwise known as the sage of
Omaha.
Mr. Buffett might be risking his homespun image by riding around
in such opulence, but it is all part of a plan by one of the richest
men in the universe to add an extra few million to the bottom line.
Mr. Buffett is using the modified Boeing 737-800 to fly to six
countries in three days to persuade the Croesus set to part with
some of its cash for a time-share in a business jet operated by one
of the many companies he owns.
He argues, with himself as a prime example, that planes like this
are productivity-enhancing business tools rather than royal barges
for idle playboys. This trip "would never have made sense," Mr.
Buffett said, "if I'd had to fly commercial." He owns the company,
Executive Jet Inc., that operates a network of "fractionally owned"
aircraft called NetJet, in which customers or corporations buy
shares in corporate jets and then trade them to fly anywhere and
anytime they want.
They are guaranteed that a plane identical to the one they partly
bought or better will turn up at the closest airport within a few
hours' notice. The interior design in all NetJet aircraft is cloned and
then tailored to the carefully catalogued whims of customers
before takeoff, so that they get the impression they are always
flying on the same plane, even though there are hundreds in the
fleet that are switched around with frightening mathematical
complexity.
For a man whose every word is followed for an indication of
where the stock market is headed, Mr. Buffett offered little as he
relaxed on a 45-minute flight from Farnborough, near London, to
Paris this week. He agreed that the U.S. economy was slowing
down but said he did not care for stock values as much as the
underlying performance of the companies he buys.
He said his furniture and jewelry businesses had suffered declining
sales for the past two months, "but we haven't seen anything like
that" at NetJet. It was possibly picking up business from
dot-bomb victims who might have bought an entire jet a year ago
but are happy to own a piece of one now.
"Buffett took a great idea and applied it," said Jeffrey Lenorovitz,
president of the InfoWEST Group, an aviation consulting company
in Vienna, Virginia. "The rate at which the business jet market is
expanding is phenomenal."
In fact the chief danger to Mr. Buffett, other than a recession,
could come from copy-cat ventures coming onto the market, none
of which approaches Executive Jet in size. Mr. Lenorovitz said
corporations like the time-sharing concept, even though it does not
come cheap, because they can buy all the convenience of a
business jet without the hassle of finding a hangar, maintenance
and crew for a plane they own themselves.
Even some of the manufacturers, like Bombadier and Raytheon,
are offering part shares in corporate jets. For the industry, NetJet
offers a huge market. But Mr. Lenorovitz said manufacturers might
be concerned about being too tied to a single large customer, just
as the manufacturers of commercial aircraft worry about the
collective might of the large leasing companies.
In the past five years, NetJets has acquired about 40 percent of all
business jets produced, for an investment of some $14 billion.
The buyer of an eighth share in the Boeing will have to pay $6.2
million as an up-front payment, giving him the right to fly around
for 75 hours each year in a plane capable of carrying 145
passengers but now decked out with polished walnut and
inch-deep carpets to accommodate 19 passengers in luxury.
Co-owners also have to pay a monthly management fee that
covers maintenance and the crews' salaries, plus the operating
costs for the time they are actually using the aircraft.
Of course, there are cheaper options. The NetJet network
includes 338 planes, ranging from seven-passenger Cessna
Citations to the Boeing, with 449 on order. The beauty of the
system, as far as Executive Jet is concerned, is that it is the
customer rather than NetJet that bears the financial burden. The
company does offer to buy back shares at fair market value,
although this typically happens when an expanding company wants
to trade in its shares and buy a larger aircraft type.
Mr. Buffett's Berkshire Hathaway Group acquired Executive Jet in
July 1998 for $725 million, adding to a quilt of investments that
brings in an estimated revenue of almost $30 billion a year. Mr.
Buffett is famed as a stock picker, but actually he makes most of
his money by buying old-economy corporations, which in the past
year included insurance, shoe, jewelry and carpet businesses.
He avoided technology stocks, which resulted in a steep drop in
Berkshire Hathaway's stock price. But when the bottom dropped
out of dot-coms, the stock came roaring back to more than
$70,000 a share, an increase of 26.6 percent in the calendar year.
It has sometimes been said that the easiest way for a very rich man
to become a very poor man is to buy either a newspaper or an
airline. It therefore fits with Mr. Buffett's contrarian reputation that
he has bought into Washington Post Co., which jointly owns the
International Herald Tribune with The New York Times Co. Mr.
Buffett also is on the board of directors at the Washington Post
Co.
He also owns a major aviation outfit, which he adds is nowhere
near as risky as the commercial airline business. He's owned airline
stock in the past and, he said, "I'll take off my shirt and show you
the scars on my back, if you like."
Buying Executive Jet was "a very simple decision, when you work
it out," he said, adding: "You have to decide, is there a huge
untapped market for the product? The answer is 'yes.' Is the
company a leader in its field? The answer is 'yes.' Does it make
money? The answer is 'yes,' and that's the end of it for me."
Exactly how much profit is made by NetJet, which has sales of $2
billion a year, Mr. Buffett was unwilling to disclose.
All he would say was this: "It's smaller than an elephant and bigger
than a breadbasket."
Long established in the United States, NetJet is now seeking to
expand in Europe from its base in Portugal - one of two countries
in the European Union along with the Netherlands, that will register
the co-owned planes - and in the Middle East.
Expansion in the Far East and South America is planned later. So
far the European program includes the Cessna Citation VII,
Raytheon Hawker 800XP and Dassault Falcon 2000 models, but
not the Boeing business jet.
Richard Santulli, Executive Jet's chairman, said he was confident
that the program would rapidly expand as companies and wealthy
individuals realized the benefits of being able bypassing busy
airports.
Mr. Buffett reasoned that a company could actually save money
by buying time on a jet, since it could locate near an airfield in a
remote area where labor costs are low, rather than near a big city
airport. Or it can save time for executives by avoiding crowded
hubs and air traffic delays.
But many NetJet users are simply the fabulously rich, like
Hollywood stars and sports idols, or people like Mr. Buffet
himself and his friend Bill Gates, who enjoy calling for a plane as
easily as most people call for a taxi.
When Mr. Buffet and Mr. Gates shared a flight some time ago, the
plane was virtually spit-polished, and the food was an Epicurean's
dream.
But the pair stopped at a fast-food restaurant on the way to the
airport, and munched Egg McMuffins throughout the flight, a
NetJet veteran recalled.
Although he could if he wanted to fly off whenever he wanted to,
Mr. Buffett said he seldom decided on a whim.
"My wife is more of a whim type than I am," he said, reporting that
she has made some 700 trips on NetJet planes. But he does use
the jets to drop in on many of his dozens of scattered businesses,
and he is happy to let their managements buy NetJet time shares if
he thinks it will improve their productivity.
Mr. Buffett has a reputation for buying companies with healthy
earnings and then leaving them alone, but he is always willing to
lend a hand if they need his help, as he is clearly doing by acting as
NetJet's chief salesman in Europe. He enjoys the role.
Aerospace, for sure, is more interesting than brick-and-mortar
businesses, he said, adding: "When I wake up in the morning, am I
thinking about bricks? The answer is no."
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