NetJets is turning a profit at home but will probably just
break even this year due to European losses— however, it sees Europe as critical
to global success in the long run.
NetJets garnered 70% of new fractional business by dollar
value this year, and attributes at least part of its success to its Marquis
card.
NetJets held 4,967 U.S. customer contracts in 2004, counting
Marquis, up from 3,877 the year before, versus approximately 1,200 contracts
when Berkshire Hathaway bought the fractional operator in 1998.
The above was revealed earlier this year in Berkshire
Hathaway chief Warren Buffett's letter to shareholders.
"NetJets earned a modest amount in the U.S. last year,"
Buffett said. "But what we earned domestically was largely offset by losses in Europe.
"We are now, however, generating real momentum abroad.
Contracts, including 25-hour cards that we ourselves market in Europe,
increased from 364 to 693 during the year.
"We will again have a very significant European loss in
2005, but domestic earnings will likely put us in the black overall.
"Europe has been expensive for NetJets," Buffett said, "far
more expensive than I anticipated— but it is essential to building a flight
operation that will forever be in a class by itself.
"Our U.S. owners already want a quality service wherever they travel, and their wish for
flight hours abroad is certain to grow dramatically in the decades ahead," he
explained. "Last year, U.S. owners made 2,003 flights in Europe, up 22% from
the previous year and 137% from 2000. Just as important, our European owners
made 1,067 flights in the U.S., up 65% from 2003 and 239% from 2000."
Buffett talked about safety, too, and about the business of
safety. At subsidiary FlightSafety International, he said, "profits rose as corporate
aviation rebounded and our business with regional airlines increased."
Margins, however, are tight. "We now operate 283 simulators
with an original cost of $1.2 billion," Buffett said. "Pilots are trained one
at a time on this expensive equipment. This means that as much as $3.50 of
capital investment is required to produce $1 of annual revenue.
"With this level of capital intensity, FlightSafety requires
very high operating margins in order to obtain reasonable returns on capital,
which means that utilization rates are all-important," Buffett said. "Last
year, FlightSafety's return on tangible equity improved to 15.1% from 8.4% in
2003."
