NetJets Modifies Contract to Extract More $$$ From Owners

Recent losses apparently have spurred NetJets to seek increased profit margins on the backs of its customers. Case in point, NetJets used to increase hourly flying rates, international crew fees and ferry charges based solely on increases in the Consumer Price Index. Admittedly, the CPI bears little relation to any of these charges but, in a low inflation environment, NetJets has had to forego meaningful increases in these charges. Not any more. NetJets quietly has instituted a minimum annual increase of 2% in these fees, even if that exceeds the increase in CPI. Existing owners who expect to renew their contracts on essentially the same terms as their existing contracts may be surprised to find this change in their deal.

NetJets: You Know It's Bad When...

In a recent letter to shareholders, Warren Buffett said that were it not for Berkshire Hathaway's guarantee of their debt, "NetJets would have been out of business." This is unsettling news for existing NetJets owners who regularly contact me, concerned about the future of NetJets and how their investments will be impacted - particularly if they decide to sell.

With the industry down as a whole and many fractional companies struggling to stay afloat, owners have good reason to be concerned. As I've noted before, the attempt by some fractional companies to delay repurchases is a clear indicator that capital is tight. If you’re wary that financial problems may cause your provider to fail, you might seriously consider selling your share now. With few sales occurring, you’ll benefit from older comparable sales that reflect higher values. That said, many fractional companies have and continue to low ball their owners on repurchase valuations - a battle that I've been fighting against for years. (See this related client story.)

For those considering a new investment, it’s important to consider the length of your investment horizon. While the current economic downturn may provide an opportunity for you to take advantage of lower aircraft pricing (resulting from declines in the market value of aircraft), this decrease may continue for some time and so the value of your aircraft, and thus your share, may drop over the next couple of years. The private jet market tends to by cyclical, and so values likely will come back with the economy, but this will take time.

Whether you're an existing owner, concerned about your provider's reliability or getting out of your investment, or you are considering a new investment in hopes of striking a good deal, it’s crucial to have an expert sitting on your side of the table, ready to fight for you.

NetJets: Losses Run Deep

Aviation International News recently reported some staggering facts on NetJets’ performance over the last couple of years:

• NetJets lost $711 million in 2009.

• NetJets revenues dropped last year by $1.465 billion-or 32 percent-versus 2008 due to a 77-percent fall in aircraft sales and lower flight operations revenues.

• In the 11 years that Berkshire Hathaway has owned it, NetJets has recorded an aggregate pre-tax loss of $157 million.

Here's another factoid: Aircraft manufacturer, Hawker-Beechcraft, recently announced that NetJets has canceled its order for "a significant number" of aircraft that were to have been delivered over several years, starting in 2011. The cancellations represent 90% of NetJets' orders with Hawker Beechcraft. In an apparent response to these setbacks and a shake up of senior management, NetJets has been taking a much harder line with its customers in all areas--contract terms, customer service, share buybacks, etc.