NetJets 2009 danger ahead ?
 

Seems that Warren Buffet placed a huge $45 billion derivates bet in 2003 which is not going along nicely....he lost $7 billion the last quarter alone (company holds $35 billion in cash), all accoording Bloomberg.

You might think a capital intensive industry as NetJets is not the perfect combination when you are running out of cash?

The last dip in economic performance (2002) made NJ started selling 25 hourly cards, which became popular over time, but are a complete different bussiness as they where used to (eg. selling aircraft and not financing them, because the fractional owners were loaded with the debt).

At the moment the word on the street is, postphoned deliveries and long term storage of planes...seems not many new customers coming in....

Anyone with another take on the situation ?

In the annual letter to Berkshire Hathaway shareholders in 2002 Buffet wrote:

'Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.'

Berkshire Hathaway has had little to do with derivatives. I think all major companies will have had some exposure B-H will be no different. - so I was told by a very senior manager in Netjets.

Maybe he was bull****ting me but, Buffet has been very vocal on subject.

Correct, and still he did the $45 billion bet, maybe he thought when everybody else is greedy.....

Anyways, curious about the impact on NetJets, because they are going through some tough times is my guess, and they use capital like no other business, the share of cardholders vs owners seem to be greatly out of proportion, so when looking for cash this is easily found in the NetJets business....

So besides the shake out at their commercial department in 09 (who is "voluntarily" leaving first?), I am wondering how the operation will hold out?

Any other views?

A balanced view
 

Its worth looking at the NJ business model in a slightly more lateral way. Remember that even when customers arent flying they are still paying the fixed costs, and for the card holders they have all paid in advance and therefore NJ may prefer that no one flies but everyone keeps paying!!!!!!!!!!!

Just a thought!!!!!

Almost correct, the cardholders pay upfront, however the financing of the plane is completely done by netjets, upfront as well.

It is different on the owner side, they actually buy a piece of the plane, so they are the ones financing the planes.

So NetJets original plan to sell fractions was great, almost no financing required great stuff, the last crisis however decided them to make it more attractive to the market and started offering cards. Which is a great tool, but mostly used to persuade people to become owner. This pratice has gotten out of control and the ratio owners vs cards is wrong.

Therefore NJ is needing a lot of finances to keep the thing running....now Buffet is needing all the cash for his bet, then there might not be cash enough left to keep the operation running....

Together with the unprecedented slowdown in sales it might be wise to sell the business to whoever.....

So I see a lot of problems for NJ in the short (1 to 2 years) future.. (too many pilots, postphoning of aircraft, problems financing the operation, aircraft sitting on the ground long term, etc)

great
 

great...and they still hired 30+ new pilots in the last 3 months.
Hopefully not out of generosity otherwise i am in the brown.
D

I do not understand what exactly is meant by the "45 billion Dollar bet".
Maybe its because I ain't a native english speaker, could anyone be so kind and explain that to me ?
Is Buffett in desperate need for Cash for the time beeing ? Did I miss something ?

There is no risk for such a payout. The Dow and S&P must equal 0 for such to happen. Second Berkshire going bust won't affect Netjets, unless there is cross securities, which is unlikely.

Lets get the facts right:

Berkshire Hathaway’s Net Assets are 87 Billion (67 Billion in 2006).
The derivates contract would costs them 35.5 Billion in 2019 if the four stock indexes fall to zero, which is very unlikely
“Buyers of the derivatives could be entitled to billions of dollars from Berkshire if the four stock indexes, including the S&P 500, drop below agreed-upon levels on dates beginning in 2019. The indexes would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that’s at risk.
Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion through Sept. 30”

Yacan, you are correct. However it appears that he still had to pay some 6,7 billion in garantees in the last quarter in 08 alone to backup this deal. If there are 5 more quarters like that in the coming 2 years he is running quickly out of cash.....

VORTIME, the connection is the credit rating and therefore the ability to be able to get loans at reasonable rates, so if Berkshire gets into trouble, NetJets is feeling it as well because the whole show will cost them a whole lot more.....

Thanks for your replies ! Any more views, maybe actual facts what's happening at NJ now?

As I understand some of the "core fleet" aircraft are NJ property and most of them have already been "paid", so no real capital cost.
For the newer ones used for the cardholders, i believe that NJ is just leasing them, with probably early terminations possible without any huge penalty. NJ being the biggest customer for many manufacturer they will do all their best to suit NJ.

Furthermore the one who as the strongest financial situation will survive, I believe that banks will support NJ more than Vistajet or any small outfit...

But in any case 2009 is going to be very interesting in BizAv.

Granted, I've not been paying much attention to NJE for a couple of years but they have a core fleet again? I thought that died with the disposal of the Citation VIIs and Falcon 50:confused:

Core Fleet for sure ain't worth mentioning.
As far as I know, its less than 5 planes....

Netjets
 

which begs the question....will they find the $700mill. they need to fulfil their 2005 commitment to buy the Hawker 4000. If card holders provide better liquidity, it would seem prudent to purchase some VLJ's rather than larger aircraft?

It seems that some of you European NJE types need to re-read the beginning of this post. It sure seems to be aimed mainly at NJ i.e. the colonial or American operation, particularly posts referring to the core fleet.

C2j

Cubs2jets.

I'd bet that the OP (Europe based) was referring to NJE. When last I looked Buffet and BH had the controlling interest there too. Then again maybe he meant NJ as a whole.

Holyman?




Branleur. NJE are about to mothball Bravos and Hawker 400s so why would they buy a load of VLJs?

VLJs....now why would they help NJE?

They are about as much use as a beaver is to a nun!

...just to support this discussion about the mentioned "difficult next 2 years" for nje. 10 years the company made minus, last two years plus and also 2008 plus. That are the facts. So, now lets talk about the difficult near future....
What I want to say: nevertheless a difficult time for all in the business, but absolutely no reason to panic! cheers :ok:

Flinstone, yes I was refering to NJ as whole...

Austrian71, yep correct, however don't forget NJ USA was already making money, and NJE was riding along but loosing money...
they only made money for 2 years (NJE), and probably will be on the loosing side the next 2 years again...

My worries are especially NJE, cause it is a difficult market, and they are having some problems....for example too many pilots.

I am wondering if NJE is offering the OECD inflation correction in 2009, or if they say hey that is not going to happen...furthermore they might say we have 10% pilots too much, either they go or every pilot will agree with a 8,5% salary cut (roughly the same amount of money) in order to save money...

Anybpody with news on the OECD correction (NJE) already ?

The OECD inflation rise is part of the contract, if NJ start breaking part of the package they will find it hard to patch up the broken trust.