Frac to the future

opinion

by Alasdair Whyte

November 11, 2024

Berkshire Hathaway's NetJets recently recorded its busiest day.

Warren Buffett’s Berkshire Hathaway owns more than 70 companies. But after the global financial crisis, business aviation caused him more headaches than any other industry.

“NetJets was my number one worry: its costs were far out of line with revenues, and cash was haemorrhaging. Without Berkshire’s support, NetJets would have gone broke,” wrote Buffett in 2011.

Berkshire Hathaway’s decision to keep supporting the company was completely vindicated when Covid lockdowns came to an end. Established fractional providers like Flexjet and NetJets saw unprecedented demand. And this enthusiasm for shares has largely continued.

NetJets had its busiest ever day on the last Sunday of October when it flew 898 customer flights (not including repositioning sectors). “A special thanks to our crew members and flight centre teams for making NetJets history,” said Patrick Gallagher, president of NetJets in a statement.

Demand is as strong at Flexjet (as you will hear from its chairman Kenn Ricci, at our CJI Miami conference today). Argus Analytics says that US fractional flights last month were up 8.4% compared with October 2023. Part 135 charter flights were down 2.3%.

New customers

There are no signs that new customers who bought shares in 2020 and 2021 are looking to downgrade.

A lot of the demand for fractional shares has been from customers who took out jet cards after Covid and are now switching to fractional ownership. This pool of prospects may be starting to dry up. But both companies are targeting whole aircraft owners looking for simplicity.

You may pay a premium to fly fractional. But all the things that cause headaches for aircraft owners – finding pilots, getting hangars, supply chain parts issues and other operational issues – are your provider’s problem. Not yours.

The past few years have been tough for anyone looking to hire pilots. This has been a lot less of an issue for the largest fractionals. Flexjet – the biggest non-unionised aircraft operator in the world – has worked very hard to keep its pilots happy. And it has worked. About a third of all its pilots have been with the company for more than 15 years.

NetJets had high-profile issues with its pilot union earlier this year but still managed to retain and hire pilots.

Fractional operators

Hiring new pilots is especially important as both are growing their fleets. Flexjet and NetJets took 20% of all business jet deliveries in 2023 – 94 jets out of 493. Fractional operators typically need five pilots for every new aircraft.

NetJets took its 50th 2024 jet delivery in October. It had hoped to take 80 business jets this year, but OEMs may struggle to reach these. Either way, all of these aircraft are fully sold. In 2025 it hopes to take 100 jets and has already sold more than half of these. Flexjet is also sold out for the first part of next year. As they are the biggest customers of aircraft manufacturers, they also get priority for parts and maintenance.

Increased scrutiny on business jets – whether through tax audits, ESG reporting or worries about jet shaming – is another factor encouraging corporates and individuals to buy fractional.

As Buffett often writes in his shareholder letters: “Come by bus; leave by private jet. Live a little.”