When Dave Sokol took over the management of NetJets at Warren Buffett's request in 2009 he hit the ground running. Within a week he had reshaped the managerial structure, including appointing a new head for NetJets North America and a new Chief Operating Officer. He also announced that NetJets' headquarters would be relocated from Woodbridge, N.J., to Columbus, Ohio, where the company's flight operations were based. (Buffett's deals from 1941 to the 1990s and their lessons for investors today are available to read in previous newsletters - I've yet to write about the twenty-first century deals).
Buffett seems to have accepted journalist Brian Foley’s argument concerning the over supply of fractional aircraft. Buffett wrote in his 2009 letter that NetJets owns “more planes than is required for its present level of operations”.
Aircraft orders were cancelled and by Spring 2010 Sokol had lowered debt to $1.4bn from $1.9bn. Within two years 1,700 employees were laid off (from 7,945). Sokol had plans to dispose of “selected aircraft” but refused to do so in fire-sale way, rather waiting until prices were reasonable. The fleet size went from 629 planes to under 500 over three years.
He said the tough decisions were necessary, “When you have a major economic shift such as in the fall of 2008, you have to reinvent yourself. Five years from now, I’ll wager all of us will look back at 2008 and say it was the best thing that ever happened to the aviation industry because it’s forcing innovation that wasn’t going to happen.” (David Sokol quoted in Iteknowledgies (2011) “Owners, Profit Return to NetJets” Aerospaceblog, February 2)
Stephen Pope’s verdict, writing in The Business Jet Traveler, was “the prognosis for the company is good, I think. The fractional-ownership business model has matured and adapting for the next growth cycle will require fresh thinking…the company's core customer base is still out there. They don't want to go back to charter. They want to be able to pick up the phone, arrive at the airport four hours later and climb aboard a meticulously maintained airplane crewed by well-trained, by-the-book pilots. The trick will be finding the right balance to make the numbers work again.”
The remarkably quick turnaround pleased Buffett greatly and in Spring 2010 he wrote (in his 2009 letter) that the plans already implemented would lead to rightsizing. Furthermore, NetJets was on course to make a profit in 2010.
Unfortunately, David Sokol’s time at NetJets was limited. Indeed, his time at Berkshire Hathaway was cut short by a regrettable incident early in 2011. He bought shares in Lubrizol before proposing to Buffett that Berkshire Hathaway buy the company. He purchased them because he thought the company to be outstanding and an excellent investment, but he was also asking Lubrizol’s CEO if he might be interested in being bought by Berkshire.
Sokol didn’t know for sure that Buffett would buy Lubrizol when he invested his $10m. He had told Buffett that he owned stock in Lubrizol but “It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings” wrote Buffett in his News Release March 30, 2011.
Carol Loomis of Fortune Magazine wrote, “the facts about Sokol’s buying – combined with the lift in Lubrizol’s stock that accompanied Buffett’s decision to indeed buy – put Sokol into disrepute for what some onlookers thought might be insider trading.” (Carol J. Loomis (2012) Tap Dancing to Work)
Buffett was careful to publicly note that Sokol’s actions were not unlawful, even though he made $3m profit, which was a fraction of his annual remuneration.
Sokol resigned March 28 to, as he put it “utilise the time remaining in my career to invest my family’s resources” (Berkshire Hathaway Press Release March 30, 2011). He had submitted two similarly worded resignations in previous years, but Buffett had persuaded him to stay on. In the March announcement Buffett wrote that he had not asked for his resignation and it came as a surprise to him, but he did not set out to ask him to stay in post this time.
In April a Berkshire’s audit committee report concluded that its policy of precluding share buying by its managers in companies Berkshire was considering acquiring had been violated. Also, its policy of not using confidential information for personal use had not been followed, and Berkshire’s reputation had been damaged.
A few days later, at the annual meeting, Buffett said he regretted that he hadn’t expressed a greater rebuke to Sokol. He corrected that by describing Sokol’s actions as “inexcusable and inexplicable”. Sokol was later told by the Securities and Exchange Commission that he would not face enforcement actions. He continued to maintain his innocence in the matter.
The turnaround within a………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author.
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