Bloomberg News

Buffett Pounces in Private-Jet Slump With $9.6 Billion

June 12, 2012

Buffett Pounces in Private-Jet Slump With $9.6 Billion of Planes

A Bombardier BA Learjet 45 XR in flight. Photographer: by Paul Bowen/Bombardier Inc.

Warren Buffett’s Berkshire Hathaway Inc. jumped into the slumping private-jet market again with a record order valued at $9.6 billion, betting on a rebound later this decade with a third plane purchase in less than two years.

Buying as many as 425 jets from Bombardier Inc. and Textron Inc. (TXT:US)’s Cessna will bolster Berkshire’s NetJets in “a long-term bet on the global economy,” Chief Executive Officer Jordan Hansell told Betty Liu in an interview today on Bloomberg Television’s “In The Loop.”

Deliveries will start as soon as two years from now as NetJets refreshes and looks to expand a fleet of more than 700 planes. The Columbus, Ohio-based company probably won favorable terms as planemakers work to rebuild order backlogs, said Michel Merluzeau, an aviation consultant for G2 Solutions in Seattle.

“This is a favorable time to buy,” Merluzeau said yesterday in a telephone interview. “It’s a good demonstration of the anticipation of cycles.”

NetJets’ transaction covers as many as 275 Bombardier (BBD/B) Challenger aircraft, including 100 firm orders. The Cessna portion of the deal consists of as many as 150 Citation Latitude jets, of which 25 orders are firm, according to a statement. Bombardier deliveries will begin in 2014, and the Cessnas will start arriving in 2016, NetJets said.

“It’s prudent to take a stand now and make a decision now to be sure that we’re well positioned to compete over the longer term,” Hansell said on a conference call late yesterday.

Largest Order

The order is the largest ever for business aircraft, according to NetJets, eclipsing the $6.7 billion list value for the company’s March 2011 purchase of as many as 120 Bombardier planes. In October 2010, NetJets agreed to buy as many as 125 Embraer SA (EMBR3) Phenoms, with a list value of $1.05 billion.

NetJets’ previous two deals were rare bright spots for a global business-jet industry that saw the value of deliveries tumble 29 percent from a 2008 peak through 2011, according to a report published in April by consultant Teal Group.

“All the manufacturers want to make a deal today,” said Janine Iannarelli, president of Houston-based plane broker Par Avion. “They’re able to secure significant discounts because they are fleet orders. You wield a lot of power when you go in and place an order like that.”

Fleet buyers typically pay less than catalog prices, and neither planemakers nor customers disclose those terms. The $9.6 billion value for the order is based on list prices for the jets, Hansell said, without giving further details.

NetJets’ Fleet

Hansell is building on steps taken by predecessor David Sokol to strengthen the fleet after the company cut back by about 20 percent since the end of 2008 as demand fell for luxury travel. The business-jet industry typically rests on three pillars: operators such as NetJets, corporate buyers and wealthy individuals.

“A portion of what we’ve ordered will replace our current fleet, and a portion of it could be used to expand it,” Hansell said in the Bloomberg Television interview. “We’re placing a long-term bet on the global economy.”

The U.S. is seeing a slow rebound in its housing market that, once completed, will help drive global economic growth and air-travel demand, Hansell said today. NetJets is “relatively optimistic” about China’s economy while Europe, which is struggling with a debt crisis, will “figure out its troubles within a time frame that makes sense,” he said.

Bigger Planes

Ordering Challengers and Citations brings NetJets a bigger class of executive aircraft after the previous Bombardier deal, which was for planes in the Montreal-based company’s Global series, and the purchase of Embraer’s Phenoms.

“By increasing the range and endurance of our fleet, we will allow our owners to get to even more destinations worldwide,” Hansell said in the statement.

Bombardier, the world’s largest business-jet maker, surged 6 percent to C$3.87 at 4 p.m. in Toronto, while Providence, Rhode Island-based Textron rose 4 percent to $24.52 in New York. Omaha, Nebraska-based Berkshire (A:US) climbed less than 1 percent to $121,740.

NetJets showed “confidence in the growing strength and long-term outlook of the global economy and the aviation industry,” Cessna CEO Scott Ernest said today in a statement.

Bombardier said the order included an aftermarket support agreement with a value of as much as $2.3 billion if all aircraft options are exercised.

Bombardier Production

For Bombardier, the order is equal to about four years of Challenger production, said Walter Spracklin, an analyst with RBC Capital Markets in Toronto, who has an outperform rating on the Canadian planemaker’s stock.

“This gives significant visibility into their product backlog for the Challenger series and will give them the comfort they need to raise production levels,” Spracklin said.

Bombardier’s Challengers can carry as many as 12 people, depending on the model and the cabin configuration, according to the planemaker’s website. Cessna’s Citation can fly as many as eight passengers, according to a company statement.

Larger business jets have been the industry’s strongest segment in recent years, buoyed by “high net-worth individuals in emerging markets,” Joseph Nadol, a JPMorgan Chase & Co. analyst in New York, said in a note yesterday. The NetJets order is a “positive development” even as a slowing global economy stokes concern that demand may wane for private jets, he wrote.

To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net.


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