With skill and daring over the next decade, Santulli turned this vision into a billion-dollar business. In 1986, Santulli bought eight Cessna Citation S/IIs and recruited a top-flight crew to pilot the fleet.18 Even then, there existed a large clientele who hated the hassles of scheduled commercial airline travel. But only a few could afford private jets, and the chartering option brought its own headaches. Santulli’s model of fractional ownership offered something new and in between: the ease and freedom of private aviation at a fraction of the cost.
Still, target customers were affluent, and services priced at a premium. Fractional ownership entails paying a share of the plane’s cost in exchange for a part of its use. Depending on a plane’s size and model, the purchase price runs one-sixteenth to one-half of the total, in exchange for fifty to four hundred hours of annual flying time. A monthly maintenance fee is added, along with an hourly charge for flight time used.
As with traditional private planes, advantages of fractional aviation include flexibility. Instead of finding flights commercial airlines offer, customers name departure and arrival times and locations, often using smaller, more convenient airports, shorter flight routes, and swifter travel times. Another key advantage: skirting the cumbersome security checks at commercial airports.
Like the real estate time-share business it mimicked, NetJets, as the company came to be called, drew controversy from its earliest days. Crews at established corporate flight departments sniffed that it was predatory, charter aviation firms portrayed its economic features as a legalized Ponzi scheme, and owners of private aircraft frowned on the potential adverse effect on how jets are valued.19
Despite controversy, the company quickly attracted several hundred customers, generating considerable revenue. But costs, especially the costs of owning the company’s core fleet, were high, which kept margins low. The company narrowly escaped bankruptcy in the early 1990s, when Santulli personally guaranteed bank loans of $125 million.20 Competitors also entered the field, making it difficult to raise prices, particularly if NetJets was to maintain the leadership advantages of having been the industry’s first mover.21
To stay in first place required acquiring more planes in inventory to sell, which also meant enlarging the core fleet. To obtain capital, Santulli turned to his friends at Goldman Sachs, which acquired a 25-percent stake in the company.22 Santulli, along with his brother Vincent, also an entrepreneur, got the customer base up to nearly seven hundred, attracting numerous large corporate customers like General Electric.23 Other clients included wealthy individuals who used the NetJets service for personal use: Arnold Schwarzenegger, David Letterman, Pete Sampras, Tiger Woods…and Warren Buffett.
By the late 1990s, Santulli had cemented the company’s leadership, generating more than $1 billion in revenue.24 At that point, Goldman Sachs thought it time to exit, favoring an IPO. Santulli demurred. The entrepreneur planned to launch NetJets in Europe, extending his franchise.25 But profits do not come quickly in this business. Start-up costs for a four-plane core fleet were $100 million. The short-term outlook of public markets is inhospitable to such a venture, which needs patient capital. So in May 1998, Santulli called Buffett, who as a customer had extolled NetJets as friendly, efficient, and safe.
Buffett saw huge potential at NetJets in both North America and Europe. At the time, NetJets served more than 1,000 customers, employed 650 pilots, and managed 163 jets (including twenty-three in its core fleet).26 Its balance sheet was lean, with debt of only $102 million. The safety record was impeccable, and all NetJets pilots trained at FlightSafety. With Berkshire’s capital and credit to guarantee NetJets’s debt, Buffett and Santulli shared a vision of vast growth and quickly cut a deal.
Goldman Sachs was disappointed in the price it received in the sale to Berkshire of its 25-percent stake.27 It preferred an IPO, as proceeds would have been far greater. In an interview for this book, Santulli explained that he favored the sale to Berkshire because, along with the money, he valued the Berkshire culture of autonomy and permanence.28 Buffett told Santulli that NetJets was Santullli’s tapestry, Berkshire supplying paint and brushes but otherwise staying out of the way.29
During Berkshire’s first decade of ownership, NetJets grew rapidly. It financed expansion of the core fleet and inventory for sale, increasing both assets and liabilities; it delivered profits most years, reaching $206 million in 2007 and $220 million in 2008. Buffett regularly cheered about NetJets’s industry domination, with the largest fleet value of any rival by far.30 Santulli was widely seen as among the few Berkshire subsidiary chiefs who might one day succeed Buffett at Berkshire’s helm.