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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 211708  
Subject: NetJets Date: 8/7/2012 3:26 PM
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As with Q1, NetJets had very limited disclosure with only directional comments on performance (lukewarm at best) but no hard numbers.

However, I found the following disclosure interesting since it implies that the large airplane order discussed a while back is more of a maintenance move rather than expansionary ... and a large amount of the order can be canceled. I believe the number of optional units was discussed in the news accounts in June but not the dollar amount.

In June 2012, NetJets placed orders with certain manufacturers to acquire up to 425 aircraft with an estimated value of $9.6 billion. The aircraft purchases would be made to replace aircraft in its existing fleet, with deliveries expected to occur over an 8 year period beginning in 2014. The orders include cancellable commitments for 125 aircraft with an estimated cost of $2.8 billion and options to purchase an additional 300 aircraft, with respect to which, NetJets is not presently obligated to acquire.
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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193091 of 211708
Subject: Re: NetJets Date: 8/7/2012 3:44 PM
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The orders include cancellable commitments for 125 aircraft with an estimated cost of $2.8 billion and options to purchase an additional 300 aircraft, with respect to which, NetJets is not presently obligated to acquire.


So some (125) are cancellable, and some (300) we are not obligated to acquire. So do you think are we obliged to acquire ANY planes?

Regards, DTM

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193092 of 211708
Subject: Re: NetJets Date: 8/7/2012 3:48 PM
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So some (125) are cancellable, and some (300) we are not obligated to acquire. So do you think are we obliged to acquire ANY planes?

Good point, I guess we are not obligated to buy anything. My mental adding machine didn't connect the dots on that one.

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193093 of 211708
Subject: Re: NetJets Date: 8/7/2012 3:53 PM
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I guess we are not obligated to buy anything.


Maybe there is a technical difference between the two terms in the disclosure, 'cancellable' (perhaps with a penalty) and 'not obliged to buy'. Presumably so since they qualify the two parts of the order differently, but what that difference might be escapes me.

Regards, DTM

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Author: robinstarveling Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193094 of 211708
Subject: Re: NetJets Date: 8/7/2012 4:29 PM
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Thanks for pointing that out--I'd missed it, and it's good to know we're not locked in to a big expansion of what might be my least favorite subsidiary.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193096 of 211708
Subject: Re: NetJets Date: 8/7/2012 5:25 PM
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it's good to know we're not locked in to a big expansion of what might be my least favorite subsidiary.

I hear you.
But I'm sure Berkshire management has a fairly full appreciation of its weakness.
The honeymoon is certainly over by now.

I'd love to know how many chips we have on the table.
Total purchase cost, plus total money put in after that, plus total debt guaranteed,
less total money paid back to the parent in dividends and debt guarantee fees.
i.e., what we'd lose if they went bankrupt tomorrow with zero recovery rate.
I might grudgingly reduce that capital account by a truly fire sale
estimate of what we could get for the fixed plant, most of which has wings.

Though some of that total is sunk costs and might not be relevant to the future,
any scorecard of overall results ought to be examined as on-trend
annual profit divided by the amount of skin in the game.

Jim

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Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193097 of 211708
Subject: Re: NetJets Date: 8/7/2012 5:48 PM
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I could be wrong, but my read of this would be:

The orders include cancellable commitments for 125 aircraft:

I expect cancelling these would involve a cancellation fee payable to the supplier so this part of the deal favours (or provides some protection to) the supplier. I presume the cancellation fee would be structured in some way based on the quantities and timing of the cancellations.

and options to purchase an additional 300 aircraft, with respect to which, NetJets is not presently obligated to acquire.

I expect that this part of the deal favours Net-Jets in that it can purchase up to 300 aircraft at a predetermined price (which presumably has some escalation clauses built in dependent on the purchase / delivery date).

So I think there is something for both parties in this deal as you would hope (win-win).

StevnFool

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193108 of 211708
Subject: Re: NetJets Date: 8/8/2012 3:52 AM
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I think it's worthwhile to examine this to-date failed investment by Buffett...just to keep things real. (Obviously, this business could have a wonderful transformation some day and give Buffett the "last laugh").

Take a look at how excited Buffett was about this in 1998:

EJA's growth has been explosive: In 1997, it accounted for 31% of all corporate jets ordered in the world. Nonetheless, Rich and I believe that the potential of fractional ownership has barely been scratched. If many thousands of owners find it sensible to own 100% of a plane -- which must be used 350-400 hours annually if it's to make economic sense -- there must be a large multiple of that number for whom fractional ownership works.

In addition to being a terrific executive, Rich is fun. Like most of our managers, he has no economic need whatsoever to work. Rich spends his time at EJA because it's his baby -- and he wants to see how far he can take it. We both already know the answer, both literally and figuratively: to the ends of the earth.



He was wrong on the business, as well as Santulli. He is human. Berkshire investors need to remember that.


p.s. I wonder how much of his mis-judgment in this case was caused by his delight as a customer with NetJets. Obviously, what is wonderful for a consumer does not necessarily make a wonderfully-profitable business (Amazon anyone?).

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Author: robinstarveling Two stars, 250 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193119 of 211708
Subject: Re: NetJets Date: 8/8/2012 9:21 AM
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I'd love to know how many chips we have on the table. Total purchase cost, plus total money put in after that, plus total debt guaranteed,
less total money paid back to the parent in dividends and debt guarantee fees. i.e., what we'd lose if they went bankrupt tomorrow with zero recovery rate. I might grudgingly reduce that capital account by a truly fire sale estimate of what we could get for the fixed plant, most of which has wings.


Agreed! It's not that I think Berkshire's management is likely to throw capital into a hole, but I don't understand the economics of this business, and it makes my opportunity-cost radar go beep.

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Author: cdesouza One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 193702 of 211708
Subject: Re: NetJets Date: 8/30/2012 11:34 PM
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Also, remember that after being wrong on Net Jets (the business) AND Santulli (the manager) Buffett was ALSO wrong about David Sokol.

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