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May 18, 2000

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Berkshire Hathaway

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Subject:  Executive Jet: My Notes
Author:  TheSandman

I had the opportunity to talk with a number of Executive Jet (EJA) representatives at this years annual meeting. I also had the opportunity to talk with an Executive Jet pilot on my flight back home. These conversations, combined with my natural interest in this company, led me to the decision to do further research. I was able to find some interesting information over the past couple of evenings. In order to make it easier for those people who are interested in learning more about Executive Jets, I decided to post the information that I have been able to find. I hope you enjoy it.

Note: For those who are primarily interested in EJA's bottom line -- You may want to skip directly to the section where I question whether or not EJA's competitive advantage is sustainable.

History of Fractional Ownership:
*In 1986, there were four owners of fractionally held aircraft. By 1993, there were 89. From 1998 to 1999, the number of companies using fractional ownership has grown by over 50 percent from 1,125 to 1,700 companies.

*Today, fractionally owned planes still only account for about 400 of the nation's fleet of 12,000 business planes.

EJA: 169 planes (Boeing, Cessna, Dassault, Falcon, Gulfstream and Raytheon)
Flexjet: 87 Planes (Canadair jets and Learjets)
Raytheon Travel Air: 51 planes (all Raytheon products)

*Article which compares Executive jet, FlexJet, and Travel Air:
"Big Ticket; The Fractional Jet Set"


History of Executive Jet:
*EJA created fractional ownership of airplanes in 1964, but the business was tarnished by scandalous use of its planes for transporting executives and their girl friends to vacation homes.

*1984-Richard Santulli buys EJA. 1986-Santulli starts NetJets with eight Cessnas.

*On July 23, 1998 Berkshire agreed to a merger with EJA shareholders. EJA shareholders received $725 million in a combination of BRK.A, BRK.B, and cash.

*Currently own 169 planes. This includes ~23 "core" aircraft that are owned or leased by EJA itself, in order to be certain that service requirements can be met during the times when demand is heaviest.

*In the last 3 1/2 years Executive Jet has ordered 600 new aircraft for the NetJets program, almost 40% of the world's business jets, from Boeing, Cessna, Dassault, Falcon, Gulfstream and Raytheon.

*EJA see's the same growth prospects in Europe, the Middle East, Asia and Latin America, as in the US, and they plan to be the first into those markets. With Berkshire's financial backing, EJA now has the ability to grow at as fast of a pace that makes good business sense.

*EJA's Marketing director explained to me that Europe presents more problems with flexibility than the U.S does. In Europe, most airports are open only from 7 a.m. to 10 p.m., and 90% require slotting times -- meaning that if a passenger is late, there's a mechanical problem, etc., a plane will miss its scheduled departure slot and may have to wait several hours for a new slot. A scheduling nightmare.

*Approximately 30% of NetJets owners use their plane for private purposes.

*78% of NetJets customers have never owned a business jet before signing with NetJets.

*Even large companies that fly their own business jet more than 400 hours per year, have started to use EJA as a supplement to their own fleet.

*EJA's growth is fed mostly by owner referrals. Approximately 70% of EJA's new customers come by way of referrals from EJA owners. EJA's customers could not pay them any higher compliment than this.

Santulli's history:
*EJA, and fractional aircraft ownership in general, is the creation of Richard Santulli, a former mathematician and former head of Goldman Sachs leasing unit. What Santulli figured out is this: How many jets and how many owners do you need to ensure that each owner can be guaranteed a jet with as little as four hours notice.

*The EJA Pilot that I spoke with told me that he had been Richard Santulli's pilot on a few occasions. These flights provided an opportunity for the pilot to have conversations with Mr. Santulli. The one thing that seemed to amaze the pilot was the fact that Mr. Santulli wanted to know all about the pilot. Mr. Santulli wanted to learn about the pilot's family, working conditions, was he happy with his job, what the pilot thought EJA could do to strengthen the business, etc.

EJA's NetJets concept:
An owner purchases a portion of a specific aircraft based on the average number of hours that they fly annually. EJA sells fractional interests in as small as one-eighth increments. Then, EJA acts as a management company that manages and maintains the aircraft for those participating in the program. Maintenance, crew, catering, storage - are all covered by the management fee. The owner is guaranteed a set number of hours per year, dependent on the size of his interest. While not guaranteed the same aircraft on each flight, the owner is guaranteed a similar make and model delivered when needed. Dead-head hours don't count against your time allotment, and you're allowed to average your hours over five years. Owners have access to their aircraft anywhere in the continental United States on four to six hours notice (six hours for the Gulfstream IV-SP). You get all of this for a lot less than the cost of owning an entire plane. This
makes calling for your plane no more difficult than calling for a taxi.

*"If Executive Jet is such a hot business, how come it was for sale? Back in 1995 Santulli needed capital to expand his then-U.S.-only operation into Europe, and sold 25% of the company to his former employer, Goldman, Sachs. Wanting to cash out while Santulli wanted to expand, Goldman was pressing him to take Executive Jet public. Santulli asked Buffett's advice. Buffett's response: "Well, what if I buy the company?"
"Flying Buffett"

*An article which describes the NetJets concept:
"The great Santullis"

Competitive Advantages of Fractional Ownership:

Flexibility -- Fly whenever/wherever you want. Change course in route. Leave and arrive according to your own schedule.

Saves Time -- Decreased total travel time since they utilize smaller airports closer to final destinations. Also, the office environment of a business plane allows travel time to become productive time.

Safety -- Businesses planes have compiled a safety record that's better than the major airlines.

*One of the primary benefits of fractional ownership is being able to go into smaller communities that are not served by commercial air travel. At this years EJA exhibit, I learned that part of the reason for EJA's popularity is due to the fact that we have access to approximately 5,500 airports in the United States, compared to approximately 550 which are accessible by charter operations and commercial airlines (Later, I'll have more to say about this very important point). The ability to use smaller, less-congested airports located closer to our customers final destination is a vital part of our competitive advantage.

*Article: "Benefits of Using Business Aircraft"

EJA VS the Other Fractional's:
*Specifications of EJA's Planes: Currently, the NetJets program offers you twelve different types of airplanes. Here's a link to a list of all the types of airplanes, as well as a description of each that EJA currently has to offer. If you're interested in learning about the specifications on each type of plane, this is a great site.

To Order yours....
Executive Jet Aviation (1-800-848-6436)
Online request form:

*EJA's pilot training, and safety standards, far exceed FAA regulations. Example: The industry standard has been that a pilot can be "type-rated" (licensed to perform duties as pilot-in-command) and current in two aircraft without jeopardizing safety. That's not good enough for EJA. EJA believes it's much safer to have a specific pilot and crew fly only one type of airplane. This avoids the potential confusion and mistakes often associated with pilots who fly two or more aircraft types.

*EJA includes MedAire Services on its European fleet
Like its NetJets program in the United States, NetJets Europe owners will now benefit, at no extra cost, from MedAire's MedLink Worldwide passenger care services.
With this extra level of care, EJA International's program is setting a global standard among the fractional ownership industry.

*More about Medair: MedAire, Inc. is the single medical resource for companies that want to bring peace of mind to customers and employees isolated from their customary source of medical care. Worldwide, 24-hour Emergency Telemedicine Hotline allowing people to talk directly and immediately with board certified emergency physicians.

Warren's History with EJA:
*Buffett flies about 225 hours a year and is the sole passenger on about 85% of his flights.

*Warren's 90 year old aunt owns a one-sixteenth share in an EJI Raytheon Hawker!

Warren's Words:
*"As an Executive Jet NetJets fractional aircraft owner, I had 3 1/2 years to examine the service of NetJets before Berkshire Hathaway purchased Executive Jet. We knew we were purchasing the premier provider of aviation solutions in the world. And you can quote me to the world on that."

*"It's the kind of business that the leader, if it does its job, really it just widens" its dominance over competitors, Buffett said.

*" I think Executive Jet will be the fastest growing of all the Berkshire Hathaway operations. The fractional aircraft ownership industry is in its infancy, and Executive Jet is far and away the leader. In our opinion it will remain so."

*Buffett believes fractional supersonic business jets are even "more of a natural" market than current, hugely popular fractional jet programs that fly subsonic aircraft.

*Article: "Executive Jet has big fan: Buffett"

Supply Constrained - Planes:
"Indeed, the limiting factor in our business right now is the availability of planes."

Supply Constrained - Pilots:
I have always wondered where we were going to get the pilots to fly all the new planes that we have ordered for EJA. I took advantage of the opportunity to ask my new friend, the EJA pilot. Here's what I learned:

*EJA currently employs approximately 650 pilots.

*According to the EJA pilot that I spoke with, there are only ~4000 pilots in the pool of pilots which meet EJA qualifications. EJA, other fractional's, charter operations, and major airlines are all competing for these same pilots. Given the nature of the business, I
would assume that safety is EJA's number one concern. We need to be able to attract the highest quality pilots. For that reason, I decided to look at the compensation packages that are being offered to these pilots. Here is what I found:

*Pilot's Salary Comparison:
Salary Comparison - Fractionals Only:
(Captain, 4 Years experience)
EJA =$ 57,996 Raytheon Travel Air =$ 58,265 Flexjet = $ 62,685

Salary Comparison - EJA VS United:
(Captain, 4 Years experience)
EJA = $ 57,996 United = $179,092

*Benefits Package Comparison amongst the Fractionals:
(EJA package seemed to be comparable to other fractionals)

*Pilot's Union Contract:
The Pilots at EJA Columbus, OH are represented by The International Brotherhood of Teamsters, Airline Division. From what I understand, the pilots do not like being represented by a union. The pilot that I spoke with mentioned the union as being the only part about his job that he didn't like.

*The number of U.S. student pilots and private pilots has been declining for several years. Although I could not find any definitive timeline, the FAA predicts an upturn in the number of student and private pilots in the future . A community effort called "Be a Pilot" has been implemented in an attempt to renew interest and growth in general aviation at the grassroots level. Not very promising.

(By the way: When I asked the pilot if he had called his friends who might be interested in flying for EJA, he said that he had called ALL of them.)

Does EJA have a sustainable competitive advantage?

*The Federal Aviation Administration (FAA) could limit the competitive advantage that we have over charter operations. Currently, charter operators have to follow tougher FAA rules than the fractional guys. This is not a matter of safety regulations, it's mostly a concern over the flexibility advantages that the fractional guys enjoy. At the urging of a group of charter operations, and many major airlines, the FAA has formed a study committee to investigate the possibility that current regulations provide a competitive advantage to the fractionals.

If the FAA imposes charter rules on EJA, it would potentially destroy one of EJA's key advantages: Flexibility. Remember the example that I gave earlier -- Under current regulations, fractionals can land at about 5,500 United States Airports versus about 500 for commercial service-- One reason for this is, under present rules, charter operators must have longer runways than are currently being used by the fractionals.

Here's what it boils down to: Regulations

*Charters and commercial airlines fall under FAR 135
*Fractional operations fall under FAR 91.

*The National Business Aviation Association(NBAA) and the FAA seem to support placing fractional operations under Part 91 even though FAR 91.501B5 says business
aviation falls under Part 91 only when company employees, guests and directors are using the plane.

Maintaining the FAR 91 for fractionals could be the key to EJA's sustainable competitive advantage. If fractionals were to be converted to FAR 135, the fractionals could lose a large part of the competitive advantage that they currently enjoy. There
would be far less flexibility with FAR 135.

The pilots believe that the NBAA, through their NBAA Membership opinion poll, may have misinformed the FAA as to the consensus of opinion of its membership regarding their support for fractional operations to remain under FAR Part 91.

Pilot Viewpoint:

Fractional share owner members of NBAA are allowed a full vote. This vote is given even though they are only renting time on an airplane without the responsibilities of real flight department ownership and management. (The pilots believe that, by allowing fractional shareholders a FULL vote, rather than a proportional vote, the NBAA has allowed the fractional shareholders to stack the deck in their favor.)

The National Business Aviation Association Viewpoint:

NBAA's counsel advised us that owners of fractional shares are now and always have been entitled to full voting membership. To deny them membership would risk NBAA's status as a not-for-profit corporation.

Fractional Ownership: Buyer Beware?

*Article: "Pitfalls of Fractional Ownership"
From Professional Pilot Magazine, February 1999

After having read many articles which raised the same type questions as the above mentioned Professional Pilot Magazine, I proceeded to look for facts that would support or refute their claims. Here are some of their questions, followed by the answers that I was able to find:

*Does fractional ownership make good business sense? From Executive Jet's web site: Fractional ownership, as a rule of thumb, best fits the needs of individuals and companies who fly between 50 and 400 occupied hours a year. Full ownership is typically cost-justifiable when you fly more than 400 hours a year out of a single location. Chartering tends to be cost efficient when you fly less than 50 hours a year on day trips. Further, charter is not guaranteed. Unlike any other method, fractional ownership provides you with the guaranteed availability of an aircraft 365 days a year, while charter and full ownership cannot provide that guarantee due to owner utilization, other charter utilization, or maintenance demands.

How long do you own your interest? From the EJA web site: The NetJets program is unique in this regard. When you purchase a fractional aircraft interest with NetJets, there is no requirement for you to sell your interest and repurchase a new interest in a new aircraft at the end of five years, as there is in other fractional ownership offerings.

Are there other costs involved with NetJets ownership? You have a monthly management fee and occupied hourly fee for each hour you fly. Both fees are indexed by the Consumer Price Index-Urban(3.75%) in the U.S. and the OECD Index in Europe. At the end of the five years, you simply renew your management and occupied hourly fees at the then-current rate. You pay a small fuel variable as applicable and in the U.S., an approximate 9% FET tax on your occupied hourly fee.

When I decide to sell my shares, how will the value of my share be determined?
(The way that I understand it, by buying airplanes in bulk, EJA gets big discounts from the manufacturers, which it pockets by reselling the planes at list price.)

"Don't be misled by some fractional ownership companies assurances that you will get "fair market value" for your fractional share when you decide to leave the program or move to a larger model. There is nothing "fair" about it. Your share's market value is going to have depreciated at a rate two to three times that of a typical corporate aircraft even though you used it only 1/4th as much."
*Article: "The Real Cost of Fractional Ownership"

From the EJA web site: NetJets is an initial five-year commitment to fractional aircraft ownership. Remember, you own your aircraft for as long as you wish. However, you can buy additional shares or sell shares to meet your changing needs at any time. After 24 months, NetJets will repurchase your Citation S/II, Citation V Ultra, or Citation Excel share; your Citation VII, Hawker 800XP, Hawker 1000 and Citation X share after 30 months; and your Falcon 2000, Gulfstream IV-SP, Gulfstream V or Boeing Business Jet share after 36 months based upon the fair market value of your aircraft. Trade-ins for other models are allowed with no minimum time period.

Well, it's getting late.... and I don't know if this information is of any value to anyone out there. So, I'll bring this to an end now. Like I said, all this information comes from my conversations with EJA representatives, the EJA pilot, and from surfing the internet the past couple evenings. I hope that you were able to find something of interest in these notes!

Good Luck,

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