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Warren Buffet's NetJets eyes the boys who ove jetset toys

`It's the best toy known to man' and a status symbol, says a former Chrysler chairman, but Buffet's firm hasn't quite monopolized this service for the very well-off

NY TIMES NEWS SERVICE , NEW YORK

Chowing on salads and sipping San Pellegrino water at the Santa Monica, California, airport two weeks ago, a well-heeled group of travelers compared notes on a fleet of spiffy Hawkers, Gulfstreams and Citations that NetJets, which peddles fractional ownerships in private jets, had assembled for their inspection.

Lee Iacocca, the 81-year-old former chairman of Chrysler, and Howard Grossman, a principal at GLWG Inc, a business and wealth management firm in Los Angeles, were among those reviewing the fleet and deciding whether to spend, say, US$406,250 to own a 16th of a Hawker 400XP or US$2.625 million for a 16th of a Gulfstream 550. Convenience and speed sell, of course, but Grossman spoke more directly about one of the other primary lures of having a high-priced airsteed at one's beck and call -- even if only on a part-time basis.

"It is a status symbol," he said. "It's the best toy known to man."

NetJets is also one of the best toys known to Warren Buffett, the storied Omaha, Nebraska, investor, whose holding company, Berkshire Hathaway, bought it from the maverick entrepreneur Richard Santulli in 1998. Buffett, who became a multibillionaire and one of the world's richest men by ferreting out undervalued companies, acquired NetJets on the assumption that demand for part-time jets would take off among the rich and famous who were desperate to avoid commercial flights and enamored of jet travel's luxurious perks.

As has so often been the case, Buffett's hunch, inspired by Santulli's own early appreciation of jet ownership, was prescient. Demand for part-time jet ownership has boomed over the last several years. Along the way, however, NetJets itself has endured a bumpy financial ride, calling into question the company's prospects for delivering the growth that Buffett expected -- and illustrating the frustrating vagaries faced by many small companies that get an early and seemingly insurmountable head start in a promising field.

Buffett has a long-standing and successful penchant for buying companies run by managers who can exercise nearly monopolistic control over prices in their markets. Although NetJets is by far the leader in its industry, the company lost US$80 million last year, after scratching out a profit of US$10 million in 2004 (it also lost money in 2001, 2002 and 2003, according to the company).

Buffett declined an interview, but he noted in his most recent letter to Berkshire Hathaway shareholders that while he had thought that NetJets would be profitable last year, he had been "dead wrong."

Santulli, the chairman and chief executive of NetJets, who agreed to be interviewed, had a more colorful observation of his company's problems last year -- induced, he said, by haggling over a new pilots' contract, increasing and budget-busting demands on its domestic fleet, and a number of ongoing problems in its efforts to build a presence in Europe.

"It was horrible, horrible," Santulli said. "I was embarrassed."

Still, ever the optimist, he also said he saw clearer skies ahead.

"We will have an excellent year and we will make money this year," he said. "We have the critical mass we need."

But some analysts and shareholders are not as sanguine as Santulli and voice concerns about NetJets' ability to turn itself around. "They can't charge enough to where they can make money on the ongoing part of the business," said David Strauss, an airline industry analyst at UBS Securities.

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