Buffett in Rare Pinch Due to NetJets Unrest

In mid-November, on a Saturday, NetJets hosted a few hundred of its most wealthy customers in Las Vegas at the luxury ballroom in the Wynn resort. Guests had the opportunity to play poker beside Warren Buffett and there were $950,000 worth of prizes in play.

Outside of the event, there were several dozen pilots in NetJets uniforms picketing the event held by the private jet company. “Management greed is destroying NetJets,” one of the placards read. “Do pilots need to pay more for healthcare so you can fly cheaper?” read another.

For Warren Buffett, since he took over Berkshire Hathaway nearly 50 years ago, labor unrest is not normal. The image that the company portrays is of well-paid managers overseeing workers that are very content in over 80 subsidiaries that the company operates. But the drama playing out at the private airline shows the harder side of Warren Buffett, where he is very focused on returns. In the instance of NetJets, the pressure that he is experiencing to complete turning around a business that he once called his “number one worry” is now finding its way into the view of the public.

The protest that took place in Las Vegas was part of a labor situation that was deteriorating and has now got employees to accused management of accessing an online portal where NetJets pilots communicate with one another. The pilots look at this as an illicit activity, and if this conflict does not come to a resolution soon, it can become the latest headache from a business that has become a major worry for Warren Buffett over the years. Over the last 16 years, Berkshire Hathaway has owned NetJets, and the company has never paid a dividend to Warren Buffett, and the net worth of the business is significantly less than when Buffett purchased it for $725 million back in 1998, we’ve learned from a person close to the business.

Some of the current unrest in the company is expected during the NetJets bargaining season, which typically has testy negotiations. But due to the escalating tension and the high profile business of the company, investors seem to be noticing this fight prevalently.

“Perhaps this is standard posturing between labor and management, but it does appear to be getting more contentious,” says professor of finance at University of Maryland David Kass. He’s also a Berkshire Hathaway shareholder. “And Buffett has said perpetual money or labor problems would be to reasons to exit a company.”

Employees at NetJets are protesting what they feel are “unjustifiable cost cuts and overhead reductions in the face of increasing flight demand, record profits and a dramatic reduction in debt,” according to Buffett’s letter that he sent last March.

NetJets says that it put out a contract proposal for the pilots and asked for a “few reasonable changes” that included modifications to health benefits and inclusion in an annual incentive program based on individual performance that is tied to the company. The company also states that the pilots are among the highest paid in the industry, and also states that other benefits and salaries, including overtime, longevity pay and an industry-leading 401(k) plan that matches 50% of the contribution by employees, would not change with the new contract.

The fight has gotten worse due to extended contract negotiations with a number of different unions representing pilots, mechanics, flight attendants and other employees. The company, based out of Columbus, Ohio, has more than 6200 employees, and the majority of those people belong to unions.

In a lawsuit in December, the union that represents the 2700 NetJets pilots alleges that the company has obtained confidential information posted to a message board illegally that is strictly used by the pilots. This lawsuit was filed in the federal court in Ohio, and also alleges that the executives have unlawfully set up a Twitter account where they impersonated a pilot. “TwinkieTheKid” is the account name that has allegedly baited pilots to participate in or endorse “unlawful job actions,” said the lawsuit.

The negotiations have not resulted in any cancellations by customers or interrupted service at all, but some users have called the company to ask about labor problems, we’ve learned based on information from someone familiar to the issue.

Thomas Hoyt, a NetJets spokesperson, declined to make any comments about the lawsuit. “We continue to be disappointed that the union continues to engage in theatrics when there is work to be done at the bargaining table,” said Hoyt in a statement.

Warren Buffett has not addressed this issue in the public. He also declined to comment, but in an interview he had said, “In almost 20 years where my family and I have flown over 1000 flights, I’ve never met a pilot who wasn’t professional or friendly.”

Into the “owner’s manual” at Berkshire Hathaway, where Charlie Munger and Warren Buffett explain the principles of the company to the shareholders, they both mention that poor labor relations and a money-losing business are the two reasons that they would ever sell a company.

Even though Berkshire Hathaway has more than 330,000 employees across the globe, in the last 50 years it has only seen a handful of strikes since Warren Buffett has been running the company.

Berkshire Hathaway purchased NetJets back in 1998, not long after Warren Buffett became a huge fan of the business model. More than 50 years ago, the company was founded as Executive Jet Airways, and they have pioneered the concept of “fractional ownership,” where individual people can purchase a share in a plane in exchange for flying hours.

During the financial crisis, NetJets took a hit because wealthy clients began to cut back on their private flying. The only reason the company survived is because their $1.9 billion debt load was guaranteed by Berkshire Hathaway.

After making big layoffs and furloughs back in 2009, the company began to turn around. And since 2010, they have even placed orders for as much as $17.6 billion worth of new jets. The company revenue grew in 2013 by 7.5%, and they sold more plane shares in the amount of $4 billion.

During 2011 in the annual letter to shareholders, Warren Buffett wrote about the evolution of the company. “A few years ago NetJets was my number one worry,” wrote Buffett. “Its costs were far out of line with revenues, and cash was hemorrhaging. Without Berkshire’s support, NetJets would have gone broke. These problems are behind us.”

Having dropped the company debt to around $500 million, according to someone familiar with the situation, the company has continued to stay profitable in 2014. But they still produce only a small fraction of the earnings at Berkshire Hathaway, which was around $20 billion during 2013. The profits at NetJets went up by 7% during 2013. Berkshire Hathaway will report its annual results for 2014 in February.

Union officials tell us that Jordan Hansell, the CEO of NetJets, said to them that weakened job security protections, reduced compensation and increased cost of health care “are necessary because Berkshire” requires that NetJets produce a greater return on revenue.

The contract proposal by NetJets is said to strike a balance between lowering labor costs and achieving business targets without having to reduce pay. The company even pitched a modified healthcare plan. This will require that union employees contribute to the premiums that they are currently not paying. It has also offered to offset the rising costs that employees face through lump-sum payments.

All in all, the two sides have not had much success when it comes to bargaining.

The protest in Las Vegas was one of several staged informational events that took place in 2014. The union members were seen picketing outside airports including Teterboro in New Jersey, which is regularly used by private jet operators. At the May annual meeting in Omaha for Berkshire Hathaway, pilots were handing out flyers to attendees. Most recently, union workers protested at Art Basel in Miami, which is an event that is quite popular with their wealthy customers.

“We really don’t like this labor dispute,” said Pedro Leroux, the NetJets pilots’ union president. “We just want the contracts to reflect what we bring to the table. The company says we have world-class pilots, so treat us accordingly.”

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