Monday, January 05, 2015

NetJets Unrest Puts Warren Buffett in a Rare Pinch • Pilots Protest Against Pay, Benefits at Berkshire Hathaway’s NetJets

NetJets pilots protest outside the Miami Beach Convention Center in December. Globe Photos/Zuma Press

The Wall Street Journal
By Anupreeta Das

January  5, 2015 2:22 p.m. ET

On a Saturday in mid-November, NetJets Inc. hosted several hundred of its wealthiest customers in the ballroom of the luxury Wynn resort in Las Vegas, where guests played poker alongside Warren Buffett with $950,000 in prizes at stake.

Outside, dozens of uniformed NetJets pilots picketed against the private-jet company. “Management greed is destroying NetJets,” read one placard. “Do pilots need to pay more for healthcare so you can fly cheaper?” asked another.

Labor unrest is unusual for a company owned by Mr. Buffett’s Berkshire Hathaway Inc., where the prevailing image is that of a conglomerate with well-paid managers who oversee contented workers at more than 70 operating subsidiaries. But the drama playing out at NetJets illustrates the hard side of Mr. Buffett’s singular focus on returns. In the case of NetJets, the pressure to complete the turnaround of a business Mr. Buffett once called his “number one worry” is now spilling into public view.

The Las Vegas protest was part of a deteriorating labor situation that now has employees accusing management of illicitly accessing an online portal where NetJets pilots communicate. If the conflict isn’t resolved soon, it could become the latest headache from a company that has been a periodic source of worry for Mr. Buffett. In the 16 years that Berkshire has owned NetJets, the jet operator has never paid its owner a dividend, and its net worth is considerably less than the $725 million Berkshire paid for it in 1998, a person close to the company said.

Of course, some of the unrest is expected during bargaining season at NetJets, which has a history of testy negotiations. But because of the escalating tension and the company’s high-profile business, this fight seems to be garnering attention from investors.

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

NetJets employees are protesting what they consider “unjustifiable cost cuts and overhead reductions in the face of increasing flight demand, record profits and a dramatic reduction in debt,” according to a letter sent to Mr. Buffett in March.

NetJets says it put forth a contract proposal for its pilots that asked for a “few reasonable changes” including modifications to the current health benefits and inclusion in an annual incentive program tied to company and individual performance. The company says its pilots are among the best-paid in the industry and that salaries and other benefits—including longevity pay, overtime and an “industry-leading” 401 (k) plan in which it matches 50% of employee contributions—wouldn’t change under the proposal for a new contract. 

The fight has worsened amid extended contract negotiations with multiple unions representing pilots, flight attendants, mechanics and others. NetJets, based in Columbus, Ohio, has about 6,200 employees, a majority of whom belong to unions.

In a December lawsuit, a union representing NetJets’s 2,700 pilots alleged that the company had illegally obtained confidential information posted to a password-protected message board used by pilots. The lawsuit, filed in federal court in Ohio, also alleges that NetJets executives have unlawfully set up a Twitter account impersonating a pilot. The fake account, called “TwinkieTheKid,” allegedly baited pilots to endorse or participate in “unlawful job actions,” according to the lawsuit.

The talks haven’t yet interrupted service or resulted in customer cancellations, although some users have called to inquire about the labor problems, a person familiar with the matter said.

NetJets spokesman Thomas Hoyt declined to comment on 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,” Mr. Hoyt said in a statement.

Mr. Buffett hasn’t addressed the issue publicly. He too declined to comment but said in an interview: “In almost 20 years where my family and I have flown over 1,000 flights, I’ve never met a pilot who wasn’t professional or friendly.”

In Berkshire’s “owners’ manual,” where Mr. Buffett and his business partner, Charlie Munger , explain their business principles to the company’s shareholders, the two wrote that a money-losing business and poor labor relations are the only two reasons that would compel Berkshire to sell a company.

Although Berkshire, based in Omaha, Neb., has more than 330,000 employees globally, it has seen a handful of strikes in the nearly 50 years that Mr. Buffett has been at the helm.

Berkshire bought NetJets in 1998, after Mr. Buffett became a big fan of its business model. Founded as Executive Jet Airways more than 50 years ago, NetJets pioneered the concept of “fractional ownership,” where individuals can buy a share in a plane in exchange for flying hours.

NetJets took a major hit during the financial crisis as wealthy clients cut back on private flying, surviving only because Berkshire guaranteed its $1.9 billion debt load.

After big layoffs and furloughs in 2009, NetJets began turning around. Since 2010, NetJets has placed orders for as much as $17.6 billion worth of new jets from Bombardier Inc., the Cessna Aircraft Co. unit of Textron Inc. and others. In 2013, revenue grew by 7.5% to about $4 billion as it sold more plane shares.

In his 2011 annual letter to shareholders, Mr. Buffett wrote about the company’s evolution. “A few years ago NetJets was my number one worry,” he wrote. “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 shrunk its debt to about $500 million, according to a person familiar with the matter, the company continued to be profitable in 2014. Still, NetJets produces a tiny fraction of Berkshire’s total earnings, which stood at about $20 billion in 2013. NetJets’s profit rose 7% in 2013. Berkshire is expected to report its 2014 annual results in February.

Union officials say NetJets Chief Executive Officer Jordan Hansell told them that reduced compensation, weakened job security protections, increased health-care costs “are necessary because Berkshire” requires a greater return on revenue from NetJets.

NetJets says its contract proposal tries to strike a balance between achieving business targets while lowering labor costs without reducing pay. The company has pitched a modified health-care plan that will require union employees to contribute to premiums that they currently don’t pay. It also has offered to offset the increased cost to employees through lump-sum payments.

However, the two sides haven’t had much success at the bargaining table.

The Las Vegas protest was one of several informational events staged in 2014. Union members also picketed outside airports such as New Jersey’s Teterboro, frequently used by private-jet operators. At Berkshire’s May annual meeting in Omaha, pilots handed out fliers to attendees. Recently, they protested at Art Basel in Miami, an event that is popular with wealthy customers.

“We really don’t like this labor dispute,” said Pedro Leroux, president of the NetJets pilots union. “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.”

Story, Video and Photos:

A banner hangs near a NetJets jet in Omaha. NetJets, the aviation business of Berkshire Hathaway, has faced increasing labor unrest in recent months. Bloomberg News

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