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Berkshire's NetJets Purchase Seems to Contradict BNI Acquisition


Berkshire's NetJets Purchase Seems to Contradict BNI Acquisition

NetJets, the Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) owned private jet provider, made a large splash in small aircraft industry today with the announcement that it will purchase as many as 425 jets from Canadian plane maker Bombardier, Inc. (TSE:BBD.B)(TSE:BBD.A) and Textron Inc. (NYSE:TXT)’s Cessna. The purchases total $9.6 billion when options are included.

The order includes 100 firm orders for Bombardier Challenger Aircraft and an additional 175 options for the similar planes. From Cessna, NetJets has ordered 150 Citation Latitude Jets, of which 25 are firm orders. According to NetJets, this would be the largest order ever for business aircraft, surpassing the record it set itself last year with a March 2011 acquisition of 120 Bombardier planes.

NetJets Chief Executive Officer Jordan Hansell told reporters that “it’s prudent to take a stand now and make a decision now to be sure that we’re well positioned to compete over the longer term.”

The larger aircraft purchased in this order may be a suggestion that NetJets sees lower aviation fuel prices ahead, and that companies will prefer to rent the more luxurious aircraft over more fuel efficient, but smaller, aircraft. The large scale of the purchase also indicates that NetJets is optimistic that American and European economies will recover from their current states and more will be spent on luxury business travel.

Aviation firms are also seeing increased demand from wealthy individuals and some corporate clients in emerging market economies. The purchase of larger jets, with increased range, may also indicate that NetJets will become more aggressive in attracting business from these markets.

The expansion of NetJets may be an attempt to hedge Berkshire’s arguably bullish position on oil prices in the acquisition of Burlington Northern in 2009. The railway stood to benefit from increasing oil prices as railways are more cost effective than truck based transport during times of high fuel costs. Such high fuel prices would negatively impact NetJets, especially with these larger aircraft.

In addition to the aircraft sales, Bombardier announced that the agreement also has a service agreement worth approximately $2.3 billion if all options are exercised. Bombardier’s stock is up 6.5 percent on the Toronto Stock Exchange, while Textron’s stock increased 3.5 percent in New York. Berkshire Hathaway’s “B” shares are also up 0.69% in mid-day trading.


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