Betty Liu interview with David Sokol

BL: Thank you so much Julie and as you had mentioned David Sokol is here with me, the Chairman of Mid American. You hold many hats these days, the biggest one right now being the CEO of NetJets.

DS: I think that’s right, or what ever Warren wants me to do.

BL: Haha, right exactly. There was a recent article called you “The Mr. Fix It at Berkshire.” Ok so lets start with NetJets first though. As I understand it you are spending about half your time, you are kind of scaling back a little bit from the turn-around we’ve seen at this company since you stepped in last year. So far, are you confident you are able to grow the top line at NetJets? I mean it’s gone through so much.

DS: Yea, I think 2008 was a huge wake up call for many businesses NetJets not the least but all of the changes we needed to put in place I think we finished about six months ago. I’ve got a tremendously talented young management team in place now; they’re doing a great job. I think this year our primary flights from share owners – people that own parts of our airplane – will be up close to eight percent which is very positive. Net share sales probably down about one to one and a half percent for the year, which is also significantly, better then the last two years. Really our only weak spot is on the, we have a reselling company out there-Marquis Jet-over the last two years they’ve turned back to us- well with 10 recent ones, you know nearly 60 percent of where they are so they are shrinking substantially. Other than that I think the business is on a sound foundation going forward. I think our growth going forward will be solid but it will be limited by effectively the gross domestic product growth of the U.S. or Europe.

BL: Were you and also by extension Warren Buffett as surprised at how much NetJets was affected by the economy?

DS: No, I think one of the great strengths of NetJets is the Berkshire Hathaway backing, which is if you buy a share from us if you get into financial difficulty we guarantee to buy it back within 90 days at fair market value. You know when the economy shifted as dramatically as it did in 2008; it was a real tribute to the fact that Berkshire Hathaway stood behind every one of those guarantees – we bought back 53 full airplanes in total and it cost, it ultimately cost us a fair bit of money because as the fair market value is dropping.

BL: Right, I was going to say not at a benefit to you, not at a benefit to the company.

DS: Right, we have not made any money buying those airplanes. But we stood behind the guarantee that was there and so I think it’s a real tribute to the fact but it was also why people I think, why NetJets has 70 percent market share is people want to deal with Berkshire Hathaway on an investment that is both that important to them financially but also because Warren has always maintained the absolute top safety standards in the world for NetJets and will always keep them there.

BL: Have you been surprised David, by the amount of criticism that has come out though since this turn around at NetJets. I mean you’ve had the co-founder there talking about that NetJets is now stuck with an aging fleet, um how are they going to grow their top line? Have you been surprised by that?

DS: I have been surprised at how someone like Mr. Jacobs goes out and criticizes the company that he was poorly managing. You know he’s argued that we should have been buying more airplanes, this year and last year, which would be crazy. I mean if he actually understood the business model that he was involved with, that would have been insane. They had already bought too many aircraft. Secondly, he wasn’t selling the older airplanes that they could have sold in 2007. So both premises of his argument, I think the reality is you know some people when they realize they weren’t running a business well and it gets fixed, they find it in their interests somehow to hurt the employees that are there trying to make the company a success. I don’t understand it and I don’t respect it at all, but I think that’s all it is. I think any objective look at the company, the team of people, the quality of our pilots and flight attendants including the aircraft – our Owner satisfaction numbers through the first half of this year are the highest they’ve ever been. So I think the reality is those that are running it and the group of tremendous folks that do it everyday are doing a great job. It’s unfortunate that a former executive would try to harm the very people that reportedly he cared for, but I think it’s well behind us I don’t think he has very much influence.

BL: I mean the only thing that he said as well, that he argued was well look things were turning around when you stepped in, that debt was coming down at NetJets. You know what do you say to that?

DS: Well it was, last April it was a billion 9 and today it’s about a billion 150 and almost all of that happened with the team that’s currently in place, not the prior team. So I think the numbers speak for themselves and again I hope the former executives have a good life and move on and enjoy their life and let the employees that are there do what they do for our Owners everyday and let the business go forward.

BL: You’re going to step down soon as CEO, is that correct?

DS: Right, hopefully by the end of this year, latest first quarter. Transition the CEO’s title- hopefully stand of up one my 16 team members today to President by end of this year.

BL: Ok, so you’ll make a decision by end of this year?

DS: Yea, we’ve got a great young team. Several of them have been with the company for more than 17 years; I mean they know the business. My goal here for the last several months and for the next six, is to really let them learn every aspect of the business amongst themselves. They operate tremendously in a team format and I’m really excited. I’ve got them all in one location and they’re doing a great job.

BL: Now you’ve said before David in a conversation before this that you spend about half of your time right now, you’ve scaled back a bit. You spend about half of your time at NetJets. What is the other half of your time spent on?

DS: Well I’m trying to spend as much time as Greg Abel wants at Mid American, you know he doesn’t need much time, he’s the CEO there, he does a great job. Spend a small amount of time with John Mansville and Todd Raybooth who is the CEO there. Again a great team of people doing a terrific job in a very difficult market, the fact that they’re profitable through this period is really remarkable given how affected they are by the housing market. Then a little bit of time on the BYD Board with activities with BYD. Whatever is left trying to find additional opportunities for Berkshire Hathaway.

BL: What’s the latest with BYD? Now that you bring it up because there are plans to open the U.S. headquarters sometime this year, is that correct?

DS: Yea, they’ve made an announcement earlier in the year; I think it’s going to be in LA.

BL: Given what’s happened in China, the slow down there and BYD cut their forecast last week in China for sales and I know you can’t talk operationally about BYD, but is there any sense from your being on the board at BYD, that just looking at the company, that there’s a slow down going on? And that Chinese companies are scaling back?

DS: There clearly is a slowing element in the Chinese economy, you’re right I think BYD has lowered their estimated car sales in China by about 20-25 percent.

BL: Right, 25 percent.

DS: Right, but that will still be up 50 percent over the prior year. Their the fourth largest manufacturer now in China, so you know I wouldn’t read to much into it other then I think the Chinese government is trying to appropriately throttle their economy and that will ripple through the various capital goods you know in that economy. The advantage the Chinese have though is they have enormous numbers of levers to play with as they manage that economy as they move, you know whether it’s an extra million people into the workforce each year they can have a dramatic impact. My suspicion and I have no first hand knowledge, but they are trying to understand how well those levers work so that as they pull them they can adjust in the future.