““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
Santulli's Departure from NetJets
The reasons behind Richard Santulli's sudden departure from NetJets have been the subject of speculation for weeks. Sources tell us he was forced out for failing to move aggressively enough to stem financial losses at the fractional-ownership giant. Others say he fell out of favor after rejecting calls to let go of senior managers who'd worked alongside him for years. In a statement, Santulli said he wants to spend more time with his family and "pursue other interests."
We may never know the whole story, but it's possible there's another, less obvious answer that explains part of the reason for Santulli's exit.
Maybe it was just time for a fresh start at NetJets.
If there's one thing that's been said about Santulli over the years, it's that he's is a smart guy-no, make that a genius. He developed a time-share program for private jets in 1986 after working out the mathematical model that could make it profitable. In doing so, he gave thousands of business jet travelers a new way to fly and added billions of dollars to the order books at struggling aircraft manufacturers, all while creating or helping to sustain thousands of jobs in aviation. To many, he's a hero.
In our Inside Fractionals column on page 50, executive editor Jeff Burger does a great job summing up what Santulli accomplished at NetJets. So rather than dwell on that part of the story, I'd like to touch on what his departure means for the company he leaves behind.
I interviewed Santulli only once, in 1996, when NetJets was still based in Montvale, N.J. That was two years before Santulli sold the business to Warren Buffett's Berkshire Hathaway for $725 million. In our meeting, I asked Santulli if he would ever consider an IPO. His answer was immediate and unequivocal: "I could never take this company public. Shareholders wouldn't be able to stomach the ups and downs of this business."
Revenue at NetJets grew at a dizzying pace in those days, but profits were erratic. The pairing of Santulli and Buffett, though, made a lot of sense to me. Buffett was a NetJets customer and a fan of the fractional-ownership concept. He presumably understood that the NetJets business model was different from that of, say, Dairy Queen, another Berkshire holding that excels by doing basically the same thing quarter after quarter.
NetJets, however, was always built for growth, and when it stopped growing-you can pinpoint it almost to the minute: September 15, 2008, the day Lehman Brothers went under and the global financial dominoes started falling-the swoon eventually became too much even for Buffett.
Reported revenue at NetJets fell by a staggering billion dollars in the first six months of this year compared with the same period last year. Losses at the firm totaled almost $350 million as scores of NetJets airplanes piled up in the company's unsold inventory. Finally, on August 4, it all unraveled; Santulli was out and David Sokol, the chairman at Berkshire-owned MidAmerican Energy Holdings, was named NetJets chairman and interim CEO.
When I heard the news, I wondered how long it would take before Sokol started making the sort of sweeping changes everybody knew was coming. I had my answer a few days later as Sokol moved to reshape the management structure and announced that NetJets' headquarters would be relocated from Woodbridge, N.J., to Columbus, Ohio, where the company's flight operations are based.
With a new leadership team in place and the focus put on salvaging the business, the prognosis for the company is good, I think. The fractional-ownership business model has matured, and adapting for the next growth cycle will require fresh thinking. While it's certainly true that NetJets is in dire financial straits, the company's core customer base is still out there. They don't want to go back to charter. They want to be able to pick up the phone, arrive at the airport four hours later and climb aboard a meticulously maintained airplane crewed by well-trained, by-the-book pilots. The trick will be finding the right balance to make the numbers work again.
I, for one, take Santulli at his word. I believe him when he says he's moving on to pursue other interests-most probably something to do with thoroughbred horses, if I had to bet. And why not? He has nothing left to prove in aviation. His achievements, and the way he treated those around him, speak volumes about the man. Now it's time for the new leadership at NetJets to take the steps needed to save what Santulli created.
For the sake of the company's employees and customers, we wish them all the best.