“Don’t play games that you don’t understand, even if you see lots of other people making money from them. ”
What Santulli accomplished
Richard T. Santulli, who resigned in August after nearly a quarter century as chairman of NetJets, had never been in an airplane-had in fact never been outside the New York/New Jersey/Connecticut metropolitan area- until he turned 21 and spent his honeymoon in Puerto Rico. Santulli, who was born in Brooklyn, N.Y., in 1944, has said that his goal while growing up was to someday earn $25,000 a year.
It's safe to say he beat that target some time ago.
After receiving a master's degree from New York's Polytechnic University and teaching math for a few years, Santulli joined Shell Oil and then, in 1969, Goldman Sachs, where he became involved with aircraft financing. He spent 11 years there and rose to the position of vice president of investment banking, but it wasn't until after he left Goldman that he really started to make his mark.
That's when Santulli pondered buying an airplane but concluded that doing so wouldn't make financial sense, given his 150-hours-a-year usage. So he got three friends to agree to go in with him on a purchase, which made it more feasible.
"That was the good news," he recalled in an interview on the TV show Beyond the Boardroom with Jonathan Tisch. "The bad news was...the first fellow said, 'Well, I want to fly Tuesdays and Thursdays.' So the other guy said, 'Well, then I'll use it on Wednesdays and Fridays.' I raised my hand and said, 'Then we have no deal.' The only reason to have a private jet was to use it when you needed to use it. So I actually left that meeting saying, "If there were a way to keep the economics of that-kind of like time sharing-but guarantee availability, I'd have something. Because there were a lot of people that were a lot more successful than I was, that had a lot more money than I did, that I'd be able to sell this to."
Santulli bought a company called Executive Jet Aviation and began selling fractional jet shares in 1986. The business struggled in its early days, but it had become so successful by 1998 that Warren Buffett-who'd then been a customer for three years-decided to buy the firm for $725 million. "Rich Santulli is a great salesman," he reportedly said, "and I like what he sells."
Lots of other people apparently agreed. Today, the company (which was renamed NetJets in 2002) operates more than 800 aircraft in 140 countries and dispatches more than 300,000 flights per year.
What Santulli did was to completely rewrite the rules of the game for business jet travelers. Until NetJets came along, you basically had two choices for getting involved in private aviation. You could buy an aircraft, which meant spending a whole lot of money and then making sure a flight department or management company would maintain the airplane, hire pilots and crew, make repairs and so on. Or you could charter, which relieved you of these responsibilities and required you to pay only for your flights but didn't offer the advantages of ownership, including tax benefits and quick, easy access to a particular aircraft model.
Santulli changed all that by introducing fractional jet ownership, which in some ways offers the best of both worlds: You have an owner's easy access and tax benefits but also the charter customer's freedom from responsibility, as the fractional provider manages and operates the aircraft for you. And while fractional flying costs significantly more than charter, it's far less expensive than full ownership, since you need to buy only a fraction of the aircraft. Plus, you can easily sell your share back to the provider after five years and walk away.
This model gave birth to an entirely new industry. Granted, NetJets is in a serious slump now and the whole business jet field is suffering along with the overall economy. (Some observers attribute the August departure of Santulli-who had been considered a candidate to succeed Warren Buffett-to NetJets' declining fortunes and his failure to respond aggressively enough to its problems.) But NetJets seems likely to endure; and while its business model will probably continue to evolve, the basic concept won't disappear anytime soon. NetJets now has five major competitors and numerous small ones. And the advent of fractionals has fostered more creative thinking that has resulted in other innovations, such as jet cards.
Santulli deserves a huge amount of credit for shaking up the industry and concocting a new way to fly privately. He hasn't said where he'll go from here (aside from staying on as a NetJets consultant for at least 12 months), but I for one plan to keep an eye on him.