Fractional-share provider NetJets has ordered up to 425 Bombardier and Cessna jets worth as much as $9.6 billion, with deliveries to begin in 2015. The purchase is the largest general aviation aircraft order in history and includes a firm order for 75 Bombardier Challenger 300s (plus options on another 125), a firm order for 25 Challenger 605s (plus options on 50 more) and a firm order for 25 Cessna Citation Latitudes (plus options on an additional 125). Deliveries begin in 2014 for the 300s, 2015 for the 605s and 2016 for the Latitudes. The Bombardier order is worth up to $7.3 billion and the Cessna order up to $2.3 billion. Those are retail prices and also the totals if NetJets exercises all of its options. NetJets will likely pay less than retail, but chairman and CEO Jordan Hansell explained, “We don’t get into specifics of our contractual relationship with folks, so all we’re willing to say at this point is that the $9.6 billion is list [pricing].”

The order appears to signal eventual rationalization of the NetJets fleet, which in June consisted of 540 aircraft. NetJets subsidiary Executive Jet Management manages 176 more. The NetJets fleet includes significant numbers of older airplanes that may soon be headed for retirement and replacement by aircraft that NetJets has ordered. These include not only the latest order from Bombardier and Cessna, but also NetJets’s announcement last March of plans to buy 120 Bombardier Global jets worth $6.7 billion if all options are exercised (a firm order for 30 Global 5000s and 6000s and 20 Global 7000s and 8000s and options for 70 more). In October 2010, NetJets placed a firm order for 50 Embraer Phenom 300s, with an option for 70. The Phenoms, which begin delivering next year, are called the Phenom 300 Platinum Edition and include special features–mostly in the cabin–unique to NetJets.

After ordering the Phenom 300s, Embraer subsidiary ECC Leasing purchased 25 NetJets Citation Ultras, presumably taken in trade by Embraer. ECC Leasing remarketed the Ultras. Hansell didn’t provide any information about trade-ins on the latest Bombardier and Cessna orders. Among the older airplanes in the NetJets fleet are 34 Hawker 400XPs, six Citation Ultras and a few Gulfstream IV-SPs and GVs. The Phenom 300s may replace the Ultras and 400XPs, while the Challenger 300s could supplant Citation Sovereigns and Gulfstream G200s. Challenger 605s might supplement or replace Falcon 2000s, and the Global jets the larger Gulfstreams. If NetJets decides to replace some of the 68 Hawker 750/850XP/900XP models, there might be room to order another new midsize jet. Asked about whether NetJets plans to order more jets, Hansell said, “It will depend a little bit on what the market looks like. And how we see things trending, but yes, it’s possible.”

The new Challenger 605s and 300s and Cessna Latitudes will be configured as NetJets’s new Signature Series, which “are the first aircraft that NetJets helped design from start to finish,” according to the company, and include “advanced in-flight entertainment systems, quiet cabins and customized seating, lighting and storage features.” Hansell emphasized that the Signature Series Challenger “is not a Challenger 300; it’s a Challenger 300 Series. It is not the Challenger 300 that is on the market today.”

Long-term Outlook

The decision to order the Challengers and Latitudes, Hansell explained, resulted from internal analysis. “We assemble large teams to help us analyze potential aircraft purchases. Those teams consist of maintenance technicians, pilots, flight attendants, financial analysts and lawyers, and we go through a multipronged analysis from fuel efficiency to short-field performance to nautical-mile distance to interior cabin configurations and to the flexibility of each OEM to work with us. Ultimately we are a large fleet operator and that makes us unique in private aviation. Once you put all of those pieces together, we felt these aircraft most suited our needs and the desires of our owners.”

The economic decision wasn’t because of rapidly growing fractional sales, according to Hansell. “Share sales have been relatively static for us. They crept up over the last couple of years, that’s from a low base [in 2009], but they continue to expand. And we expect, barring large economic shifts, that we will continue to see that to occur, at least at a modest pace.” The optional orders allow NetJets some flexibility. “That will depend on market and economic conditions,” he said. “Provided the market is friendly and remains friendly and people continue to buy, it will be an expansion of the fleet or it could be a replacement, depending on where we see current conditions. We’ve seen near-term demand is relatively strong. We still keep an eye on Europe and elsewhere, but generally speaking it’s maintained a relatively strong position.” According to TraqPak data released last month by aviation services company Argus, flying activity at fractional providers fell 6.9 percent year-over-year.

“It’s clear from the terms of the deals we take a long view about what we think private aviation and the general economy will look like,” Hansell said. “We have a 10-year planning cycle at NetJets that we refresh every year on a rolling basis. Obviously with these orders we look out even a little further than that. But we feel confident and comfortable that the U.S. and the European economy will ultimately come back to a much stronger position. We’re seeing some evidence of that in the U.S. today. And so we feel it’s prudent to expand now, to be sure that we’re well positioned to compete over the longer term.”

None of the newly ordered airplanes is intended for the aircraft management operation NetJets is building in China. “These aircraft will be devoted to our U.S. and European fleets,” he said. “At some point we hope that the fractional market in China will be a robust one, but we think that will take some time.”

Although Bombardier’s Flexjet fractional-share operation owns only Bombardier airplanes, there was no discussion of exclusivity in the NetJets order, according to Hansell. Flexjet doesn’t own any Global jets, but does operate Challenger 300s and 605s. “It did not enter into the negotiations at all,” Hansell said. “We made a decision two to two-and-a-half years ago that we would buy the best possible aircraft we felt we could find for our owners’ use and that we wouldn’t let any other considerations color our determination.”

The nearly $10 billion order will be financed from normal funding arrangements, according to Hansell. Warren Buffett, chairman of NetJets owner Berkshire Hathaway, was apprised of plans for the big order. “We did share our plans with him,” he said, “as we would with anything of this size. He just wanted to make sure we were getting airplanes that our owners would like, and I think we succeeded in doing that.”

NetJets will negotiate service and support deals separately from the purchase agreement. NetJets recently signed a 15-year OnPoint solution agreement with GE Aviation for the maintenance, repair and overhaul of the CF34 engines that power the Challenger 605. Pratt & Whitney Canada signed a 15-year on-condition fleet maintenance program agreement with NetJets for the Latitude fleet’s PW306D engines.

Commenting on the NetJets order, financial newsletter publisher Stephen Leeb, writing in his Cash Cow bulletin, noted that, “Warren Buffett has proved over several decades that he is one of the most successful contrarians of all time. He knows instinctively that things are cheaper when no one wants them than when they’re in high demand (a simple concept unfortunately lost on many investors) and that getting a low valuation in a cyclical company is like a gift from above for those patient enough to see the cycle shift through to the other side. He’s done it with all manner of businesses–railroads, beverages, banks, etc. And now he’s doing it with businessjets.”

Leeb surmises that given the slump in private aviation, NetJets is “undoubtedly paying significantly lower than list,” adding that “if ever there was an example of smart money anticipating a turn in a cycle far ahead of the conventional wisdom, this is it… All in all, within five years we think Wall Street will view this deal as one of the shrewdest Buffett has ever done.”