1999: What return on equity does Buffett expect for FlightSafety and Executive Jet?

AUDIENCE MEMBER: Good morning. My name’s Marc Rabinov from Melbourne, Australia.

I was wondering if you could help us out with the flight operations, which are now a large part of Berkshire. I think we’re still putting a lot of capital into them.

I was wondering, you’ve pooled both of them together in the annual report. And I was hoping, perhaps, you could help us out with what return on equity you’re expecting for each of those divisions.

WARREN BUFFETT: Yeah, the more capital intensive is the flight safety operation. Because every simulator costs real money. And we will add a number of simulators each year.

So, flight safety — you can look at their figures before we acquired them, and it’s reasonable to extrapolate those numbers out on a larger basis — base as we go along.

But flight safety’s return on equity is not going to move up or down by a dramatic amount. I mean, our simulator training prices are related to the cost of the simulator. And so, there’s not going to be way higher returns on equity, nor should there be way lower returns on equity.

There is a growth on the equity employed in the business, because it is a growing business and we’re training more and more pilots every year. But that’ll be a fairly steady thing.

The Executive Jet business is in an earlier part of its development, although it’s the leader in its field, by far. But we’re doing substantial investment spending in a place like Europe. And we’ll be doing that on an accelerated pace, if anything.

In the end, though, our customers end up owning the plane. So, we have an investment in a core fleet of planes, which supplements the customer’s planes.

But by its nature, it’s not a capital-intensive business. We are moving around a lot of capital every day. We’ll have 140 or so customer planes now and an aggregate, you know, just to pick a figure, that those planes are certainly worth a billion and a half or more.

And we’ve got 7 billion of planes on order, or some number like that. But we will sell those planes to our customers. So it could be, down the line, that it will be a business with a very good return on capital.

We’ll still have an investment in the core fleet and we’ll have some facilities — hanger facilities and that sort of thing. But our customers will have the big capital investment.

I should point out, they’ll have a whole lot less capital investment if they own their entire plane themselves. So, they will be getting a bargain as well.

Let’s take off for lunch. And I’ll see you back here in about 45 minutes, those of you who wish to rejoin us. Thank you. (Applause)