FlightSafety
Company Overview
FlightSafety International is the world's largest aviation training company, providing simulator-based flight training to pilots of business aircraft, commercial airliners, and military aircraft worldwide. Berkshire acquired FlightSafety in 1996 for approximately $1.5 billion in cash and stock — one of the first Berkshire acquisitions where Buffett explicitly contrasted the company's model with See's Candies to illuminate capital intensity economics.
Investment Story
1996: Acquisition from Al Ueltschi. Al Ueltschi founded FlightSafety in 1951 and built it over 45 years into the global leader in aviation training. At age 81, he called Buffett and the deal was struck quickly — Berkshire paying $1.5 billion for a company Ueltschi had built from nothing. Ueltschi continued as chairman.
The simulator economics. FlightSafety's primary product is simulator training time — the FAA requires pilots to complete significant training hours in full-motion flight simulators before flying actual aircraft. A high-fidelity commercial airliner simulator costs $12-20 million to build and requires continuous updates as aircraft software changes. FlightSafety owns and operates hundreds of simulators worldwide.
Quality regulation as a moat. Aviation safety regulation creates a captive market: airlines and corporate aviation departments have no choice but to provide specific simulator training hours to their pilots. FlightSafety's global simulator network and decades of certified training methodology make it the default provider for most commercial and business aviation customers.
Capital intensity and return. Buffett used FlightSafety as a teaching example in contrast to See's Candies: both were excellent businesses, but FlightSafety required ongoing capital investment in new simulators (as aircraft fleets evolved) while See's required almost nothing. Both could generate good returns — but FlightSafety's capital intensity meant that earnings had to generate sufficient returns to justify continued simulator investment, making free cash flow substantially below operating earnings.
Buffett's Own Words
FlightSafety International, another Berkshire subsidiary and the world leader in pilot training. The bottom line on our pilots: I’ve sold the Berkshire plane and will now do all of my business flying, as well as my personal flying, with NetJets’ crews. Being the leader in this industry is a major advantage for all concerned. Our customers gain because we have an armada of planes positioned throughout the country at all times, a blanketing that allows us to provide unmatched service. Meanwhile, we gain from the bl
Berkshire shares increased: We issued stock in acquiring FlightSafety International and also sold new Class B shares. Over the last 32 years (that is, since present management took over) per-share book value has grown from $19 to $19,011, or at a rate of 23.8% compounded annually. * Each Class B share has an economic interest equal to 1/30th of that possessed by a Class A share, which is the new designation for the only stock that Berkshire had outstanding before May 1996. Througho*
FlightSafety International, another Berkshire subsidiary and the world leader in pilot training. The bottom line on our pilots: I’ve sold the Berkshire plane and will now do all of my business flying, as well as my personal flying, with NetJets’ crews. Being the leader in this industry is a major advantage for all concerned. Our customers gain because we have an armada of planes positioned throughout the country at all times, a blanketing that allows us to provide unmatched service. Meanwhile, we gain from the bl
Aviation Services Our two aviation services companies — FlightSafety International (“FSI”) and Executive Jet Aviation (“EJA”) — are both runaway leaders in their field. EJA, which sells and manages the fractional ownership of jet aircraft, through its NetJets® program, is larger than its next two competitors combined. FSI trains pilots (as well as other transportation professionals) and is five times or so the size of its nearest competitor. Another common characteristic of the companies is that they are still ma
*Aircraft Services pilot training at FlightSafety (FSI) and fractional ownership of business jets at Executive Jet (EJA). Both companies are run by their remarkable founders. Al Ueltschi at FSI is now 83 and continues to operate at full throttle. Though I am not a fan of stock splits, I am planning to split Al’s age 2-for-1 when he hits 100. (If it works, guess who’s next.) We spent $272 million on flight simulators in 2000, and we’ll spend a similar amount this year. Anyone who thinks that the annual charges *
Investment Lessons
Regulatory moats can be excellent long-term competitive positions. FAA-mandated training creates a captive market — airlines literally cannot operate without periodic simulator recurrency training for their pilots. FlightSafety's global network and regulatory certifications across aircraft types create significant switching costs. Establishing equivalent regulatory certifications and global reach would take a new entrant decades and billions.
Capital-intensive businesses with pricing power can still be excellent. The key is whether ongoing capital investment earns adequate returns. FlightSafety's simulator investment earns adequate returns because required training creates captive demand at margins that justify the simulator capital cost. The lesson: capital intensity is not inherently bad — only capital intensity combined with inadequate pricing power or competition that erodes returns is problematic.