Fractionals adapt to an ever-changing market...
Thirty years ago, most people would have dismissed anyone who said they’d eventually make money by selling bottled water, especially since tap water was, and still is, plentiful and nearly free. But since then, a lot of people have actually traded tap water for bottled water, resulting in skyrocketing sales of the clear liquid in plastic bottles. In fact, sales of bottled water are expected to surpass those of carbonated soft drinks by next year.
In 1986 many people scoffed similarly at Executive Jet Aviation owner and CEO Richard Santulli, who launched the NetJets fractional-ownership program that year. After all, why would travelers eschew the airlines, with their relatively inexpensive fares, for high-priced transportation aboard smaller business jets? As with bottled water, however, Santulli found an audience that would buy a premium-priced product based on perceived quality, safety and, in NetJets’ case, service and convenience.
The fractional-aircraft business initially wasn’t easy going for Santulli, and it took nearly 10 years of hard selling before he could claim something resembling success. And with success came competitors, the first of which was Bombardier Flexjet in 1995. Then entering the scene was a flurry of regional and national fractional providers, with the latter group including Raytheon Travel Air (1996), Flight Options (1998) and CitationShares (2000). In April 2002, Travel Air and Flight Options merged to become Flight Options LLC.
Over the past 10 years the entire fractional aircraft fleet has grown more than tenfold, from 71 aircraft in 1995 to 834 at the end of May, according to statistics from Wichita-based AvData. During the same period the numbers of shareholders and shares sold climbed, respectively, from 242 and 288 to 4,616 and 6,379, AvData said.
The industry grew most rapidly between 1998 and 2002 and has since logged modest single-digit-percent growth while the economy took a breather. Over the 12 months ending May 31, shares at the four major providers and 16 regional fractional companies tracked by AvData increased 6.6 percent, and the combined fractional fleet grew by 4.6 percent. Notably, Flexjet was the only major provider to experience erosion in both categories. (See box on page 28 for more detailed market analysis.)
In perspective, the fractional industry was the sole business aviation segment that actually grew during the economic downturn. And now that the economy is gaining steam, the prospects for this segment are quite good.
According to Honeywell’s latest business aviation forecast, released last October, the fractional fleet is expected to stand at 1,210 aircraft in 2007, which equates to an average annual growth rate of 10.6 percent between 2002 and 2007. Likewise, the number of shareowners in 2007 is projected at 6,989, up from 4,616 owners at the end of May.
A Changing Market
But today’s fractional share buyer is markedly different from that of 10 years ago. “Share customers are now more savvy and are buying only the service they need, not what is best for the fractional provider to sell,” noted James Butler, CEO of Shaircraft, a consulting firm that acts as a customer advocate for aircraft shareowners. “As fractional owners become more experienced, they’ve found out that the ‘known’ cost structure is really an unknown. In the fine print of the fractional contracts are many cost escalators, including consumer price index multipliers for monthly management fees and occupied hourly charges, provisions to pass along pilot-salary increases and fuel surcharges.”
Responding to fractional owners’ concerns over residual values, which fell dramatically over the past few years as the inventory of pre-owned aircraft climbed, more fractional providers have been promoting so-called “jet cards.” These entitle customers to most of the advantages of fractional ownership without the commitment of ownership. Marquis Jet, in partnership with NetJets, has offered a jet-card program since 2001, and Flexjet unveiled its jet card last fall. Last month Flight Options and CitationShares launched their respective jet-card programs–JetPass and Vector JetCard.
“Another incentive that could help retain customers is to raise the allowable annual usage,” said Walter Kraujalis, an associate at aircraft broker Bloomer de Vere and president of JetRe. “Traditionally, annual fractional aircraft utilization is pegged at 800 hours per year, which means that a sixteenth share translates to 50 hours of annual allowable flying time. This number was essentially picked out of the air and became the standard. But last year Flexjet raised the bar by allocating 60 hours of annual usage for a sixteenth share in a Challenger 604, translating to an overall annual utilization of 960 hours per aircraft. So the fractional providers could add more value to their programs just by raising the number of annual flight hours per share.”
The Market Leader
To continue its expansion in this changing marketplace, NetJets hired former Gulfstream president Bill Boisture, who joined the Columbus-based fractional provider last October as president. He said he plans to prepare NetJets for growth and sustain the existing high service level.
“We are adapting to the changing marketplace now by offering solutions that are more varied,” Boisture told AIN. “One example is Marquis Jet, which is the fastest-growing segment of our business.”
Other “solutions” include more aircraft choices. This month the entry-level Raytheon Hawker 400XP (formerly the Beechjet 400A) will join the NetJets fleet, and later this
year the fractional provider will accept its first midsize Citation Sovereign. Boisture said the light and midsize aircraft segments continue to be the most popular, and
these two new aircraft models will help to fulfill that demand.
Even before it lands on NetJets’ property, the Hawker 400XP has proved so popular with share customers that in late June the Columbus, Ohio-based provider placed an order for 20 more of the light business jets, along with a matching order for more midsize Hawker 800XPs. This is in addition to NetJets’ previously standing order for 50 Hawker 400XPs and 10 Hawker 800XPs.
Boisture said share sales of the large-cabin aircraft, including the Gulfstream IV-SP and GV, seem to be growing at a more “modest pace.” However, share sales of the Boeing Business Jet seem to have stagnated, and AvData figures show only two shares sold in NetJets’ three BBJs–the same as it stood in May last year. NetJets last month said it had five BBJs in its fleet, but that two will be sold.
On the Gulfstream front, in February NetJets expanded the operating area of these two long-range jet models to be “more responsive to the needs of our owners.” In doing so, the fractional provider is waiving ferry charges for international flights, as long as those flights originate or terminate in the U.S.
Internally, NetJets is looking to optimize usage of its fleet. To do this, the company recently upgraded software at its operations center so it can perform real-time fleet optimization, and it separated its scheduling team into two groups–one for near-term scheduling (defined as 24 to 72 hours out) and one to handle current-day scheduling; the latter changes by the minute as aircraft are delayed for various reasons or grounded for unscheduled maintenance.
Much has changed at Cleveland-based Flight Options, the second-largest fractional provider, since Raytheon Co. assumed majority ownership last year. According to company chairman and CEO John Nahill, the biggest difference is that Flight Options has broadened its management team.
In February the company named Michael Scheeringa as COO, fully responsible for the overall operations, maintenance, procurement and customer care. Scheeringa previously served as v-p of US Airways Express. At US Airways he also held a series of officer-level positions, managing the areas of customer service, operations and corporate planning, in addition to overseeing the MetroJet and US Airways Shuttle divisions.
Other additions to the Flight Options executive team are v-p of operations control Scott Link, a 23-year aviation veteran who joined the company in May after a stint at JetBlue; v-p of supply-chain management Jay Jenkins; senior v-p of sales Jim Guerin, who previously worked in sales for both Gulfstream and Flexjet; chief marketing officer Cameron Gowans, formerly of Delta Air Elite; and chief information officer David Davies, who provides strategic deployment of new technology and applications, which the company said will increase operational efficiency and enhance customer service. Sadly, one of Flight Options’ founding officers, executive vice president Richard Heckman, died in June.
Besides the new faces at its corporate headquarters, Flight Options is also “refreshing” its fleet with younger aircraft. The aircraft in the company’s fleet are indisputably the oldest, on average, in the entire fractional fleet, since Flight Options began life in 1998 offering only shares in pre-owned aircraft.
When it merged with Raytheon Travel Air in 2002, the Flight Options fleet was injected with about 110 new aircraft, lowering the average age of aircraft in the fleet. And to reduce this even more, each year the entire fractional provider plans on replacing between 5 and 10 percent of the older jets with new aircraft.
In fact, Nahill noted, when all is said and done this year the company will have “refreshed” the fleet with 17 aircraft over the previous 24 months, including four Hawker 400XPs and seven 800XPs delivered this year. Overall, the Flight Options fleet has grown by 15 percent over the past 10 months.
Nahill said Flight Options’ “sweet spot” continues to be the light and midsize aircraft segment, with the total year-over-year percent-sales increase reported to be in “the double digits.” Reflecting this trend, the company has added five super-midsize Embraer Legacy Executive twinjets to its fleet over the past year.
The Legacy is so popular “that, on average, they have been flying more hours per month than any other aircraft in our fleet,” Nahill told AIN. “In fact, we’re over-subscribed on the Legacy and we’ve had to limit access to this fleet.” By the end of next year, he said, the Legacy fleet will double to 10 aircraft, and even then he’s not sure if that’s enough to meet demand for shares in the model.
Asked about the King Air fractional program, he said the scuttlebutt about this program being eliminated is not true. While he said Flight Options will continue to offer shares in the twin turboprops, “the aircraft doesn’t integrate well with the jet fleet” since it’s more of a “regional” program. Nahill termed the program as a “niche product” and said Flight Options will not make any major investments to expand the fleet. On this subject, he concluded, “We’re letting the market decide the fate of the King Air fractional share program.”
Like NetJets, Flight Options is also trying to optimize use of its fleet. It, too, has rolled out a new version of scheduling software that allows for real-time optimization.
And following its example as an early adopter of the electronic flight bag computers, Flight Options in April issued each of its nearly 1,000 pilots with Blackberry wireless devices, the first fractional provider to do so. Using these palm-size devices, flight crews can transmit information regarding their flight status and trip details instantaneously to the operations control center.
This data allows Flight Options’ operations team to update scheduling information and to ensure service levels are being achieved. Nahill said the devices will help greatly in better optimizing the fleet. Not resting on his laurels, Nahill has big plans for Flight Options. Besides launching a jet-card program last month, the company chief is finalizing plans for a European program, as well as several “strategic alliances.”
Nahill told AIN that the European program, to be formally announced in the third quarter, will be in partnership with an established charter operator that will offer “a high level of service.” He acknowledged Flight Options’ failed fractional venture with UK-based ChauffAir, and vowed this time that the outcome would be different. Nahill said the European “fractional” market is “more in tune with block-hour sales,” so the venture is likely to follow this strategy.
On the strategic alliances, Nahill was tight-lipped, saying “a number of them” would be announced during the third and fourth quarters. Asked if they were simply vendor/ supplier alliances, he answered that they would be more marketing-type affiliations.
Since it took majority control of Flight Options in June last year, Raytheon’s quarterly results have shown that the fractional provider has been bleeding red ink. Nahill said Flight Options is about halfway through a three-year “operational improvement plan,” under which it is meeting or exceeding goals, that should see the fractional company breaking even or making money in a year or two.
Further, Nahill said the parent company “is committed to making sure Flight Options is successful. In fact, Raytheon has been nothing but completely and unequivocally supportive of our business since I arrived [in February last year].”
Flexjet Still Struggling
Over the past year, Bombardier Flexjet has seen shares sold decline by 11.7 percent and its aircraft fleet shrink by 10.1 percent. The Dallas-based frax provider may be down, but it definitely isn’t out, according to Tom Bacon, the company’s v-p of business strategy, marketing and development. In fact, he predicts that Flexjet will reverse course and start to grow over the next year.
To ensure this prediction becomes reality, Bacon said that Flexjet is reacting to the changes in the fractional industry by adjusting its programs to meet market needs. Since last June, the company has added several new features, including Versatility Plus, AnyTime Options and, more recently, Jet Rich Quick.
Versatility Plus allows owners to place into a pool or draw up to 25 percent of their allocated hours each year, while AnyTime Options offers shareowners guaranteed access to larger or smaller aircraft and guaranteed access to more than one jet on the same day. Both of these incentive programs were introduced in June last year.
In March, Flexjet rolled out Jet Rich Quick, a financing lease program that provides a low-cost entry to its fractional program. However, the leased shares are available only in the Bombardier Learjet 45, Learjet 60 or Challenger 604. (Currently excluded from Jet Rich Quick are the Learjet 31A, Learjet 40 and Challenger 300.)
The program requires no cash down payment other than the cost of one month’s flying; instead, owners pay a fixed monthly payment over a two- to four-year term. Monthly payments range from approximately $4,600 for a sixteenth share of a Learjet 45 over a four-year term to $12,000 for a sixteenth share of a Challenger 604 over a two-year term.
The program is structured as a unique financing lease and offers all the advantages of ownership, including potential tax depreciation benefits. Payments are based on the purchase price of the share, as well as program fees that cover finance charges and expected depreciation, divided by the number of months of the term selected. In addition to the monthly lease payments, shareowners pay the standard monthly management fee, variable rate per occupied hour and fuel component adjustment.
Bacon said Flexjet had its best sales quarter earlier this year. He attributed the sales increase to the aforementioned programs, as well as the recent addition of two new aircraft models to the Flexjet fleet– the Challenger 300 and Learjet 40. In fact, Bacon told AIN that 17 super-midsize Challenger 300s are on order from fractional customers.
Since these future Challenger 300 shareowners will have to wait until their airplane is finally delivered, Flexjet is now offering a two-year option for a share in a pre-owned aircraft as a bridge program. However, Bacon said this alternative is available to everyone.
Besides Flexjet Membership, the company’s jet-card program that kicked off at last year’s NBAA show, the fractional provider in March formed a partnership with Abercrombie & Kent to provide private aircraft lift for its vacation club members. Dubbed A&K Jets, the vacation service provider owns several Flexjet shares and in turn resells essentially what are air charter trips to members. According to Bacon, a similar partnership will soon be announced.
CitationShares Keeps Growing
While CitationShares, a joint venture between Cessna and TAG Aviation, “has been very conservative in its growth plans,” figures from AvData show anything but slow and measured growth. In the 12 months ending May 31, AvData reported that CitationShares experienced 51.7-percent share growth, while its fleet expanded by 25.7 percent. This makes it the fastest growing fractional provider among the four majors.
In late 2002, CitationShares began operating throughout the entire continental U.S., lower Canada, Mexico and the Caribbean, but it still didn’t begin to solicit customers west of the Rockies until last October. As such, CitationShares has expanded fractional sales to include all of the 48 contiguous states. To expand its sales efforts, in February the company named Michael Calman as senior v-p and chief marketing officer, a newly created position.
Last month, the fractional provider launched a 25-hour jet-card program called Vector JetCard. Prices start at $84,995 for a Citation CJ1 jet card.
At the NBAA Convention last year, CitationShares placed an order for up to 50 Citation Sovereigns. Said company CEO Steve O’Neill, “The Sovereigns will not only enhance the quality of our service but will also give us added capability on both long- and short-trip segments.” The super-midsize business jet will enter the CitationShares fleet this fall.
Shaircraft’s Butler said many regional fractional programs are a good choice for some would-be shareowners. However, he warned that to be seriously considered they need to have a good track record and their capital, structure and resources should be examined. He added, “Make sure you go beyond the claims made on their Web site before you buy a share from any regional fractional provider.”
According to AvData, the 16 regional providers that the firm tracks are growing at an amazing clip– across-the-board share sales growth is reported to be 50 percent and the combined fleet expanded by 21.3 percent in the last 12 months.
One up-and-coming regional fractional provider is 18-month-old Avantair, based in Fairfield, N.J. The company offers shares in Piaggio P.180 Avanti turboprop twins. As of last month, it had 11 of the Italian-built aircraft on property, with another 39 expected to join the fleet by fall 2007.
If Avantair CEO Steven Santo has one problem, it is that “we basically don’t have enough inventory to sell.” He said the regional fractional provider’s average rate of net sales is nearly equal to that of new aircraft deliveries, which will continue at a rate of about one aircraft per month until the third quarter of 2007.
Besides its New Jersey headquarters, Avantair opened bases in St. Petersburg, Fla., and Reno, Nev., to better serve customers. In the coming months the company plans to open a base in the Chicago area, and within a year it will have a West Coast presence, Santo said. In five years he expects Avantair to cover the entire continental U.S.
Subpart K and DRVSM
Two major changes for fractional providers in the coming year are the Part 91 Subpart K rules, which take effect in February; and domestic reduced vertical separation minimums, slated to begin in January. On the DRVSM front, all of the major fractionals plan to have their respective fleets fully compliant by the end of the year; CitationShares has had RVSM approval for its fleet since last year.
However, there is no real consensus among the major providers regarding the coming fractional regs– Part 91 Subpart K. In fact, Flexjet claims it already complies with the new rules since the company sat on the Fractional Ownership Aviation Rulemaking Committee, which drafted Subpart K for the FAA.
Flight Options’ Nahill said his company plans to bypass Subpart K altogether, instead opting to go entirely Part 135. He explained that this route was taken for several reasons, including shareowners’ insistence that Flight Options retain operational control and the fact that Nahill does not want to operate under any regulation that could be construed as a gray area. The fractional provider’s CEO noted that its maintenance department already fully complies with Part 135, and Flight Options’ pilots and airplanes are “99-percent there.”
Of the top-three major fractionals, NetJets is expending the most energy to comply with Subpart K. Besides its plans to hire more pilots to adhere to crew duty-time limits, NetJets last month announced changes to its flight operations organization “to strengthen management capability in this core business area, better prepare to operate under Part 91K/135 and structure the company for the increased delegation and accountability required by the company’s current size and future growth.”
NetJets’ flight operations area is now led by senior v-p of flight operations Dave MacGhee, a retired USAF Maj. General. Former Raytheon Travel Air president Gary Hart has also joined the fractional provider as v-p of flight operations/director
of operations. Additionally, NetJets plans to restructure its current program manager function by appointing chief pilots, a certificate position, for each of the major fleet types. All chief pilots will report to Hart.
The Future of Fractional
“The fractional industry won’t be the same in five years,” predicted Bloomer de Vere/JetRe’s Kraujalis. “All fractionals will become more involved with charter, as seen already with the jet-card concept.”
He pointed out that current fractional contracts allow the providers to use their shareowners’ aircraft for charter activities, but with 100 percent of the revenue going to the fractional company. The question, Kraujalis said, is how long share customers will allow this practice to continue. “Under a typical charter-management arrangement, the aircraft owner gets 80 percent of the charter revenue. Fractional shareowners don’t get a single penny of the charter revenue.”
Shaircraft’s Butler said the fractional industry “is the healthy maturation of the private air industry, and we are now seeing variations of that theme emerge.” He expects “more tailored” solutions to be offered by the fractionals, including discrete programs that fly only specific routes, such as New York to Chicago or Los Angeles to Vail, Colo.