The Charter Market: Demand for charter grows steadily in U.S.

 - October 2, 2006, 5:07 AM

Options, awareness, acceptance, security, time, the economy and the hassles of airline travel are contributing to a buoyant U.S. charter market, with activity up an average of 30 to 40 percent over last year. The increased demand is putting pressure on operators to add aircraft to their fleets as they edge up their base rates.
Even “dramatic” increases in fuel surcharges, which are added to the base rates, don’t seem to be dampening demand–at least not yet. All the charter operators who contributed to this report expect their activity levels to remain high for the rest of this year and even continue to increase next year, though perhaps at a slower rate. The increasing cost of fuel, the threat of terrorism and the possibility of an economic downturn are the main factors they cited as possibly curbing growth. The operators also mentioned the availability of aircraft, tax law changes and the entry into the market of less experienced operators. The wild card in this high-stakes poker game is the very light jet (VLJ), the first of which are expected to begin entering service next year.

“Charter operators are benefiting from the airline misery index,” said Scott Beale, president and CEO of Atlanta-based FlightWorks. “This includes flying on cramped and noisy airplanes, spending more time getting to and through the airports and being herded on and off airplanes, oftentimes only to wait on the tarmac or in uncomfortable lounges. We don’t see this misery index retreating, and as a result, more and more business and private travelers are using charter services.”

Regarding the general economy’s influence on charter demand, Beale quoted Federal Reserve chairman Alan Greenspan’s testimony to Congress on July 20: “Our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures.”

Beale added, “If the Fed’s upbeat assessment of the economy’s prospects hold true, that should be one of the largest drivers of charter-service demand next year.” FlightWorks saw a 69-percent jump in revenues in the first half of this year over the same period last year.

Said Jeff Cropper, senior vice president of charter services for Cincinnati-based Executive Jet Management (EJM), the charter affiliate of fractional provider NetJets, “The economy is driving demand, but perhaps more than that is the increased acceptance of charter as a tool for both business and personal use.” EJM’s business in the first half of this year grew 22 percent over last year, not including the flying EJM does for NetJets, he said. He expects demand to remain high for the rest of this year and to continue to climb next year.

In the case of PrivatAir, which headquarters its U.S. charter operations in Stratford, Conn., “Demand is being driven by an increased focus on end users, building a strong, dedicated customer base that values the safety and quality standards that PrivatAir offers,” said Mark Reichin, senior vice president for U.S. charter sales. This is in contrast to “the mass of pure brokers in the marketplace,” he added.

He said that PrivatAir, which has experienced annual growth of about 40 percent since last year, is also seeing strong demand as the public markets begin to rebound this year. (PrivatAir has a division dedicated solely to providing service to investment clients.) “We look for continued strong demand through the second half of this year and continued, though slightly reduced, overall growth next year,” Reichin said.

According to Lauran Weiner, marketing manager for Waterford, Mich.-based Pentastar Aviation, fractional aircraft providers’ need for additional lift is also driving charter demand. She also sees an increase in charter trial by first-time private aviation users “as a result of the challenges associated with new commercial aviation regulations,” she said. Pentastar’s business is up 30 percent over this time last year.

Bill Herp, founder and CEO of Linear Air of Boston, agreed with Weiner. During the last 12 months he’s seen increasing interest among first-time customers and regular charter fliers alike. Linear Air, which obtained its Part 135 certificate in August last year, operates three executive Grand Caravans for on-demand charter and on a limited number of scheduled routes from Boston and New York to Nantucket and Cape Cod. “There is increased awareness of more affordable private charter options, such as per-seat service,” said Herp, “and increased frustration with the hassles of public airlines and concerns over security in large public places.”

According to economic theory, increasing demand for a product usually pushes prices up, at least temporarily. Some U.S. operators report this happening with base charter rates, but the primary economic driver this year has been the cost of fuel, which doesn’t translate to more profit for charter operators.

Unlike European operators, which tend to bundle increases in fuel prices into their base rates, U.S. operators attach a fluctuating fuel surcharge to their rates. Thus, although some operators reported small increases in the base charter rates and others none, all reported increases in fuel surcharges.

PrivatAir’s Reichin said, “Charter rates have started to rise over the last 12 months. Some of this is due to fuel prices (much of which is included in fuel surcharges over and above the regular charter rates) and the rest is due to reduced supply driving up demand and raising retail pricing on some categories of aircraft.”

Said Beale of FlightWorks, “We have seen fuel surcharges increase approximately 5 percent. However, because the price of jet fuel has increased almost 75 percent in the last 12 months, this nominal increase in fuel surcharges is not enough. Fuel is a pure commodity for us, and we’re directly impacted by higher prices.” He said that after taxes FlightWorks is buying raw jet-A for $2.40 per gallon. In mid-2003 the average was $1.24 per gallon, he said. “The simple economics of this dictate that charter management firms must increase their fuel surcharges or raise hourly rates for the foreseeable future to protect the return for aircraft owners,” he concluded.

Base rates have increased slightly, according to Ari Sarmento of Islip, N.Y.-based Executive Fliteways,but “fuel surcharges have increased dramatically.” Weiner of Pentastar and Brandon Greene, director of marketing of Cincinnati-based Delta AirElite, said rates have remained about the same and fuel surcharges have increased. Weiner also mentioned that companies have added operational and airport fees as well.

Demand for Lift Drives Demand for Aircraft

All operators interviewed for this report said they planned to add aircraft next year. In fact, PrivatAir’s Reichin said that the supply of quality aircraft is one of the main problems the charter market will face in the near future.

All except Linear Air, which owns its small fleet, could be called “typical” charter-management firms, owning few if any of the aircraft they hold out for charter. On average they own only about 10 percent of their fleets. So if they plan to add airplanes to their managed fleets, how do they go about finding aircraft owners?

“We have a sales force that does this,” explained EJM’s Cropper. “They go out and try to find owners of aircraft that match the types of aircraft we already have on our charter certificate and that adhere to strict criteria in terms of age, interior and exterior.”

EJM looks for the same jet types that NetJets uses, although to Cropper’s knowledge the charter company has not acquired any aircraft previously operated by NetJets itself. Regarding age, “For the majority of our customers, age is not a big issue, but then the average age of EJM’s fleet is less than nine years,” he said.

FlightWorks’ Beale said the ideal situation is when his company is involved with the owner early in the purchase process of an aircraft that FlightWorks will eventually manage for the owner.

“We have helped charter clients who are new to ownership and fractional owners looking to buy whole airplanes,” he said. “I love to get a client who wants us to manage his future airplane and asks, ‘What’s the best aircraft for me?’ Then I can help him decide on the model that not only fits his travel needs but is also popular for charter, if he wants to offer it for charter. Some jets do better than others in the charter market. We don’t broker sales and we don’t want to. Unlike brokers, we still have clients for a long time after they buy the aircraft, if we add their aircraft to our managed fleet. So it’s in our best interest to treat them right,” he added.

Beale said charter customers are becoming more educated about the age of the aircraft they fly. “Before fractionals it was all about cosmetics–the interior and paint,” he said. “The fractionals banked on providing premium service with newer airplanes at higher costs. Now some charter clients will not fly on any aircraft that’s older than 10 years.”

Executive Fliteways’ Sarmento, who is director of training and pilot recruitment, has encountered similar attitudes from clients. “I fly our Hawker 700, which is more than 20 years old. The airplane has not had an interior upgrade in some time, so it looks old and tired. I frequently get customers who will ask how old the aircraft is and several have declined to use it. Since we are a management company, it’s the owner of that aircraft who has to make the investment to upgrade it. We keep advising him that without a new interior, his aircraft will be requested less and less.”

Some customers even ask for photos of the actual aircraft before committing to the charter. “If the exterior has not been upgraded recently, customers can tell the difference between older and newer aircraft,” Sarmento said. “On aircraft with new interiors, they’ll sometimes look into the cockpit to see if it has older equipment (steam gauges) or newer EFIS. But ironically they never ask about the age of the engines, which tend to be replaced and upgraded more often than the cabin.”

Because PrivatAir sees continued economic growth in the U.S. and internationally driving demand for larger-cabin, longer-range aircraft, it plans to continue to add aircraft such as the large-cabin Gulfstreams, the Global 5000, the Embraer Legacy and the Falcon 900EX to its fleet. “We are also increasing our midsize fleet with the addition of Learjet 60s and Hawkers, and a few small-cabin aircraft, such as the Hawker 400,” Reichin said. The company’s fleet is a mixture of managed and owned aircraft (the percentage of each not specified), but of its managed aircraft fully 90 percent are available for outside charter.

VLJs and Other Concerns

The rising cost of fuel, the threat of terrorism and the possibility of an economic downturn (possibly precipitated in part by the first two) are the main concerns for U.S. charter operators. The effect of VLJs on aircraft charter is still an open question, except for Linear Air, which is the only operator interviewed for this report that said it has VLJs on order. It’s also the youngest and smallest of the group.

Said Linear CEO Herp, “We plan to expand our New York operation this fall with the addition of two more aircraft. Next year we plan to add five more Caravans and two more major metropolitan markets. In the fall of next year, we plan to add five VLJs to the fleet, one in each market. In 2007 we plan to add 25 additional VLJs and several new markets. We believe there is tremendous growth potential for the regional transportation profile the VLJs are designed to serve.”

FlightWorks’ Beale foresees VLJs improving the overall charter market. “If VLJ operators properly execute, they could open up a new charter-service offering for people who can’t quite afford traditional charter service,” he said. “This will stimulate the growth of first-time aircraft owners and boost charter demand for all classes of aircraft. Eventually, some owners will outgrow the VLJs and want to move up to larger aircraft and ownership programs.”

On the other hand, Executive Fliteways does not see VLJs having a dramatic effect on its business, and EJM is taking a wait-and-see position: “We’ve made no changes to our business with the advent of the VLJs, but our customers’ demand will determine if it’s needed,” said EJM’s Cropper. Pentastar’s Weiner is concerned about less experienced pilots and inferior operators, possibly operating VLJs, getting into the market. PrivatAir and Delta AirElite, which serve markets outside the realm of the VLJs, do not expect any effect on their businesses.

Regarding other issues facing charter operators, Cropper said simply, “We see a positive picture for the aircraft charter market. The industry will continue to prosper, so no issues or problems.”

Sarmento of Executive Fliteways named capital acquisition costs and tax law changes as possible problems.

PrivatAir’s Reichin sounded a warning that, “Should there be another terrorist threat that involves business aircraft, the market stands to be severely affected.”

Linear Air’s Herp summarized his vision. “The status quo of many small operators relying on a small number of customers and charter brokers to fill their airplanes is going to change dramatically.

“Companies such as Linear Air are bringing a higher level of marketing, financing and operational savvy to the table, and existing players are finding it increasingly difficult to compete. This will lead to a major shift in the charter landscape toward larger, safer and more professional operations, a boon to customers, but a major impact on the small mom-’n’-pop operators that characterize the majority of charter companies today.”

And finally, Beale of FlightWorks gave a more philosophical take on the future: “For centuries business men and women, from blacksmiths and wheel-makers to aircraft operators and rocket scientists, have faced the normal ups and downs of business.

“I am not saying it’s easy, but the basics of business dictate that if you build a strong management team, develop a clear strategic vision, treat employees as you’d like to be treated yourself and deliver on your customer promises, your business can overcome most market challenges,” he concluded.

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