The Charter Market: Europe’s charter market continues recovery

 - October 2, 2006, 5:13 AM

Executive aircraft charter activity in Europe has definitely increased this year. On average, operators surveyed by AIN reported that during the first six months of this year, the number of charter flight hours logged was around 17 percent higher than during the same period last year.

However, reports about whether increased demand had resulted in firmer charter rates were mixed. Those who acknowledged price increases during the past 12 months or so indicated they had been on the order of around 7 percent. Others said that strong competition in the European market has continued to restrain prices.

Balancing the apparent rising demand for charter is the fact that numerous new business aircraft are entering the marketplace, increasing Europe’s available fleet. All the operators who responded to the AIN survey reported that they had either just introduced new aircraft or had firm plans to do so over the next year or two.

After a couple of somewhat flat years, the executive charter market experienced a recovery between May and July last year, according to major charter broker Air Partner International (whose financial year ends on July 31). Group executive charter director David Macdonald said that “good” levels of demand have continued into this year.

The company’s interim financial statement for the first half of its current financial year (up to Jan. 31, 2005) bore out his cautious optimism. During the first half of this year the UK-based group’s sales rose by 46 percent to $111 million, with executive charter accounting for 17 percent of the total. During FY2004, Air Partner’s executive charter bookings increased by 40 percent.

Macdonald said that the fortunes of the European charter market are still tied closely to those of the stock market. However, he welcomed the fact that, at the same time, his customer base has become more diverse and is not dominated so overtly by financial institutions.

Air Partner is also seeing more Russian clients, and more Russians are buying business aircraft that are then being made available to the charter market through management contracts. However, its brokers have also noticed a decline in the number of Arab clients booking flights in Europe.

Managed Aircraft Dominate Europe’s Charter Fleet

Macdonald estimated that as much as 90 percent of the European executive charter fleet consists of managed aircraft. The AIN survey showed that about half of charter operators’ fleets are managed aircraft and that almost 70 percent of these are available for charter.

Macdonald argued that the large number of managed aircraft in Europe has generally been a good thing for charter clients. According to him, the fact that many aircraft owners are generally content with a contribution to their operating expenses has restrained price increases and kept them stable. He rejected the complaints of some charter operators that the availability of “below cost” managed aircraft has actually forced prices down.

Charter Prices on the Rise

Kimon Daniilidis, managing director of Greek operator Interjet, predicted that charter rates could rise by a further 5 to 8 percent by the end of next year. He said that the deteriorating level of airline service is largely driving the increased demand in his region.

London Executive Aviation (LEA) managing director George Galanopoulos told AIN that charter rates have firmed up during this year. However, he said that prices continue to be under pressure because some operators are offering rates that are at or below operating costs. “This clearly upsets the market and confuses charter users,” he claimed. “At some point, these companies either compromise quality or go out of business.”

Bookajet managing director Christian Rooney said the UK charter market has been particularly dynamic and that it has attracted operators from other European countries to base aircraft there. Although this trend has boosted local capacity and kept charter rates stable, the Farnborough-based operator expects demand to continue to strengthen.

One non-competitive factor that has clearly pushed up charter rates in Europe is the elevated cost of jet-A. Macdonald said that European operators have factored all fuel costs into the quoted price for a trip, rather than resorting to shifting fuel surcharges, as has become increasingly common in the U.S.

In his view, the European approach is ultimately more transparent, because the use of surcharges implies that higher fuel costs are temporary, whereas in truth they appear to be the new reality. “Uncertainty over charter pricing in the U.S. has driven the growth of fractional ownership,” he commented, while acknowledging that frax providers themselves are now resorting to fuel surcharges and other add-on fees.

Europe’s Fleet Gets Younger

Largely driven by costly new technical requirements, such as RVSM, there has been a lot of fleet renewal in Europe over the past few years. According to Macdonald, the European charter fleet is markedly younger than that in the U.S., with new models such as Cessna’s Citation Excel and CJ1 replacing older workhorses such as 1980s-vintage British Aerospace Hawkers. He added that the new Citation Sovereign, with its double club-four seating, has strong potential in the European charter market.

In his opinion, other new types such as the Gulfstream G200 and Bombardier’s Challenger 300 face tough competition in the super-midsize class of charter transport from established, but still youthful, equipment such as the Dassault Falcon 2000.

The first wave of new-generation very light jets (VLJs) is not expected to arrive in Europe until after the VLJs have begun operations in the U.S. Macdonald said types such as the Eclipse 500 potentially could fill niches in the charter market, but only if they are operated under full public-transport rules and with two pilots. “There is still debate over who will be flying these aircraft and under what rules,” he noted.

According to Ben Paindavin, marketing director of Belgium’s Flying Group, VLJs will expand Europe’s charter market. He also predicted that increasing concern about the threat of terrorism and a growing desire for privacy will drive future charter demand.

Philippe Fragniere, a director of Zurich-based charter marketing group Exklusiv Aviation, said that VLJs could potentially replace 1970s- and 1980s-vintage turboprops and may also give operators of smaller Citations a run for their money. However, he emphasized that they will be accepted in the European market only with two-pilot operations and with clearance to operate into small airports under commercial rules.

According to Fragniere, operators that cannot afford to replace older aircraft “could be wiped out.” In his experience, “few clients are willing to accept aircraft that are more than four or five years old.” He predicted consolidation among European charter operators over the next five years, largely driven by high regulatory costs. He also said that air traffic and airport congestion will force operators to be more proactive about using smaller airfields. From Fragniere’s perspective, the arrival onto the market of further business aircraft is holding down charter rates even though overall demand continues to grow significantly.

Addressing Security Concerns

Executive Airlines sales manager Philippe Bina concurred that concern over terrorism is stimulating new prospective customers to consider business aviation. Economic growth in the operator’s Spanish domestic market is also driving up demand. However, Bina added that charter firms are facing growing operating problems associated with airport slots and ATC congestion. LEA’s Galanopoulos also pointed to security concerns as key drivers of charter demand.

Over the past year, LEA has seen a threefold increase in demand for flights from the UK into eastern Europe and Russia. Other popular destinations for flights are Geneva and Zurich, Switzerland; Paris; Edinburgh, Scotland; and Frankfurt, Germany. The company has also taken more bookings for trips to the Alps and the Mediterranean.

According to Richard Koe, PrivatAir’s vice president for Europe charter sales and aircraft management, economic growth and an increased emphasis on executive productivity are stimulating demand in Europe. On the supply side, new aircraft, an increased choice of operators and more open market access regulation have boosted the industry.

He predicted that additional economic deregulation in Switzerland, where PrivatAir’s European operations are based, will drive significant further charter market growth in that company.

The UK’s Xclusive Jet Charter reported that operators have faced rising costs at a time when customers have not tolerated rate increases. It blamed the expense of adopting new European operating requirements for the increased cost. However, the company also predicted that stronger demand will make long-awaited charter price increases take hold over the next 18 months.

Bournemouth-based Xclusive is now looking to introduce new midsize jets to its fleet and is eventually planning to take VLJs. It currently operates a single Beech King Air C90 and intends to introduce a B200 before year-end.

Meanwhile, European charter operators are bracing for tougher security procedures on the assumption that the UK has plans to extend the existing full-screening requirement to smaller business aircraft. The UK government is pushing for the application of the European Union’s National Aviation Security Program (NASP) to aircraft weighing between 5,952 pounds and 21,825 pounds that are operated under a commercial air operator’s certificate.

Adoption of the NASP would oblige operators and FBOs to ensure full security screening of smaller business aircraft, including, for example, a Socata TBM 700 (at the low end of the weight range) and the new Bombardier Learjet 45XR (at the high end). The existing EU regulation 2320 already applies to aircraft weighing 22,045 pounds or more or capable of carrying more than 19 passengers.

Macdonald warned that some countries apply security requirements much more strictly than others. He alleged that the competitive playing field is still more imbalanced because some FBOs do not appreciate that all commercial operators have to be screened.

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