NetJets Europe expects 2005 profit

 - November 3, 2006, 5:10 AM

Assuming the next six months or so do not see a deterioration in trading conditions, the NetJets Europe fractional-ownership program should finally achieve an operating profit in the second half of this year. This is the forecast of the company’s chairman and chief executive, Mark Booth, who also told reporters at a recent press conference that NetJets Europe is at last expected to achieve a net profit next year–fully 10 years after it was launched in the spring of 1996. It will then be able to start repaying an unspecified amount of capital debt to its U.S. parent, NetJets Inc.

In the face of sustained skepticism from rival executive air transportation providers, NetJets has always insisted that fractional ownership can work in Europe. Now it appears to be proving the doubters wrong, having achieved impressive growth over the past couple of years.

According to Booth, NetJets Europe struggled for its first four-and-a-half years with no more than 80 aircraft share-owners. In the following two-and-a-half-years (beginning with Booth’s arrival at the company in late 2001), it has added around 500 new clients to the program and is now fast approaching 600 in total. About a year from now, it expects to have 1,000 clients, which would represent a 12-month growth of more than 60 percent.

However, this tally also includes customers in the private and corporate jet card pre-paid block charter programs that it has run since taking over the Marquis Jet Partners Europe operation in the middle of last year. The split between card and fractional share sales is around 50/50.

Arguing that fleet capacity is now more of a challenge to him and his team than demand, Booth has put NetJets Europe’s money where its mouth has been. On November 23, the London-based company signed its first-ever aircraft acquisition through a $160 million contract for 25 Raytheon Hawker 400XPs. The company claims it is the largest single order in European business aviation history.

None of these aircraft constitutes new business for the manufacturer because they were all spoken for in orders NetJets Inc. placed in December 2003 and June 2004. These have now been reapportioned to NetJets Europe and will be delivered over the next three years.

NetJets Europe Pays Its Own Way

What is significant is that this is the first time NetJets Europe will have paid for aircraft directly itself. New Jersey-based NetJets Inc. has purchased the 60 or so aircraft currently in the NetJets Europe fleet.

The first 400XPs will be delivered this year, with the remaining 15 to follow next year and in 2007. The Raytheon type will become the company’s new entry-level product. Initially it will be available only to fractional-share and lease clients, and will not be offered through the private and corporate jet card programs.

The acquisition cost for a one-eighth share in a NetJets Europe 400XP is $800,000. This gives the owners 100 flight hours annually over the course of the standard five-year agreement.

Customers will also pay a monthly management fee of €11,600 ($15,544) and an occupied hourly charge of €2,280 ($3,055). NetJets Europe prices aircraft shares in U.S. dollars and its management and hourly charges in euros. According to the company, the continued devaluation of the U.S. dollar against the euro has meant that the share purchase prices for European customers are now as much as 33 percent less expensive.

The seven-passenger 400XPs for NetJets Europe will have an interior different from those being produced for the NetJets North American fleet. Inside the cabin, a titanium finish will be used on surfaces instead of gold, and plainer materials will be used for carpets and sidewalls. “We treat NetJets and NetJets Europe as completely separate customers,” said Brad Hatt, president and general manager of Raytheon’s Hawker business.

Raytheon Aircraft and NetJets Europe are now in the process of securing approval for the Hawker 400XPs and their pilots to use London City Airport, with its 5.5-deg steep approach and 4,327-foot runway. The new model’s larger Hawker 800XP sibling has already been approved for the downtown gateway, which is just a short ride from the UK capital’s financial district.

In December 2003, NetJets Inc. ordered fifty 400XPs and took an option on 50 more. Then in June last year, the U.S. company ordered 20 more of the new light jet (developed as a successor to the Beechjet 400A), indicating at the time that some of these would be destined for the European program. Hatt said that the flexibility in its contracts with NetJets means that more of these batch orders can in fact be transferred over to the NetJets Europe ledger.

According to Booth, the private and corporate jet cards have been crucial in the successful campaign to bring new customers into the NetJets fold. “The purchase of Marquis in Europe means that we now control the food chain,” he said, reflecting on the fact that NetJets Europe can now directly offer a limited-commitment introduction to business aircraft usage for those customers who are not ready to make the leap into fractional ownership. “NetJets Europe is now a total solution provider for those needing private aviation, and we are impartial about what form you want this to take,” he concluded. NetJets also offers leases, an appealing option for companies that don’t want aircraft appearing on their books as capital assets.

NetJets launched the corporate card in June last year and now has around 40 customers. Booth said that the program has proved to be particularly effective for attracting firms that have eschewed fractional ownership in the past. For instance, NetJets Europe has now signed up five of the 25 firms listed on Frankfurt’s DAX stock market, having previously had absolutely no joy trying to sell fractional ownership to Germany’s top public companies (many of which encounter resistance to corporate aircraft ownership from trade union officials who, by law, sit on their boards of directors).

About half of NetJets Europe’s new customers are now enrolled in the block charter card programs (which offer occupied time in blocks of 25 flight hours). According to the company, both cards currently enjoy a renewal rate of about 93 percent, and between 30 and 40 percent of these customers migrate into fractional share ownership within two years.

Corporate Flexibility

The corporate card option promises greater flexibility and benefits than the private jet card–albeit at prices that are about 5 percent higher. An unlimited number of cards can be issued to company employees.

Corporate card customers can purchase 25 occupied flight hours, or more in increments of five hours (unlike the private jet card offer, which is available only in 25-hour blocks). There is no upper limit and customers have 24 months (versus 12 months under private jet card terms) to use these hours. There is also a 10-percent discount for round-trip flights. If a firm buys 25 hours and uses all of these for single-day round-trips, it will get an additional 2.5 flight hours for no extra cost.

NetJets also provides these clients with software that allows them to analyze their flying activity to assess whether the program provided them with sufficient value. Corporate card members can also fly in 14 different aircraft types in NetJets’ North American and Middle Eastern programs.

Booth predicted that NetJets Europe will become the world’s second largest seller of business aircraft, after NetJets Inc. itself. “This [NetJets Europe] will be a very big company in an industry whose time has come,” he insisted. “We have crushed the notion that Europe is different (in not accepting fractional ownership) and have proved that people here do place a high value on time.”

This year the last five of an order for Cessna Citation Bravos will come to NetJets Europe, making 19 in total. These will be used largely to support the block charter card programs in future.

In May, Gulfstream will deliver the first of up to three G550s to NetJets Europe, and the fractional company was set to get its first Dassault Falcon 2000EX by the end of last month. The fleet also includes 14 Citation Bravos, 13 Citation Excels, three Citation VIIs (which are to be retired), 16 Hawker 800XPs, seven Dassault Falcon 2000s, two Falcon 900s, one GIV-SP and one GV.

Now Hiring Across Europe

More aircraft means more flight crew at NetJets Europe. The company will be hiring 140 additional pilots this year, recruited from a variety of commercial and military backgrounds and all trained to NetJets’ own standards. In the early years of the program, many pilots came from the UK, but increasingly their new colleagues are coming from a wider range of European countries, including Germany, France and Belgium.

The company does not publish its pilot pay rates and employment terms, but insists that they are competitive with industry standards. NetJets’ minimum requirement for new-hire aircrew experience is 1,500 jet flight hours and a full European ATP license.