The Charter Market

 - November 7, 2006, 5:25 AM

Demand for aircraft charter is rising worldwide, with more businesses and private individuals willing and able to start taking this increasingly attractive alternative to scheduled airline services. Avoiding the growing inconvenience and inflexibility of the scheduled airline network seems to be the main driver of this increasing demand, and these factors are brought into even sharper focus for consumers during times of high security alert.

AIN has surveyed charter operators in North America, Europe, the Middle East and Asia to gauge the current state of the market, understand the factors that drive it and anticipate how it might unfold
in the future. We have also spoken to experts and analysts to get an impartial overview of the situation.

While demand for charter is undoubtedly growing, so too are costs, especially the price of fuel. What is less clear is the extent to which this is reflected in charter rates and the degree of transparency with which the industry passes on its costs to consumers.

This AIN special report also looks at the rating systems that are available to assess the quality and capability of charter operators. Additionally, it considers moves to change the regulatory oversight of charter and the debate over access to international charter markets.

For many charter operations demand is now outpacing supply In this new age of heightened security awareness, air charter service providers are flourishing as more business travelers shun the airlines and the impersonal passenger terminals they inhabit. What’s more, industry experts say, this increased demand for private air travel in the face of the relative insecurity and inconvenience of the airlines has created a self-feeding growth mechanism. “There’s been a lot of discussion about the effects of 9/11 and most recently the foiled terrorist attacks in London. I think that’s had some impact on the growth of charter, but the primary reason for the growth is that there are lots of different options out there,” said Joe Moeggenberg, president of Cincinnati-based Aviation Research Group (ARG/US), which gathers and publishes safety information and reports for the charter industry. “I’ve never seen it this busy. As far as we can tell, the industry is up about 20 or 25 percent over last year. Overall, the charter industry has been doing very well. We think the primary reason is that there are so many different products that are available. People can charter a whole airplane, or they can charter a one-way, or buy a card or a fractional share. There are dozens of different ways to buy charter services compared to a few years ago. What that’s done is open up the market to a lot of people.” “I’ve been in the charter business for almost 20 years and it has evolved from a romantic, sexy type of industry where people had Learjets and Gulfstreams and they went to Vegas and it was all about perception. Now it’s becoming a working tool for business,” said Joanne Fothergill, senior vice president of client services for The Air Group, a charter company based in Van Nuys, Calif. “It provides an incredible amount of security, especially in today’s unsettled world.” FlightWorks president Scott Beale told AIN that the Kennesaw, Ga.-based operator’s revenues were up more than 35 percent in the first half of this year compared with the same period last year. “We were able to meet the continuing demand for charter services by increasing the number of jets in our aircraft management and aircraft charter programs,” he said. FlightWorks operates a fleet of about 25 charter aircraft, including a Bell 407. “It’s been a progressive process for quite a while. We’re seeing more and more people who hadn’t chartered in the past who are recognizing good value in it. We’re seeing a higher level of performance in the industry and the record is getting better when you look at losses,” said Walter Lamon, president and founder of Wyvern Consulting, one of the leading providers of safety information and reports for the charter industry. “There’s less anecdotal buying being done than there is due diligence.” “Buyers are becoming more savvy about getting up-to-date information,” said Jim Betlyon, founder and president of Portland, Ore.-based CharterX. In June, the online charter marketplace host acquired Wyvern, creating a venue for consumers to research information on more than 15,000 charter aircraft and the companies that operate them. Fleet Expansions Likely Most of the operators AIN interviewed indicated that they plan to increase the size of their fleets this year and into next year. “I think our fleet will grow over the next 12 months…a measured growth. It’s not going to be we’re taking every aircraft that goes our way,” said Jeff Cropper, vice president of charter services for Executive Jet Management, the aircraft management and charter division of NetJets. “We don’t have a certain type of aircraft we’re looking for, though we’re looking for newer aircraft.” Barbara Hunt, marketing director for West Coast Charters in Santa Ana, Calif., said her company expects to increase the size of its fleet next year, focusing on small and midsize jets, especially Citations and Learjets. “We consistently seek newer aircraft with state-of-the-art avionics and amenities. In addition, we have a client base that prefers the flexibility and reliability of the Beechcraft King Airs.” She said that the company is continually seeking to bolster its King Air fleet, which today numbers about 15 aircraft. However, most of the operators AIN interviewed indicated that demand continues to outpace supply, as charter customers compete for flight hours with the owners of managed charter aircraft. Add to this a backlog of manufacturing orders and it might become increasingly difficult for charter operators to satisfy consumer demand. “I think the industry is very busy right now, which is not necessarily great because they have a shortage of airplanes,” said Fred Gevalt III, president and founder of The Air Charter Guide. Fuel prices continue to be a dominant factor affecting the charter industry, although operators have responded to price hikes in various ways. “While some operators have chosen to raise their base rates, others have held their base rates steady while raising their fuel surcharges to a rate higher than current fuel prices would warrant,” said Brandon Greene, marketing director for Delta AirElite Business Jets in Cincinnati. “Others have done neither but have chosen to add ramp/facility/FBO or landing fees as new line items to their invoices.” Robert Seidel, senior vice president of charter for Jet Aviation, told AIN that his company’s hourly charter rates have remained virtually flat since 2000, “which is really astounding to me because the cost of operating aircraft, including salaries for crew, insurance, parts and labor, has gone through the roof. The pricing for air charter services all inclusive of fuel surcharges I expect will track with fuel pricing. If oil stabilizes in the $60 to $70 per barrel range and fuel prices stay in the $4 to $5 [per gallon] range, I would expect pricing for the remainder of the year to be flat.” Operators See Big Role for VLJs Charter operators identified several key factors that will continue to drive the demand for aircraft charter through next year, and in particular the waning appeal of the airlines. “Charter travel, although expensive, is perceived as providing greater value due to on-demand scheduling flexibility, the closer geographic proximity of general aviation airports to business sectors, increased productivity and overall time saving,” said Beale. Mark Reichin, senior vice president of charter sales for PrivatAir, said he expects to see an increase in demand for newer, longer-range aircraft as more customers travel internationally. The Swiss-based company’s fleet of more than 50 aircraft–90 percent of which are managed by PrivatAir for their owners–includes such big long-haulers as the Boeing Business Jet, the Global 5000 and the Gulfstream IV. However, Reichin said he also anticipates a growing market for smaller, shorter-range jets, including the new class of very light jets. “VLJs will increase our charter and management business,” he predicted. Some charter companies are already planning to integrate VLJs into their fleets. William Herp, president of Lexington, Mass.-based LinearAir, said his company has 30 Eclipse VLJs on order, with plans to put 18 of those aircraft on the line next year. LinearAir owns or leases its fleet aircraft, which include four Cessna Grand Caravan turboprops, and does not manage any aircraft. “Next year the VLJs will drive huge demand among current airline travelers, given their dramatically improved economics over existing light jets and turboprops,” Herp said, noting that his company’s bread and butter is regional trips of less than 500 nm. He said the Eclipse is “ideal” for this travel profile but because the Caravan offers greater passenger and payload capability, the turboprop will remain an important component of their fleet. “We expect that some of our charter clients might become owners of very light jets; however, we do not expect this to significantly affect our client base,” said West Coast Charters’ Hunt. “We already had a few clients interested in having us manage and/or charter their light jets but we are unsure of the charter market in this category.” Though it is careful not to define itself as a charter operator, Delray Beach, Fla.-based DayJet is creating a new service model, something of a charter-airline hybrid, that it calls “per-seat, on-demand air travel services” using the Eclipse 500 very light jet. The idea is that customers will pay for the seats they book, not the entire aircraft, and will fly on “individually negotiated” schedules. DayJet says it will not publish schedules and that flights will be priced “at a modest premium to equivalent regional full-fare coach airfares.” In June the company announced that five Florida cities–Boca Raton, Gainesville, Lakeland, Pensacola and Tallahassee–would be the first to offer the service. The company has a five-year agreement with Eclipse that includes firm orders for 239 aircraft and options on 70 more. Eclipse president and founder Vern Raburn received provisional type certification for the Eclipse 500 jet on July 27 this year at EAA AirVenture in Oshkosh, Wis. The FAA issued full certification on September 30.