When the economic bottom slipped from under the business aviation industry in 2001, those in the fractional ownership market were unsure where it would leave them. Recession was a new experience for those in the fractional market, which had come into its own in the mid-1990s, after the recession of the late 1980s and early 1990s.
“Now we know,” said Flexjet v-p of sales Bob Knebel. “We know that the effect was not unlike that on the rest of the business aviation industry. It was reflective of the business jet market in general, which was very tough, and is now recovering very nicely.”
Not everyone agrees. The USB Investment Research report for May 2004 noted that at the end of April, “the ratio of shareholders lost to shareholders gained for the [fractional] industry was 0.5.” and that Flexjet’s ratio was 1.92. “We believe fractional programs are losing shareholders at a high rate primarily because of significant declines in the residual values of their customers’ fractional shares, as well as general economic weakness and the advent of other less capital-intensive programs such as card fractionals.”
In an interview with AIN, Knebel said, however, that Dallas-based Flexjet has experienced an excellent first quarter and is taking a decidedly optimistic view of the future:
In 2001, the economic slide into a recession became apparent. How did this recession affect Flexjet?
Fractional ownership is a relatively new concept, so we were facing an economic downturn for the first time and in those early months, no one knew what to expect. Now it’s pretty clear that the effect on fractional ownership was just as it was on the traditional market.
There was some anger among fractional owners who sought to exit their program in recent years, only to discover that their shares were far less valuable than they had been led to believe. What happened?
In the heady days of the late 1990s, some people did create an unrealistic view of [aircraft] residual values. During the boom, residual values were unusually high. Now, we’re thinking that 70 to 75 percent is more realistic. At this point, Flexjet owners can sell their shares at fair market value based primarily on ‘blue book’ assessment, plus a small remarketing fee.
In general, a market evolves to meet changing demands. How is the fractional industry changing?
Customers today are seeing more and more options in business aviation–jet cards, block charter, various levels of fractional ownership–and added value. To us, this means creating ownership levels that best fit their actual needs and recognizing that those needs evolve over a five- or six-year period.
A recent analyst report says Flexjet’s ratio of shareholders lost to shareholders gained as of April 30 is almost two-to-one, respectively. Is this a fair assessment?
No. The total number of shareholders has decreased only slightly. What is going on is a rationalization of share size. During the irrationally exuberant 1990s, a lot of [wealthy] individuals jumped into fractional ownership, largely on the recommendation of friends or enthusiastic sales representatives who didn’t understand what the customer really wanted. So a lot of people over-bought and under-flew the number of hours purchased, and the result was a much higher cost-per-hour figure. As a result, we’re spending a lot of time re-evaluating what works for our existing customers, as well as determining more accurately what’s right for the new ones. We also find that on average, we’re selling smaller share sizes in smaller aircraft.
One example is the Versatility Plus program. We have customers who are under-flying their hours, and others who are over-flying their hours, but not enough to justify a larger share, so we created a program that allows a customer to buy or sell hours from and to other owners of similar aircraft. It’s worked out very well. And as for those leaving the program, there are some who have exited to buy a whole airplane, and others who have found their utilization to be so low that it made more sense to move to Bombardier’s SkyJet block charter program. In fact, this is what Bombardier had in mind when it began developing a variety of means for a customer to avail himself of private jet transportation.
How has the transition to the new Subpart K of Part 91 affected Flexjet in particular?
We’re on the cusp of the transition to Part 91K, and at this point, all our crews are already Part 135 certified. The entire aircraft fleet will be certified to Part 135 by the end of the year. At that point, our customers can decide whether they want to fly Part 91K or Part 135, which, from the customer’s perspective, is an issue of who has operational control of the airplane. It’s about a month or two before our transition is complete, but we think a number of fractional owners who want to limit liability by relinquishing operating control will elect to fly Part 135.
What is the size of the Flexjet fleet now and how is that changing?
We’re now just under 100 aircraft, a few less than last year. It’s not due to owners leaving but to us re-balancing our inventory as the rationalization of shares changes the shape of the fleet.
What’s new with this fleet?
Bombardier is discontinuing production of the Learjet 31A. So we’ve made the decision to eliminate this model from our fleet. The 31As are gradually being replaced by Learjet 40s.
What does this mean to Learjet 31A shareowners?
A majority of them are transitioning to the Learjet 40. Some can’t afford to leap–either in terms of capital investment or operating expenses–to the newer, larger Learjet 40, but we’re doing what we can within the bounds of good business sense. Also, some of them are switching to another Bombardier product.
Is the Challenger 300 starting to make an impact?
We have five Challenger 300s in the fleet today, and I think it may be the best airplane for the fractional market that has ever been built. Buying a share is usually a compromise of such factors as performance, comfort, reliability, operating economics and price. The 300 represents the best balance of any aircraft that has yet come to market. It’s an all-the-time, no-excuses, transcontinental airplane, and at a price of a little more than $18 million.
We’re taking another five [300s] this year, and eight next year, and we’ll be taking aircraft deliveries at the rate of eight a year for quite a number of years. We’ve already sold more than 250 shares in Challenger 300s and the backlog is now into August next year.
The past few years have been rather grim in terms of share sales and growth. Is that changing?
We’ve had a terrific first quarter [Bombardier’s fiscal year is February 1 to January 31]. The shares actually sold and delivered from February 1 through April 30 show a 231-percent increase over the same period last year. We’ve also written orders for more than 80 shares, almost double the number written last year, and we’re experiencing about an 80-percent shareowner retention rate. [Shares sold and delivered is a higher number than orders written and represents deliveries into the backlog.–Ed.]
Does that mean Flexjet is forecasting a strong year?
I think we’re seeing the beginning of a recovery and of a decent year for us. We’re on target to meet our profitability goals this year. Next year and the following year will be good in terms of sales and profitability.