AIN interview: Flight Options COO Michael Scheeringa

 - February 26, 2008, 7:18 AM

“I started when I was six,” said Michael Scheeringa, when asked how he wound up in aviation. “I grew up in Phoenix, and when I was in grade school, I used to take the city bus to the airport and watch airplanes take off and land, and count passengers. At that point, I thought I’d want to build airports.”

Scheeringa’s ambitions evolved, but his fascination with aviation remained. By age 16, he was taking flight lessons. (He subsequently earned a pilot’s license but gave up flying for lack of time.) Later, while attending Arizona State University, Scheeringa worked at America West Airlines. In 1991 he took a position at US Airways, where he ultimately became a vice president. Then, in 2004, he moved to Flight Options–a leading fractional provider that also offers jet cards and aircraft management–where he started as COO. [Raytheon, which owned the company, recently sold it to a private-equity firm.–Ed.]

At the time, both US Airways and Flight Options faced major financial problems, and we wondered why Scheeringa decided to jump from one frying pan to another–if not into the fire itself.

What led you to join Flight Options?

I was contacted by a recruiter. I initially rejected the overtures because the company had negative cash flow. I wasn’t interested in going from an industry in trouble to another that was in trouble.

Six months later, I ended up joining the company. I had proven to myself through research that it was capable of being turned around.

You’ve said that you tried to find out what drives customer behavior in
this industry. What did you learn that surprised you?

One thing people had shared with me was that people wouldn’t change travel plans based on price. But we found that 70 percent of customers using charter, cards and fractional across all programs would change their behavior on 50 percent of their travel for better value.

Flight Options says scores in its customer-satisfaction surveys are up 19 points over two years. Up 19 points from what to what?

We’ve never released the “what to what,” so I won’t release it today. But we’ve significantly closed the gap from where we were to where we want to be.

Can you tell me your current churn rate?

No. What I would tell you is that we had the low of our fleet in June [2007] and we’ve added four airplanes since then. So that would tell you we’re now gaining more customers than we’re losing.

Have you received customer complaints about the impact of your jet card on the fractional program?

When we introduced the jet card, owners had a significant number of inquiries. We’ve gone out of our way to explain that we’re adding equivalent aircraft time into the fleet with all the jet card time we’re adding.

Yet you’ve shrunk your fleet. Why?

When we were a 220-aircraft company, we were a $600- million-a-year business [in revenues] with 12 fleet types and vintages up to 25 years. Today, we fly four fleet types. The age of our fleet goes from 10 years to under six. And we are a $630 million a year business. So we shed older airplanes. And we’re generating more revenue.

But you lost customers along the way, didn’t you? Your vice president of flight operations has admitted that many shareowners couldn’t afford to move to newer models and were exiting the program. One of your calling cards used to be that you offered older aircraft at a lower price.

An uneconomic calling card is how I would classify that. When we offered 12 fleet types of varying vintages, I would call that Company B. We made a very deliberate decision to shut down Company B.

The transition happened much faster than we’d planned. But because it involved
loss-making operations, the company achieved profitability faster than our plan.

Your Fractional First program lets shareowners over-fly or under-fly their allotted hours, but there’s also a use-it-or-lose-it policy for hours.

Right, except under the previous program, if you bought 100 hours a year, you would be capped at flying 500 during a five-year contract. If you under-flew, you could use only 20 percent of hours that you rolled over in any given year and they’d expire at the end of five. And you could over-fly 20 percent, but you were borrowing from the next year. With Fractional First, there’s no borrowing but you can use 80 to 120 percent of the hours you’ve purchased each year. Rather than a five-year fixed commitment, you have five one-year variable commitments.

Our research showed that that was more pleasing than at the end of five years saying this cost me 15 percent more because of [forfeited hours]. Most people flying private would pay a 20-percent premium for the benefits fractional offered versus charter. Yet when you factored in spoilage, the cost of fractional had become 35 or 40 percent higher. Fractional First brought fractional closer in line with the value proposition of charter.

Let’s talk about buying back fractional shares. That’s the area where I hear there are the most complaints.

Still? It should actually be getting much better.

What have you done to make it much better?

First, we should talk about market conditions. There was this bubble of acquisition activity in 1999 and 2000 and then there was a burst of the bubble and a flood of used aircraft coming onto the market. The entire general aviation environment saw a low in residual values in 2003-2004.

The second thing is that Flight Options largely focused on older airplanes. Customers who bought-in less expensively were finding that that less expensive asset wasn’t going to have much value at the end of its useful life. Customers today that are
in our go-forward fleets are seeing pretty much average market residual values.

I heard that you’re testing buy-back valuations that are higher than bluebook.

We are. What we have now is the limited offer against select shares where we will guarantee the residual value. Understanding that this was an area of consternation in the marketplace, we thought it was a worthwhile test.

You replaced Flight Options’ whole senior management team and, when you launched new strategies, half the sales force quit. Why so many changes?

The senior management has been replaced with been-there-done-that people. For example, our head of human resources today previously managed HR for a 40,000-person airline. We replaced somebody for whom this had been the biggest job they ever had with somebody who had been there, done that. And on the sales force, we have taken it from an organization that was best characterized as “we’re here for the coffee break” to “we’re here to help you conduct an analysis–both quantitative and qualitative–of what your travel needs are and how we can best serve those needs.” People who were used to selling older airplanes during coffee hour would have found it difficult to operate in the new environment.

You once said, “At no time did I apologize for changing the business model…but I might have apologized about how I communicated or didn’t communicate things.”

I did say that. I think we did a pretty good job communicating to customers, but when we rolled out the company plan, what we could have done more effectively was communicate the “me factor” to [employees], because ultimately, when you go home to your spouse or kids, you’re going to say, “This is how it affects me.”

Will air taxis have a big impact on your business?

If an air-taxi program diverted a customer from fractional to a flight of 200 nautical miles or less, that would help us because we lose money on those customers. However, we don’t see that air taxis are necessarily going to work on a national level. They could be viable in California and secondary cities in the Northeast.

DayJet founder Ed Iacobucci thinks they’ll work in the Southeast.

Ed is very smart. The question is, when you look at the demographics and what they’re trying to create, does it all jell? That’s where I’d say the jury is completely out.

You’ve talked about becoming the number-one fractional provider. Do you have a plan to overtake NetJets?

If you call number one the most sustainable, profitable operator in the for-hire space, I think clearly we will be number one. We have no ambition to be their size.

Michael Scheeringa Résumé

Position: CEO, Flight Options

Past positions: Has served as Flight Options’ COO and acting CEO and held positions at US Airways, including vice president, Express Division. Has also worked at America West Airlines.

Education: B.S., transportation and logistics management, Arizona State University.

Personal:
Age 40. Married. Three children. Lives in Cleveland suburb of Chagrin Falls. Hobbies include golf and managing his investments.

Flight Options flies the coop

When we first met with Flight Options CEO Michael Scheeringa and asked whether Raytheon might sell the firm, he sidestepped the question with a twinkle in his eye. Now we know why. Negotiations were already under way with H.I.G. Capital, a Miami-based private-equity firm, which subsequently purchased Flight Options for an undisclosed sum. We talked again with Scheeringa to discuss the sale and other new developments.

What can you tell us about H.I.G.’s plans for Flight Options?

Their plan is not dissimilar to what our own plan was. H.I.G. said to me, “We agree with you on what the industry looks like in 2010, ’11 and ’12. We also agree on what you think is achievable in 2012. [But] why can’t 2012 be 2010 for the company? So the dialogue we had was about how do you grow the business [more quickly].

H.I.G. has sold 90 of the 130 companies it has bought. So might you be for sale again sometime soon?

H.I.G. purchased us out of a fund that was initiated in January 2007 and the holdings out of that fund need to be liquidated within 10 years. So they can’t hold us longer than nine years. Their average holding period is four to five years.

When we first talked, you emphasized the benefits of focusing on a few aircraft models and said that to move to different ones, “we’d have to be significantly better off to suffer the transition costs.” So why have you now ordered up to 150 Embraer Phenom 300s?

The best-performing airplane in our fleet today is the Embraer Legacy. The Phenom 300 is being built for a life of 30 years–unheard of in private aviation, with the exception of the Legacy. It’s those type of airplanes that we think work well for fractional and the Phenom, relative to other jets in its category, provides operating economics that are about 30 percent better. And its price is at the better end of the range. Plus, there’s our confidence in Embraer. So it made sense to replace our 80-some Hawker 400s with 100 or more Phenom 300s.

I take it the sale of Flight Options will have no impact on your own future with the company?

Only good things. When I first met with H.I.G., there was no disagreement about what you can do with Flight Options. The only question is timing and that’s kind of a neat debate to have. Because you’re just talking about how you get from here to there. You’re not debating what universe you’re in.