Gloves come off in two-way frax fracas

 - May 15, 2008, 10:42 AM

With the consummation of the Flight Options/Raytheon Travel Air merger on March 21, the fractional ownership business is “a two-horse race between Flight Options and NetJets, relegating the other providers to boutique markets.” So says Flight Options CEO Kenn Ricci, characteristically confident in the future of the frax operator he founded in 1998.

Ricci launched Flight Options on the premise that pre-owned aircraft could be carved up for fractional ownership at less cost to owners than was the case with new airplanes. The marketplace apparently agreed, as evidenced by the growth of the Flight Options fleet from small beginnings in October 1998 to 750 owners and about 100 airplanes by last fall, shortly before the Cleveland- and Wichita-based providers decided to unite. That merger has put Flight Options’ fleet (at 205 aircraft) on a closer footing with NetJets’ fleet (which Ricci placed at 290 aircraft early last month), and it takes Ricci’s fleet to the point of critical mass that appears to position the company as a stronger competitor.

For evidence that the competitive mood of the fractional providers has hardened, the pages of The Wall Street Journal have provided ample proof in the past few months. Flight Options ran a full-page ad in the December 11 edition, depicting Ricci asking, “Do we have the best safety record because we have the best pilots? Or is it the other way around?” The next day there was a full-page ad from NetJets (showing what was apparently a memo from Executive Jet owner Warren Buffett exhorting Richard Santulli to “Spend whatever it takes to be the safest and most secure. Then spend whatever it takes to stay that way.”) and another full page from Flight Options promoting its dedicated crewing (depicting a Flight Options pilot saying, “I know why Flight Options gives captains their own plane. What I can’t understand is why nobody else does.”)

In a more recent issue (April 11), Flight Options ran three separate ads proclaiming the advantages of “Dedicated Crewing,” “Factory Supported Pricing” and “Two Distinct Fleets” and invited readers to download the 28-page Exploring Your Options: The Smart Buyer’s Guide to Fractional Aircraft Ownership. In the same issue, NetJets ran an ad encouraging readers first to educate themselves by reading NetJets’ 38-page Buyer’s Guide to Fractional Aircraft Ownership.

New battle lines have been drawn at a time when fractional sales (particularly of large aircraft) are pausing for breath after a spectacular and extended sprint. Word on the street last month said NetJets has failed to sell any shares in Boeing Business Jets since the first airplane joined the fleet last year, but the company denies this. An Executive Jet official told AIN that while the market for large aircraft is slow, NetJets has sold some BBJ shares. However, he declined to reveal the number or how recently they were bought. The company now has seven BBJs on strength but apparently few owners to carry in them, an expensive turn of events for the company that started the frax business. At Flight Options, one of the company’s two GIVs and seven of its 13 Challengers are sold. “Core fleet is extremely expensive,” said Ricci. “With smaller aircraft you can sell a higher percentage of the fleet.” Ricci said he still wants Fairchild Dornier Envoy 7s for Flight Options, despite the current financial predicament of that manufacturer.

Behind the scenes, the marketing war has turned uglier than the ads in the WSJ imply. Last month Ricci gave reporters a copy of a letter, dated August 13 last year, in which an Executive Jet v-p warned a prospective frax share buyer (known to have committed verbally to Flight Options) not to purchase a share at that time. “Both Flight Options and Raytheon Travel Air are in dire straits,” the letter warned. “By purchasing from either program, you are putting a significant amount of capital at risk. I believe that by waiting four months [until the end of last year] and letting the market force out the weak programs you will protect your capital.”

Providing some insight into the condition of the fractional market before September 11, the letter went on to claim that Flight Options sold 359 shares/35.43 whole aircraft in 2000 but only 59 shares/5.31 whole aircraft year-to-date (through August 13) 2001–a 70-percent decline– while NetJets sold 42 whole aircraft in the same 7.5-month period. Flight Options maintains it sold 34 aircraft to 210 owners in 2000, and 22 aircraft to 240 owners last year, for a decline of about 30 percent.

Time will tell whether or not the Flight Options/RTA merger presents NetJets with a more solid, deeply rooted competitor, but Ricci’s projections certainly expect it to do so.

Ricci explains with two words (“critical mass”) the apparent contradiction between recurring revenues (up threefold) and income–up nearly ninefold. The big-two providers’ fleets are more evenly matched in size than they were when the industry was more fractured. Flight Options has also introduced more choices to the market. Whereas the company was founded with pre-owned aircraft, it now offers two distinct programs with the addition of a segregated program providing only new airplanes (five years or younger), with a “born on” plaque affixed prominently for passengers to see. The first Travel Air owners who signed five-year contracts will shortly face the choice of bellying up to another new airplane or signing for a pre-owned airplane (or, of course, opting out entirely). Ricci said he has no firm idea whether these owners will lean toward new or pre-owned and awaits the process with anticipation.

At some point, Raytheon wants to see cash from its divestiture of Travel Air. Under the terms of the merger, Ricci and his investors own 50.1 percent of the combined company (Raytheon holds the remaining 49.9 percent) and Flight Options has undertaken to buy 119 new aircraft–34 Hawker 800XPs, 50 Premier Is and 35 Beechjets–worth $900 million from Raytheon over the next five years.

Raytheon eventually intends to convert some or all of its minority stake in the combined company into money, and that could be accomplished a number of ways. An investor acceptable to Ricci and his partners could buy into Flight Options, or an IPO could be floated. Since Travel Air (a $300 million company as part of Raytheon) was never independently audited, and since the rules governing IPOs demand auditing for four consecutive quarters before issuance, the earliest an IPO could be offered would be next spring. Ricci said he is working on this process with Morgan Stanley. He also noted it has taken $45 million of capital to build Flight Options thus far. Flight Options currently has access to $40 million in working capital, a company spokeswoman told AIN.

Costly Core Fleet

While pinpointing the cost of a core fleet as being “probably the biggest item we can control,” Ricci then singled out dispatch reliability as being absolutely key to success. “If we keep our fleet 10-percent more reliable than the other program does and we have a fleet of 200 airplanes, we actually have 20 more aircraft available to us on any given day.” According to the Flight Options CEO, his company’s fleet had a 10-percent better dispatch reliability rate than RTA before the merger.

Ricci asserts that the cost of maintenance (also a target for tight control at Flight Options) is secondary to the importance of the highest possible dispatch reliability. He said it is better to pay $5,000 for a needed part today and get that airplane back in the air today than wait a couple of days and pay less for the part. His goal is to fly each aircraft 1,000 hr a year, with no more than 70 days of maintenance downtime.

While ranking maintenance cost thus, Ricci also noted that “time and materials is the kiss of death for maintenance of a fractional fleet,” explaining why Flight Options will be doubling its current roster of 200 mechanics by year-end. The company already has maintenance bases in Cleveland and Sacramento and will soon open one at its most frequently visited port of call–Teterboro (N.J.) Airport at Atlantic Aviation–staffed by 80 maintenance technicians. Eight more will follow by year-end, in Van Nuys and San Jose, Calif.; Dallas Love Field; Denver Arapaho; Atlanta DeKalb Peachtree; Naples and Palm Beach, Fla; and White Plains, N.Y.

According to Ricci, himself a Gulfstream pilot by profession before he got the frax bug, a pilot’s life at Flight Options is as good as it gets in the frax business (see box). Currently there are 4.7 pilots per aircraft. They can live anywhere they like, and Flight Options pays for their commute to work. Flight Options pilots work an eight-days-on, seven-days-off schedule, and a senior Gulfstream captain can expect to earn $130,000 annually.