Avolar, the budding stand-alone fractional business jet division of UAL Corp., stepped up its launch effort last month with a pair of new aircraft orders–despite a current economy that has other fractional providers turning to new marketing tactics. To boot, the Avolar business plan is ahead of schedule. Avolar president Stuart Oran said at the NBAA Convention in New Orleans last month, “We are now operational. We can put you in an airplane in an hour.”
The airplanes he referred to were interim aircraft, two of which were a pair of Falcon 50EXs on view at the NBAA static-display area. A Hawker 800 is also available as interim lift for Avolar customers. At press time no customers had signed up, but the company had distributed more than 100 proposals and had contracts out for signature, said Oran.
Avolar is scheduled to take delivery of its first owner aircraft (a Gulfstream IV-SP) in May. Early last year Avolar ordered a mix of 102 Gulfstream IV-SPs and GVs. Oran also penned a deal later in the year with Dassault for a total of 122 Falcon 50EXs, 2000s, 2000EXs and 900EXs.
At the NBAA confab, Avolar signed a $632 million letter of intent with Bombardier for up to 57 Learjet 45s and 60s, and a separate letter of intent for 15 Raytheon Beechjet 400As, with options for 10 more. That deal is valued at up to $150 million. Deliveries from both new orders are scheduled to begin midyear and continue through 2006. The new orders round out the Avolar fleet from light jets to bizliners (in the form of its dedicated Airbus Corporate Jetliner [ACJ] marketing/management program). Avolar hopes to have a total of 22 fractionally owned aircraft operational by year-end and complete deliveries of all 309 aircraft currently on order by the end of 2009.
Industry skeptics have questioned whether a UAL subsidiary could justify startup costs in light of the parent company’s dire fiscal straits. Oran maintains that new UAL CEO Jack Creighton is solidly behind the effort. UAL has committed $250 million to Avolar. Still, in New Orleans, Oran said the events of September 11 have shown that “traditional private equity investors” are needed to bring Avolar to full operational status.
That phase of the business plan is scheduled to be completed by the end of March. Asked to estimate how much more cash may be needed, Oran said, “several hundreds of millions.”
Oran also said, “Our program has generated considerably more interest and inquiries than anticipated–and has done so earlier in the process than expected. Customers are clearly expressing interest in our truly differentiated program–one that has the United Airlines 75-year heritage of operational excellence. The tragic events of September 11 have also further heightened interest in private aircraft and in Avolar.”
As evidenced in Oran’s remarks, Avolar hopes to capitalize on the operational credibility of United Airlines, while hoping to distance itself from public dissatisfaction with today’s brand of airline travel. For instance, he cited plans to perform more of Avolar’s routine fleet maintenance airline-style–overnight and on weekends–to minimize downtime. Also, Oran has said he is banking on United’s technological background in scheduling and dispatch software. Avolar has invested some $30 million in information technology infrastructure.
In the past, Oran has cited market research in which 70 percent of those surveyed said they would be more likely to sign on with a frax provider backed by a major airline. Of those surveyed who initially said they would not be interested in fractional shares of business aircraft, one-third said they would reconsider if the company were airline based. “We intend to marry the technical excellence of United Airlines with the customer-service excellence of business aviation,” said Oran. At the time, Avolar did not release details of the research, which was conducted by Booz, Allen and Hamilton.
Fractional patriarch Richard Santulli, holder of an advanced degree in mathematics and founder of Executive Jet’s NetJets program in 1986, scoffed at the validity of such research. Last summer he told AIN, “That’s bull. Who did they survey? Do you think the top management of Fortune 500 companies would choose [United’s program] over a company that has the reputation and experience of Executive Jet?”
NetJets’ Shifting Strategy
The NetJets marketing strategy has seen some changes in the months since September 11. At the NBAA Convention, NetJets senior v-p of sales Raynor Reavis outlined plans to pursue the supplemental-lift needs of existing corporate flight departments. He said, “We have always believed supplemental lift would play a major role in the fractional business, and we are now going to focus resources in that area. Today, flight department managers are using NetJets’ supplemental lift to support their departments’ growth, to manage peak loads and reduce turndowns, resulting in more efficient utilization of their own aircraft and people and to improve productivity and control expenses.”
NetJets is targeting traditional Part 135 providers as its most direct competition for the role of supplemental lift provider. NetJets v-p of national accounts Jim Christiansen said, “The problem is they provide an inconsistent product. The flight department never knows what they will get with charter. There are different aircraft, different crew-training issues, even inconsistencies with insurance. With NetJets, consistency is a major advantage.”
Reavis said Executive Jet’s goal was to conduct presentations for every major U.S. flight department within three years. “We’d like every substantial flight department to have at least a one-sixteenth share in a NetJets fractionally owned aircraft,” he said.
The focus on flight departments signals a significant shift in marketing strategy for NetJets. When asked by AIN in the summer of 1999 to comment on what is perceived by corporate flight department staff as predatory marketing by the fractional industry, Kevin Russell, Executive Jet’s senior v-p of marketing and international sales, stated emphatically that NetJets does not approach companies that have a flight department.
“We don’t need to approach them. They approach us. Out of 120,000 companies with $30 million or more in annual revenues,” Russell said at the time, referring to EJA’s target market, “there are 2,800 companies with legitimate flight departments. Again, I say, we don’t need to approach companies with flight departments.” EJA’s target market also includes the 120,000 people who are worth $10 million or more, Russell said in 1999.
While none of the fractional providers reveals details of sales figures or customer demographics, observers say there’s little doubt that the fractional sales explosion was largely fueled by the huge stock-market gains of the late 1990s. In the current economic downturn, it remains unclear how many businesses and individuals have sold or otherwise terminated their fractional shares, or which potential customers have postponed plans to buy into the concept. Prospecting for new customers may require digging deeper at the same time that Avolar is threatening NetJets’ market dominance with some high-profile claim jumping.
Santulli has long said he welcomes competition in the fractional field. “I’d rather have a smaller slice of a larger market than most of a smaller market,” he has told AIN on several occasions over the years. According to consulting firm ARG/US, at the end of last September NetJets accounted for an overall market share of 48 percent of 4,269 fractional owners. Executive Jet has countered the ARG/US statistic, maintaining that the number of shareholders is a deceiving measure of real market share. A spokesman said, “A one-sixteenth shareholder in a pre-owned Beechjet is not in the same financial category as a fractional owner of a NetJets Gulfstream or Boeing Business Jet.”
Regardless of who holds what market share, the overall pool of potential fractional customers is undoubtedly smaller than it was in the financial boom years of the last decade. It was during those boom times that fractional providers anted up record orders that strained the assembly lines of airframers. To date, none of the fractional companies has announced order cancellations, leading to the conclusion that, at least for now, the demand remains strong enough to sustain the existing players.