Hybrids fill fractional-charter gap

 - August 4, 2008, 7:36 AM

At first glance, the fractional industry, like the alien menace in a sci-fi thriller, appears to be morphing into a menagerie of hybrids. But in reality these hybrids are essentially sales and marketing programs of existing operations, both fractional and charter.

Of the many hybrids populating The Wall Street Journal with ads (a clear clue to their target audience), only one–Marquis Jet–has an exclusive contract to market flights for a fractional provider, which is NetJets. Some, including Bombardier Skyjet and Sentient, are essentially specialized brokers of charter flights. They may bristle at this description, but all flights operated under their banners are flown Part 135, as are Marquis Jet flights.

Bombardier’s Skyjet does have a relationship with its fractional arm, Flexjet, but it is the opposite of the Marquis Jet/NetJets relationship. Whereas Marquis Jet is now NetJets’ biggest shareowner/customer, Flexjet is charter broker Skyjet’s biggest customer. Delta AirElite, though without direct ties to any fractional, has been leasing aircraft from Flexjet, but also manages aircraft and operates its own charter fleet.

Marquis Jet

Marquis Jet, headquartered in New York City, buys shares from NetJets in new and pre-owned airplanes and resells the shares in blocks of 25-hour increments of occupied flight time. Nine NetJets aircraft types are offered in the U.S. and four in Europe. The 25-hour Marquis Jet cards range in price from $109,900 (equating to $4,396 per hour) for the Citation V Ultra to $299,900 ($11,996 per hour) for the GIV-SP. Federal excise tax (FET) and war-risk insurance are added to these rates, increasing the cost of the 25-hour card for the Citation V Ultra, for example, to $112,939. Card holders are free to interchange between aircraft types in both the U.S. and European programs.

When compared with NetJets’ rates (with the management fees factored in and FET added), Marquis’ hourly rates are about double. However, when the cost of a NetJets share is factored into its hourly rate, the Marquis hourly price, according to NetJets executive vice president Kevin Russell, is only about 22 percent higher. But this depends on favorable assumptions regarding tax accounting, the shareowner holding the share for the entire length of the five-year contract term and a good evaluation when the share is resold.

“Marquis’ market is the seasoned traveler who needs less than 50 hours per year,” said Russell. “Many of its customers, such as sports stars, have high salaries and frequent travel needs, but not much net worth yet. So not having to make the initial capital investment in a fractional share is appealing to them.” NetJets does not own any part of Marquis Jet at this time.

Said Marquis Jet president and CEO William Allard, who was previously president and COO of the Sports Group, “Last year we sold about 500 cards and this year we expect to sell 1,000 and own up to 25 whole aircraft. Our card holders are treated like any other NetJets share owner, although we do have a dedicated owner-service group at NetJets’ operational center in Columbus.” Guaranteed response time for Marquis Jet Card holders is 10 hours versus a maximum of eight hours for regular NetJets share owners.

Despite Marquis Jet’s apparent success, its arrangement with NetJets does not come without costs. By offering 25-hour increments, Marquis is, in a sense, marketing 1/32 shares in NetJets’ airplanes (a full aircraft share provides 800 hours per year; 800 divided by 25 hours per card equals 32 card holders). In general, fractional providers prefer to keep their owner-to-airplane ratios as low as possible because the greater the number of owners per airplane, the greater the number of potential scheduling conflicts, which can necessitate upgrades to larger airplanes within the providers’ fleets or chartering of additional lift–both of which increase cost. As Marquis Jet’s business increases, NetJets’ owner-to-aircraft ratios increase as well. One industry source estimates that NetJets will need to limit Marquis’ ownership to no more than 10 percent of its total fleet to keep these costs manageable.

Allard is not worried about this, however. He said, “When we were negotiating with NetJets, Rich Santulli said supply would not be a problem for NetJets. He told me, ‘You sell the product. We’ll make sure we have the inventory.’”

Another industry source wondered if NetJets shareowners would become unhappy with the idea that many non-shareowning charter customers (the Marquis Jet Card holders) are flying on–and adding hours to–their aircraft. He said, “The fractional industry was built on the idea that shareowners’ airplanes would be used only by a limited number of people, that is other shareowners. It’s like belonging to an exclusive club. Marquis opens the club’s doors to a lot more people who aren’t paying the same entry fees.”

Bombardier Skyjet

Bombardier Skyjet, which in May moved to new headquarters in Fairfax, Va., from its previous location in Washington, D.C., has incremental-hour programs similar to Marquis Jet, but engages a network of preferred charter operators to provide lift in a mix of small, medium and large business jets. Founded in 1997, the company was acquired by Bombardier Aerospace in 2000.

In addition to offering blocks of 25, 50, 100 or more hours in its Premier Fleet Jet membership program, Skyjet also has “pay as you go” on-demand charter plans for travelers needing, as a rule of thumb, less than 10 hours a year. Availability is guaranteed with a 12-hour advanced reservation, which can be made online or by telephone. Above 100 hours or so, Skyjet suggests share ownership in Flexjet, and in fact has a provision whereby Premier Fleet customers can earn credit toward purchase of fractional or whole aircraft.

Also in May, Skyjet announced that it had signed a commercial agreement with Air Canada’s specialty charter business–Air Canada Jetz–to market the two companies’ combined products. Said Nicolas Houseman, Skyjet general manager of the arrangement, “Bombardier Skyjet specializes in arranging travel on small, midsize and large business jets, while Air Canada Jetz specializes in operating large charters using dedicated crew and refitted aircraft to provide a luxury travel experience.” Air Canada Jetz operates a fleet of four Boeing 737s configured in all-business-class seating with between 48 and 60 seats.

Delta AirElite

Delta AirElite, as its name suggests, is associated with Delta Air Lines. It actually began as Comair Jet Express in 1991, providing aircraft management and charter service. Delta acquired the company in January 2000 and changed the name to Delta AirElite in October 2001. In February this year the company announced a block-charter program– with 25-, 50- and 100-hour increments–it calls Delta AirElite Fleet Membership. The company is headquartered at Cincinnati/Northern Kentucky International Airport.

Delta AirElite benefits from its association with the parent airline. Crew replacements travel on Delta and Fleet Membership brings with it points that may be exchanged for Delta Air Lines Medallion status. Said AirElite president and CEO Michael Green, “We also have an advantage in terms of fuel prices and pilot training. All of this helps keep Delta AirElite customers in the Delta family.”

Sentient

Launched four years ago as eBizJets, Sentient of Narwhal, Mass., is a pure block-charter program, unaligned with fractional providers, airlines or aircraft manufacturers. However, CEO Mark Stone claims emphatically that Sentient is not a charter broker. “A broker connects a customer to an operator. Some 97 percent of charter operators are local, which is good if you’re chartering from your local airport. But if you’re in Boston and want to charter an airplane in Los Angeles and you don’t know the operators in the area, you may go through a broker, who puts you in contact with the operator and that’s about it. We’re not that.”

Instead, he said, “We are closer to the fractional model than the broker model. We are responsible for the customer’s satisfaction. All the jets we use are owned by high-net-worth individuals or corporations.” He said that the vast majority of Sentient’s new customers are experienced business aircraft fliers and that about 35 percent have other sources of lift. The company uses auditing companies ARG/US and Wyvern and customer feedback to vet the charter companies it uses.

Sentient offers clients a three-tier Private Jet Membership program with TravelCards valued at $100,000, $250,000 and $500,000, which are debited based on the hourly rate for the class of business jet selected– small, medium or large. The company divides these categories into preferred and standard, with the former class composed of generally newer airplanes with more amenities and longer ranges. The hourly rates for one-way travel are (standard/preferred): small jets, $3,100/ $3,650; medium jets, $4,350/$5,250; and large jets, $7,100/$9,450. Round- trip hourly rates are: small jets, $2,050/$2,750; medium jets, $3,200/ $3,950; and large jets, $4,950/ $7,850. FET is not included in these rates and is passed on directly to members. The company also offers on-demand charter booking.

According to a spokesperson, Sentient shares operational control with the charter operator as it is heavily involved with flight management that directly affects the member experience. “As with any other flight services provider,” said the spokesperson, “Sentient takes all steps necessary to make sure that flights are completed in as safe a fashion as possible. In the event of a mechanical problem, we inform the members and then reposition a new jet asap; or if it’s a small problem, we’ll fix it and get going.” Both Sentient and the charter operators have liability protections.

In April, private-equity firm TH Lee Putnam Ventures acquired Sentient from CSFB Private Equity.