Major providers mature as local frax firms hatch

 - August 4, 2008, 7:33 AM

Executive Jet Aviation owner and CEO Richard Santulli brought the fractional-ownership concept to the business aviation community in the mid-1980s. Santulli created a program called NetJets, selling aircraft in shares ranging from 1/16ths to halves.

Santulli’s program used existing aircraft acquisition concepts, including shared aircraft ownership, and provided for the management of the aircraft by a separate, dedicated company. The aircraft owners participating in the program agreed not only to share their aircraft with others having an ownership interest in that aircraft, but also to lease their aircraft to other owners in the program.

The owners used the common management company to maintain the aircraft and administer the leasing of the aircraft among the owners. An FAA regional determination allowed NetJets–and subsequent competing fractional-ownership programs–to operate under Part 91. In 1999 the FAA reviewed the validity of allowing fractionals to operate under FAR Part 91, resulting in the formation of Subpart K to regulate these share programs (see page 24).

As fractional aircraft ownership took off, the number of companies offering such programs has grown, especially during the last decade, and this growth is projected to increase.

Major competition to NetJets emerged from three aircraft manufacturers–Raytheon Aircraft (Travel Air), Bombardier Aerospace (Flexjet) and Cessna Aircraft (CitationShares)–and aircraft management firm Corporate Wings (Flight Options). Flight Options and Travel Air merged in March last year to form Flight Options LLC. And in the near future the major fractional players are likely to face increasing competition from small localized fractional providers that are emerging in highly populated areas throughout the U.S.

The Big Kahuna

Executive Jet Aviation was so well known for its NetJets fractional aircraft program that last year it changed its corporate name to NetJets. The company has led the pack as the largest provider of fractional aircraft since it established the industry in 1986.

The Columbus, Ohio-based NetJets fleet is composed of 13 different models of light (Citation Bravo, V Ultra, Encore and Excel), midsize (Citation VII and X, Hawker 800XP and 1000 and Gulfstream G200) and large (Falcon 2000, Gulfstream IV-SP and GV and Boeing Business Jet) business aircraft. At the end of June, the fleet numbered 501 aircraft, down 12 airplanes from numbers reported at the end of March. In March NetJets had 1,170 aircraft on order, but this number has since decreased as a result of deliveries received and some order cancellations.

At press time, NetJets boasted 3,100 owners, by far the most of all the fractional providers. The company anticipates that this year its more than 2,800 pilots will fly a quarter of a million flights to some 140 different countries. (NetJets has programs in the U.S., Europe and Middle East.)

In September NetJets created an advisory council to share ideas to meet the transportation needs of corporate America, hoping to boost its business during these lean economic times. National accounts vice presidents Jim Christiansen and Todd Spangler chair the council, which has about 12 members.

NetJets executive vice president Kevin Russell said “in today’s economic environment many companies are realizing that the cost of competing is more expensive than ever before.” According to the NetJets company line, aviation department executives are now recognizing that owning shares in NetJets can be an ever-ready backup to their own flight departments. Its supplemental-lift program was designed especially to complement corporate flight departments’ capabilities.

NetJets maintains that flight department managers are using fractional aircraft as supplemental lift to support department growth, manage peak loads and reduce turndowns, not as a replacement for the traditional flight department.

Flight Options’ Stormy Waters

The past year-and-a-half has not been exactly smooth sailing for Cleveland-based Flight Options, the second-largest fractional provider. Following its merger in March last year with Raytheon Travel Air, the company has experienced workforce integration issues, operational consolidation, a change in top leadership (see “Stability Essential to Fractional Companies’ Success,” page 24), the mixing of new and pre-owned aircraft into the fleet (Flight Options previously operated only used aircraft) and the recent emergence of Raytheon as a majority shareholder.

When Raytheon Travel Air and Flight Options were combined into one, then chairman and CEO Kenn Ricci hailed it as creating the “critical mass” needed to help the company survive and compete. What he didn’t expect was the sticky pilot seniority issues, owners of new aircraft concerned that their jet would be used by people who had bought shares in pre-owned jets and the heavy debt load incurred during a period in which venture capital is scarce. The result was unsettled employees, concerned owners and a $107 million debt owed to Raytheon that couldn’t be repaid before the contractual deadline.

In the wake of the turmoil, Flight Options founder Ricci stepped down in February as its chairman and CEO. He was replaced by John Nahill, former v-p of corporate strategy and development at Raytheon. Nahill was no stranger to Flight Options as he had served on the board since its merger with Raytheon Travel Air.

Four months after Nahill stepped in, Raytheon completed a “financial recapitalization agreement” in which it now owns approximately 65 percent of the fractional ownership company, up substantially from its previous 49.9-percent interest in the merged operation. As of late June, Flight Options had a fleet of 220 new and pre-owned aircraft–composed of no less than 14 aircraft models–and 2,300 “shared contracts.”

Flexjet Struggling

Flight Options wasn’t the only fractional provider to experience a change in its top management. In mid-May Bombardier Flexjet announced that Michael McQuay would replace Clifford Dickman as head of the Dallas-based fractional-ownership program. McQuay served as Bombardier Flexjet vice president and general manager since May 2001.

The management change was likely spurred by the fact that Flexjet has been losing market share since the beginning of this year, according to figures from Fractional Insider, a Dallas-based consultancy firm for owners and prospective owners of fractional shares. Additionally, over the past two years Flexjet has lagged in overall market share performance, though it didn’t record a loss until this year. At the end of June the fractional provider had 107 aircraft in its fleet (Learjet 31As, 45s and 60s and Challenger 604s), and counted 660 individual owners. Learjet 40s and Challenger 300s are expected to join the fleet by year-end.

To combat the problem of eroding market share, Flexjet recently introduced programs to attract new buyers and retain existing customers. In April Flexjet announced a new share structure for the Challenger 604, increasing the flight time for 1/16th share owners from the industry standard of 50 hours to 60 hours “at no additional cost in terms of variable rate, maintenance fees or capital investment.” It said it was able to add this extra value to customers through increased fleet efficiency.

In June Flexjet unveiled Versatility Plus, a program that allows owners to place or draw up to 25 percent of their annual allocated hours each year in a pool. Said McQuay, “This new benefit enables Flexjet owners to exchange hours among themselves. It gives Flexjet owners easy access to additional hours and the opportunity to realize value from unused hours. The result is increased performance and value.”

Also in June, the company introduced AnyTime Options, which–for a fee–allows share owners to get guaranteed upgrades or downgrades, guaranteed multiple use of aircraft and, for flights under the one-hour minimum, a short-flight waiver. For the Learjet 31A, the three options, respectively, cost $495, $685 and $870; for the Learjet 45, $1,055, $1,410 and $945; for the Learjet 60, $2,030, $2,700 and $1,085; and for the Challenger 604, $4,885, $6,510 and $1,540. The cost of purchasing a guaranteed aircraft upgrade, downgrade or multiple use doesn’t depend on the number of hours flown on the associated flight segment.

CitationShares: Conservative Growth

CitationShares, a three-year-old joint venture between Cessna Aircraft and TAG Aviation, is continuing on its path of conservative growth. Last year, sans fanfare, the fractional provider–which flies Citation CJ1s, Bravos and Excels–began operating throughout the entire continental U.S., as well as Canada, Mexico and the Caribbean. However, a CitationShares spokeswoman clarified that the company’s customers must still reside to the east of the Rocky Mountains. She would not comment on if and when CitationShares will start accepting customers on the West Coast. In late July, there were 40 aircraft in the fractional company’s fleet, and 360 owners on the books.

CitationShares in March said its fleet is fully RVSM compliant and stands ready to take advantage when domestic RVSM is implemented in the U.S. in January 2005. Shortly after DRVSM takes effect, the fractional provider will take delivery of its first of 25 CJ3s it has on order.

Regional Programs

Fractional Insider president and CEO Mike Riegel predicts that established and budding regionalized fractional programs will flourish. In fact, he expects them to present a formidable challenge to the major national fractional companies.

Perhaps the most successful regional fractional program is Manchester, N.H.-based PlaneSense. Fielding a fleet of 14 Pilatus PC-12 turboprop singles, the fractional provider has about 100 owners. To serve customers in the Southeast, PlaneSense bases a couple of the turboprop singles in Florida.

Other regional fractional programs have yet to demonstrate great success, and most have fleets of only a few aircraft.

EliteJet of Carlsbad, Calif., is one of these programs, though it seems to have found the right recipe for a regional fractional business plan. The company offers shares in Falcon 10s, 20s, 20-5s and 50s, though the shares owned equate to multiple aircraft, not just one particular airplane. In effect, share owners buy into the fleet. For those who are skittish about the fractional concept, EliteJet also has a block-charter program it calls SkyClub.

JetChoice of St. Paul, Minn., also offers shares in Falcons–10s, 20s, 50s and 900s–to those living in the Midwest and “second-home locations” such as Florida, Palm Springs, Calif., and Aspen, Colo. The company’s fleet is currently based in St. Paul, but it plans to base some aircraft in Naples, Fla., and Scottsdale, Ariz., by year-end.

Customers who sign up with JetChoice have the option of a lump-sum share purchase or a zero-down share financing program. Under the zero-down program, members pay a monthly financing fee that corresponds to interest and principle on 20 percent of the share price. JetChoice share owners do not pay anything for the aircraft’s residual value (locked at 80 percent) under this financing program.

Another interesting aspect of JetChoice is that members buy into a limited liability company and are therefore not recorded on the aircraft’s registration. However, a company spokesman told AIN that JetChoice share owners “still retain all of the tax benefits of fractional ownership but better liability protection.”

Another budding fractional turbine aircraft program is emerging from OurPLANE. Until recently, the London, Ontario-based company has focused on fractional ownership of light piston aircraft, but it is now starting a King Air share program in California’s Bay Area. It plans to continue expansion into the business aviation arena, and expects to have a fractional program offering light jets within three years.

Global Jet Shares, which has bases in Fort Lauderdale, Fla., and Van Nuys, Calif., plans to launch its fractional program using pre-owned Gulfstreams at this October’s NBAA Convention in Orlando, Fla. A little less than $1.1 million buys a eighth share in Global Jet’s GII-SP, and the same size share in the company’s GIII-SP costs $1.56 million. The monthly management fee and hourly cost (for either Gulfstream) are $14,875 and $2,950, respectively. A 10-hour response time will be guaranteed.

Perhaps as a harbinger of what’s to come, of Costa Mesa, Calif., is selling one-eighth fractions for $150,000 in an unspecified “personal jet” it doesn’t expect to take delivery of until summer 2005. However, the idea of selling shares in the new wave of very light jets–such as the Citation Mustang, Eclipse 500 and Safire Jet– paints an interesting picture of what the fractional aircraft ownership industry could look like in just a few short years.