Charter's Choppy Waters

 - October 27, 2008, 10:26 AM

At the end of September, the UBS Investment Research group released a business jet update that came as no surprise to U.S. charter operators. The analysts reported that business jet flight activity was “sharply lower” in August, noting an 18-percent drop from the same period last year and an 8-percent drop year-to-date. The figures were “driven mainly by reduced charter activity,” which fell 11 percent on a rolling 12-month basis. A separate UBS report indicated that overall business conditions have dropped 30 percent. Nearly half of all aviation professionals surveyed for the report believe conditions will deteriorate.

The figures were a far cry from those seen in previous years, when demand for chartered aircraft was at an all-time high. But a shift in the economy and the subsequent collapse of a number of high-profile financial institutions led to a similar shift in charter activity as corporate and private spending declined.

The UBS update stated that short-range flight activity took the largest hit,
a fact many charter operators confirmed. “The one-hour hop seems to be most affected by the economy,” said Toby Batchelder, head of charter and aircraft management for Midwest operator Elliott Aviation. “Those customers are now getting in their cars and driving the three or four hours.” Batchelder said the company is flying two to three fewer turboprop trips per month on average. Ron Smith, vice president of business development for Atlanta-based FlightWorks, confirmed that the light to mid category has “definitely slowed.”

But it appears that the economic downturn has affected nearly every charter operator–regardless of jet type. “Everyone is feeling the pinch,” said Robert Salvo, president and CEO of Phoenix-based Crystal Air Aviation. He estimates that most operators are “anywhere from 20 to 40 percent down in their charter revenue over the same quarter last year” and admitted that his company has experienced a “large decline.”

Even the larger charter and management companies have seen a decrease in business. Jet Aviation saw a 15-percent drop, and Gama Aviation said business “slowed slightly.”

NATA estimates that charter activity has dropped between 10 and 15 percent.

Hope for the Future
But is the state of the industry really as grim as it sounds? “There’s been so much growth in the last 10 years, this is more a circumstance of the industry catching its breath after years of dramatic growth,” said NATA president Jim Coyne. “We’re cautiously optimistic that the recession won’t be a very long one, and after catching our breath, the industry will continue to grow.” He noted that most operators are back to the levels they had in 2006 and explained that the industry has “always been cyclical with the economy. And the benefits of charter are just as important during a recession as they are at any other time.”

Coyne added that the economic downturn has resulted in a shift in corporate use, one that might actually help propel the charter industry back to previous levels. “More flight departments will be under pressure during a recession not to charter as much, but in an ironic twist, there’s a side of the industry that will be doing more charter flights because their flight departments will be shut down.” Bristol-Myers Squibb announced in September, for example, that it was shutting down its flight department, selling four aircraft and terminating the employment of 32 pilots, mechanics and department personnel. “They’ll be in a position to need other lift,” Coyne said.

There has been a change in charter clientele, also a result of the economic impact. “When the market goes soft, there are always some industries that storm through and even find it to be a benefit,” said FlightWorks’ Smith. “Certain client types–real estate, construction–have taken a pretty significant hit. But the medical industries, energy and other industries have emerged. It’s all about finding out where the users are.” Crystal Air’s Salvo added that business from the entertainment industry has remained steady. “That’s always been a good client base, and that hasn’t changed,” he said.

The drop in U.S. charter activity also appears to be regional, according to the Air Charter Guide. Operators in financial hotspots, such as the New York Metro area, have been hit a lot harder than operators in other areas. Charter activity has actually increased in some areas, especially those where the airlines discontinued service, according to NBAA. “It really depends on the geographic market and whether there are other options available right now,” an NBAA spokesman said.

Ben Schusterman, vice president of operations for ElJet Aviation Services, said there has been a “significant increase in smaller, city-to-city charter trips” as airline capacity decreases. “The increase of new customers entering the charter scene has never been stronger,” he said.

In addition, some operators are hopeful that the economic downturn will bring other groups of private aviation users– such as business jet and fractional owners– into the industry. “The good news is that for every guy who moves from a midsize to a small aircraft, there’s another who goes from whole airplane ownership to charter,” said Marc Drobny, senior vice president of charter and vendor services for Executive Jet Management.

Because of this shift, EJM charter activity has remained steady, Drobny said. “We’re essentially at the same level we were at last year, both year-to-date and recent activity.” He noted that the company added 40 new aircraft to the fleet in the past 12 months, 30 since January.

XOJet chief marketing officer Adam Komack reported a similar trend. “People who would normally purchase a jet are now going into membership and fractional programs. And people who would typically buy memberships or fractionals are going to the charter market,” he said. “It’s about the level of commitment. People aren’t willing to make that higher level of commitment when in the past they might have been. That’s a trend across all luxury goods right now.” He added, “I don’t think people are dropping out of the category; I just think it’s changing the way people are buying into the category.”

The Perfect Storm
The economy is not the only factor driving the change in charter activity, however. High fuel costs also hit the industry during a particularly vulnerable time. In July, the price of oil rose to more than $147 per barrel, following reports of Iranian missile tests. The increase occurred during the summer season, when charter business normally drops off. “Our business is seasonal, and the summer months are generally slower,” Smith explained. “It’s almost like a perfect storm. You come into a slow time of year anyway, the cost of jet-A is at historic highs, our economy is rocked and we’re in a political year. It doesn’t get any worse than that.”

Gama Aviation’s vice president of charter sales, Eric Gray, confirmed the cyclical nature of the business. “Historical data shows that charter business increases in the last quarter of the year due to business travelers going back to work from the summer, universities are back in session, and there is just an overall increase in companies doing business,” he said. “Our expectations with regards to charter activity in the next 12 months are positive.”

Long Island-based ExcelAire executive vice president David Rimmer said high
fuel prices have also affected business, albeit not substantially. “The airplanes that are taking the biggest hit are the older aircraft with the highest fuel consumption,” he explained. “The GIII is showing some softness because pricing it correctly makes the fuel charges extremely high. That makes the rate on that airplane start to encroach on different categories of airplane. Given the choice between a low-priced GIV and a reality-based price on a GIII, customers go the GIV route.”

Like ExcelAire, most operators were forced to raise surcharges to cope with the high oil prices. Hourly rates, however, appear to have stayed about the same. “Our fuel surcharge has been a roller coaster,” FlightWorks’ Smith said. “We’ve tried to adjust to stay ahead. Retail rates have stayed constant.”

Every operator is implementing or raising surcharges, Salvo said. “When fuel is $6 or $7 a gallon, there is no more profit. So you have to charge a fuel surcharge,” he said. “But operators have been reluctant to increase their charter rates along with fuel prices. I don’t want to charge $5,000 for an aircraft if my neighbor is charging $4,500.”

The fuel surcharges appear to be dropping, however, as the price of oil retreats. EJM’s Drobny said his company “absolutely” increased fuel surcharges over the summer but reduced them over the past two months. “It ebbs and flows in both directions,” he said.

XOJet in early September announced a 9-percent reduction in fuel surcharges.  “We’re committed to making our fuel surcharge transparent,” Komack said. “It will go up when it needs to go up, and down when fuel prices go down.”

The company also reduced the fuel surcharge in response to changing attitudes among customers, Komack said. “Customers aren’t price conscious; they’re value conscious. In other words, they’ll pay $30,000 to take a domestic flight and that’s not a problem. But they don’t want to hear that catering is going to be extra or the flight will cost more on a certain day. They’re willing to pay to take that private flight. They just don’t want to be nickel and dimed.”

In addition to raising fuel surcharges, operators also found creative ways to save money. “We created a full-time ‘fuel buyer’ position whose only responsibility is identifying the best fuel price at a specific airfield based on our negotiated pricing programs,” said Bob Seidel, senior vice president and general manager of Jet Aviation. Otherwise, he said, “there is not much we can do to reduce fuel costs in general.”

Crystal Air’s Salvo said his company avoided FBOs where fuel costs were too high. “There are monopolies out there at certain FBOs where you’ll find your fuel prices to be as much as $2 higher just because there aren’t competitive players,” he said. “One of the things we have to do as an industry is boycott buying fuel at those places. Some companies have actually realized this and now they’re being proactive to bring fuel prices down.”

Gama Aviation participated in select volume discount fuel programs and negotiated fuel prices on a leg-by-leg basis. “We find that negotiating on one upload at a time is more cost-effective than annual fuel programs,” Gray said.

ExcelAire often suggests alternative airports to its customers. “We will try to discuss with customers a shift in where they’re going if it will mean a significant saving in the fuel surcharge,” Rimmer said.

Most, however, were simply prepared to be better shoppers. “One way we are lowering costs is by doing a better job of buying fuel on the road,” Elliott Aviation’s Batchelder said. “In many cases, the cost per gallon can vary by $1 between airports that are literally 15 minutes apart.” The most expensive FBOs and fuel stops, he added, are typically in well populated metro areas.

Regulations and Oversight
Although the economy and fuel prices top the list of operator concerns, other issues are affecting the industry as well. According to Mike Nichols, vice president of NBAA operations, education and economics, the issues surrounding A008 are “alive and well,” despite receiving less coverage in the past year. “The reality is that the FAA still has a clear focus on enforcement of operational control,” he said. “We get word of some potential enforcement actions from within the industry. It’s not an area that operators can just put behind them and be unconcerned about.”

At least one operator admits to some concern regarding the issue. “The FAA is supposed to be our watchdog for the safety of the public, but in the case of TAG, I don’t feel there were any real safety issues,” he said. “I’m having a hard time wrapping my head around the actions the agency took, and I don’t think the fines were justified. Now Sentient is the limping gazelle, and the lion of the FAA is ready to pounce.”

The FAA last year issued an emergency revocation order against TAG USA and its certificate holder, AMI. In early September, AIN learned that the agency is now searching for connections between TAG and Sentient Jet Holdings, the company that purchased TAG Aviation USA’s assets.

Other operators, however, expressed support for the FAA’s intensified scrutiny and dismissed the increased oversight as having little or no effect on day-to-day operations. “I hope those efforts by the government will eliminate the low end of this business,” Rimmer said. “This business seems to attract a lot of colorful characters, not all of whom play by the rules. So I hope A008 and other efforts by
the DOT and FAA make the industry less colorful and more ethical.”

Another topic of concern is the environment, especially in light of a European push for aviation to be included in its emissions trading scheme. “My hope is that we won’t see in the U.S. what has happened in Europe, with extra taxes to create a fund for carbon offsets and the global warming issue,” Coyne said. “After experiencing a big increase in fuel prices, the last thing we need are more taxes.”

In addition to increased taxes and regulatory issues, the issue also has the potential to affect infrastructure constraints, another concern for most operators. Restrictions such as limited operating hours   will be a “substantial” issue, according to Gama Aviation’s Gray. “Airport and airspace access [due to environmental restrictions] is something that the industry will have to get used to fighting everyday as a normal course of business,” he said.

Larry Hecht, FlightWorks’ director of operations, added that ATC modernization is another factor. “The slow pace that the FAA has taken in modernizing the ATC system, especially on the ground, is going to affect our business,” he said.

One of the biggest questions in the industry at the moment is whether future TSA regulations will hamper the charter industry. The TSA has submitted the Large Aircraft Security Program (LASP) regulation to the Federal Register as a Notice of Proposed Rulemaking. “It’s possible that this rule could address modifications to
the Twelve-Five program as part of the overall effort of the TSA,” said Doug Carr, NBAA vice president of safety and regulations. “How it could relate to other security programs is unclear. We’ll just have to wait and see.”

According to a spokesman for the TSA, the agency is “proposing that all aircraft operations, including corporate and private charter operations, with aircraft with an mtow above 12,500 pounds be required to adopt a large aircraft security program. The TSA also proposes requiring that certain airports that serve large aircraft adopt security programs.” The TSA submitted the proposed regulation on October 9.

The charter industry has always had a good relationship with the TSA, Coyne said, and he hopes it continues. “Overall, the security regime for charter has proved it works,” he said. “But there are some issues, such as access into TFRs. Our hope is that the new rules will help us get access into TFRs so we can fly into the same airports that the airlines fly into. It seems that if it’s safe enough for Southwest to fly into these areas with 100 passengers they don’t know anything about, it’s safe enough for us to fly into with the CEO of a Fortune 500 company.”

Pilot Shortages
Another concern among operators is the persistent issue of future pilot and A&P mechanic shortages. “The entire industry is concerned with the low number of new pilot starts and training completion rates,” Nichols said. “Looking down the pipeline, that could be a concern.” He noted that industry is especially concerned about the future of A&P mechanics and skilled technicians.

Coyne agreed that a maintenance shortage is “more of a problem.” He added, however, that pilot shortages might not be as bad as some fear. “The airlines have been laying off a lot of pilots,” he said.

Nichols explained that when the airlines lay off pilots, many look to business aviation for job opportunities. As of mid-September, 2,279 airline pilots were on furlough from the major airlines and 543 were on furlough from the regionals. An additional 964 airline pilots had been laid off, according to aviation staffing firm Air, Inc.

“A lot of operators are looking [at the airlines] as a good source of pilots who are well trained and familiar with safety management systems,” Nichols said. “It’s going to be cyclical, but the bottom line is that money typically talks. When there’s an attractive salary and an attractive package and a good work environment, folks can be enticed. That’s just a reality. And it’s something for employers to consider.”

XOJet, in particular, has benefited from the airlines’ misfortune. “Our team has created a great organization, and today we have 4,000 applications for 100 new positions,” Komack said. “It’s definitely not affecting us. We actually had [former] airline pilots get recalled and decide to stay with us.”

Rimmer also expressed optimism. “When the airlines are hurting, it creates more opportunity for us,” he said. “We’ll go through a cycle as we did a couple of years ago when it was difficult to hire people, but we’ve always had high-quality pilots. A lot of pilots are beginning to recognize that there’s more stability in this sector of aviation now than there is at the airlines. We see some great resumes from highly qualified people.”

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