At face value, the marked decline in leading western European economies would seem to mean an inevitable dip in the fortunes of executive charter operators on that side of the Atlantic. But the actual experience of operators in Europe has been more complex and less predictable–with signs of market fragmentation and, at the same time, massive opportunities in the emerging regions of the Middle East and Asia.
AIN surveyed a selection of leading international charter operators and found few who would admit to seeing a significant downturn in business. But many acknowledged that market conditions are shifting and that only those who can adapt to the new market realities of changing customer preferences and increased competition will survive.
Research for this report also revealed that more intense competition for business has prompted some operators to absorb rising fuel costs rather than pass them on to their customers. Also, operators in Europe indicated that they are increasingly pricing flights in euros, rather than U.S. dollars, traditionally the main currency for the business.
Another factor that ties the fortunes of some parts of the charter industry directly to the ongoing credit crunch is the potential for aircraft values to start falling. This could leave some owners exposed in terms of the equity they hold in the equipment at a time when their ability to recoup costs from managed charter operations could also take a knock. Here there is the possibility for a direct parallel with the buy-to-rent real-estate sector, where in recent years investors have bought homes in the belief that their values would continue to soar while mortgages were paid by renters, only to find the bottom falling out of the market.
Despite the fact that the Cessna Citation contingent of its fleet has been undergoing extensive maintenance and refurbishment this year, overall activity for Jet Aviation has kept pace with the same period in 2007. “In the larger [aircraft] segments there has been some decrease [in bookings], but this has picked up again in recent weeks,” said Martin Bernegger, the company’s general manager for charter in Europe, the Middle East and Africa.
Clients’ Needs Change
According to London Executive Aviation managing director George Galanopoulos, charter flying has been down about 10 percent so far this year as a direct consequence of the economic downturn in the UK and other European markets that
the operator serves. However, the dip in demand does not go right across the board in terms of aircraft size. “At the smaller end we have picked up more work because people are more careful about how they spend their money,” he said.
LEA ordered 10 Cessna Citation Mustangs in 2003 with the intention of being a very light jet pioneer in the European charter market. By year-end it will be operating seven of the new four-passenger aircraft and will have all 10 by the end of next year. Chief executive Patrick Margetson-Rushmore said that the airplane is proving to be exactly the right equipment in a softening market because it is 30 to 40 percent less costly to operate than the midsize jets many clients would have previously chartered.
That said, Galanopoulos indicated that the current economic climate might make it somewhat more difficult to attract the numbers of new customers into private charter with the Mustang as quickly as the company had anticipated. But this is compensated for by the fact that existing clients–especially companies that have to cut corporate travel budgets–are effectively downgrading from larger aircraft to avoid having to go back to the airlines.
At the upper end of the market, LEA indicated that the specter of recession is not diminishing the appetite of very wealthy individuals for large aircraft. The LEA fleet also includes four Legacys, two Challenger 300s and a mix of Citation IIs, Bravos and Excels, as well as a King Air 200 and a Navajo.
Marcel Wepfer, ExecuJet Aviation’s director of aircraft management, said that his company received more charter inquiries during the first eight months of this year than in the same period last year. However, he added that this hasn’t necessarily translated into more revenue hours flown because of fluctuations in the amount of time aircraft owners are willing to make their equipment available to third-party customers.
Kurosh Tehranchian, CEO of UK-based operator Ocean Sky, also reported mixed fortunes in the charter sector. He observed that demand for light jets has been down about 5 percent this year–especially over the usually busy summer months. At the same time, bookings for the company’s larger jets have increased by about 22 percent.
Similarly, the impact of the credit crunch and its associated fallout in financial markets is by no means uniform in Tehranchian’s view. He identified two core groups of charter client, those for whom the amount of flying they do is directly related to the prevailing profit-and-loss (PNL) status of their profession or business, and those for whom it is essentially an off-balance-sheet item.
“The PNL client is an aspirer [in terms of his appetite for charter flying] but as soon as an ill wind blows he is the first to return to the way he used to fly [the airlines] because his certainty about income goes,” Tehranchian told AIN. “The off-balance-sheet people have made a lifestyle decision to use private jets, and they stick with this without first looking at what their net worth is on any particular day.”
But the Ocean Sky CEO was by no means complacent about possible future ramifications of a prolonged economic downturn for the charter sector. “There is concern about how long this will last,” he told AIN. “If it goes on for a long time or gets worse–perhaps for more than a year–then we could see damage to the top end of the market.”
Another concern for Tehranchian is the wave of speculative aircraft purchases, which account for a significant portion of business aviation manufacturers’ impressive order backlogs. In his view, the inflated price of aircraft could well fall, dragging charter rates down as owners seek to cover their exposure to finance costs.
That said, so far this year Ocean Sky has achieved a 15- to 20-percent increase in flying activity, with particularly good utilization of its midsize jets. Evidently the owners of aircraft the company manages want them to be flown for hire as much as possible.
Ocean Sky has increased its revenues by around 22 percent over the past year. Over this time, charter rates for its light jets have been static while those for its larger aircraft have increased by around 10 percent, with much of this driven by inflated fuel costs.
According to ExecuJet’s Wepfer, operators have generally struggled not to pass on rising fuel costs to customers due to more intensive competition for bookings. In this context, he maintained that larger operators like his company have an advantage in their stronger buying power for fuel, as well as for other outgoings such as insurance.
Jet Aviation has not encountered customer resistance to fuel surcharges, although it has imposed them judiciously as it waits to see whether oil prices will continue to rise. It has also been negotiating with its suppliers for more competitive jet-A prices.
In Europe, one factor that has pushed charter rates upward is the shift from quoting charter prices in U.S. dollars to euros as aircraft owners no longer felt able to accept income in a weak currency.
LEA is based outside the euro zone and from its perspective charter rates have been unchanged this year. “In a downturn, people drop rates to get work to cover rising overheads such as pilot salaries, which went up during 2007, and high fuel costs,” said Galanopoulos.
But not everyone sees the high cost of jet-A as a threat. “We are the only part of aviation that is glad about oil prices,” argued Tehranchian. He maintained that fuel accounts for about 20 percent of Ocean Sky’s operating costs, and that in relative terms fuel cost has a much more severe impact on airlines than on executive charter operators. “Even if the price doubles again it will still mean only a 20-percent increase in our costs, and the upside is that many of our new clients are coming from energy-based economies such as the Middle East and Russia,” he stated.
Crystal Ball Remains Hazy
AIN found little consensus among operators as to what to expect from the market over the next 12 months.
ExecuJet’s Europe division sees more growth on its radar, but this will be due mainly to additions to the continent’s charter fleet, which could weaken operators’ bottom lines. “In general the [weakening] financial market and increased aircraft deliveries will result in tougher competition,” said Wepfer. “There will be more aircraft owners but fewer charter customers.” He predicts that could continue for two or three years.
Jet Aviation’s Bernegger has found himself pleasantly surprised at how the market appears to have held up in worrying economic times. “Before the summer I really wondered where the market would go, but we are still flying the same clients and still doing well with weekend [leisure] trips to places like Sardinia and the south of France,” he said. “I don’t expect to see any further negative trend; after all, only one part of our market comes from investment bankers.”
But LEA’s Galanopoulos was less sanguine. “We are looking at a period of stagnation,” he concluded. “People have committed themselves to aircraft deliveries, and we could see a lot of these orders being sold on. We won’t see any real growth; there will probably be a small decrease [in flying activity] and some smaller operators will go bust.”
“No one can really predict what will happen, but we are prepared for more of the same–a continued credit crunch and further rises in fuel prices,” said Ocean Sky’s Tehranchian.
Everyone agreed that despite the gloomy prognosis for European economies, there remains great potential for further growth in charter demand in the emerging markets of the Middle East (see box on page 30), Russia and Asia. Tehranchian also predicted that the market in Latin America is about to come alive, with much of this driven by massive new oil and gas fields set to be exploited in Brazil.
So apart from the uncertain economic times, what else is keeping the management of leading international charter operators awake at night?
For the European operators, new flight duty and rest time limits for aircrew are complicating rostering and adding to cost. The core problem is that the new limits, which took effect in July, were developed with scheduled airlines in mind and do not take into account the different operational circumstances of the ad hoc charter market. Making matters worse, according to operators, is the fact that although the new limits are supposed to form part of the new EU-OPS operating rules for all European countries, in practice different states are enforcing the rules in different ways.
For example, ExecuJet has found that in Denmark (where it has one of its AOCs) the authorities count all non-flying time as half for the purposes of calculating flight time limits so the clock is ticking from the minute the pilot steps out of his home to go to the airport or when he is on standby. As a result, the company has had to employ more pilots to be sure of having capacity when needed.
Similarly, European operators are finding that new requirements to conduct full security screening for commercial flights by aircraft weighing more than 10 metric tons (22,046 pounds) can be quite onerous depending on the sophistication of the infrastructure at the FBOs and airports used. And, again, there are reports of
wide variations in the degree to which these requirements are being implemented, with countries such as the UK and Switzerland evidently enforcing them to the letter while other countries appear unaware of them.
Despite almost six years of lobbying on both sides of the Atlantic, bitterly resented U.S. restrictions on foreign charter operators remain in place even though no such restrictions apply to U.S. operators coming to Europe. Foreign operators are limited to 12 flights per year (originally the limit was six) before they have to go through the onerous process of applying for a Part 129 air operator’s certificate. And even getting approval for this limited number of flights can prove so time-consuming as to make the operations unviable.
ExecuJet Switzerland went to the trouble and expense of getting Part 129 approval, only to find that it still has to get individual trips approved by the Department of Transportation. This process can take two or three days, compared with the 10 to 15 days required without the Part 129 certificate. The operator has to keep an American attorney on a retainer just to deal with the associated red tape.
Jet Aviation also bit the bullet to get Part 129 approval for its European operation. But the company is still reporting variations in the way access rules are enforced depending, seemingly, on which particular DOT official happens to be dealing with an application on any given day.
Speaking to AIN on a not-for-attribution basis, several operators said that the time for kid-glove diplomacy on this issue is over, commenting that European authorities ought to impose reciprocal restrictions on U.S. operators to level the competitive playing field, but there is little sign of this happening.
Until fairly recently, pilot recruitment has been difficult for many charter operators but this issue looks set to wane as airlines start trimming their payrolls. At the same time, other operators said that they are still struggling to get the slots and ramp parking they need at some of Europe’s busier airports. But if the continuing economic storm washes away some of their customer base, this is an issue that these operators might look back on as a nice problem to have had.