NetJets Europe predicts profit this year

 - September 28, 2010, 11:13 AM

As a result of aggressive cost-cutting measures, NetJets Europe expects to achieve modest operating profits this year. But the recovery in demand for its business aircraft fractional ownership, block charter and lease offerings is proving slower than anticipated, to the extent that the company now doubts whether even a return to modest market growth will be achieved next year, according to chairman and CEO Eric Connor.

“We thought that 2010 would be a year for stabilizing, followed by modest growth in 2011 and then that there might be an uplift in 2012, 2013 and 2014,” Connor told a September 9 press briefing in London. “But now we will have to see whether there will be any growth in 2011 or 2012–there probably will be some in Western Europe.”

10-year Plan

The NetJets Europe manage­ment team is putting the finishing touches on a new 10-year plan for the business and this is due to be implemented beginning January 1. The company expects to take delivery of at most one or two new aircraft next year, having deferred delivery positions for many of the jets it ordered during the boom years of 2005 to 2007. As things stand, new aircraft will be added to the fleet purely to replace aging aircraft rather than to expand operational capacity. The fleet currently consists of some 150 jets and no new aircraft will have been added during the course of this year.

During this year’s first quarter, flight hour volumes were 12 percent up on the same period last year, when the impact of the global financial crisis on business aviation was at its strongest. This recovery was dented by operational disruption caused by the spread of volcanic ash across Europe from Iceland to the extent that overall growth for this year’s first half was around 5 percent compared with the same period last year.

During the first six months of this year the company logged about 25,000 revenue flight hours. “The most telling quarter will be the fourth quarter [beginning October 1],” said Connor, reflecting on the uncertain prospects for market recovery.
Anticipated flight-hour volumes for this year are about 10 to 15 percent down on what NetJets Europe achieved in 2007, when the company added 20 aircraft to its fleet.

The company suffered its steepest decline in the first quarter last year, when flight-hour volumes fell by 20 percent. According to NetJets, this compared with a 30-percent dip in sales among other business aircraft operators.

The sudden downturn prompt­ed NetJets Europe to agree to new terms and conditions with its flight crew, including arrangements for some staff to alternate between working for a year and then taking the next year off and others to take an extended leave of absence. This agreement is due to expire in July 2012, and Connor indicated that the company had not yet restarted consultation with staff and would review the situation closer to this date.

About 350 pilots are participating in the year-on/year-off job share program, for which they are paid 60 percent of their salary. Some 78 pilots are on the three-year leave of absence option and both measures have effectively reduced the pilot payroll by about 253 positions.

Between its office in London and operational headquarters in Portugal’s capital, Lisbon, NetJets Europe now employs about 700 people, not including approximately 900 flight crew who make up the overall workforce of some 1,600. Overall the workforce has been trimmed by about 5 percent, with some 120 jobs being cut.

Aircraft Buybacks

In the wake of the financial crisis NetJets, Inc. had to take back around 50 aircraft from owners wanting to sell back their shares under the terms of their fractional ownership agreements. This amounted to some 400 aircraft shares, and Connor estimated that NetJets Europe probably accounted for about a quarter of these. NetJets, Inc. is the minority shareholder in NetJets Europe, with its majority owner being an undisclosed European Union citizen to comply with legal requirements for holding an air operator’s certificate.

Connor told reporters that while NetJets Europe has lost some customers who found it easier to liquidate aircraft shares than other assets such as real estate, some clients have since returned to the service. He maintained that the company has been able to renew many aircraft share contracts when they come to the end of their five-year terms–contradicting claims by charter rivals who assert that concerns about falling aircraft values have driven people away from fractional ownership.

NetJets contracts include a guarantee to buy back aircraft shares at “fair market value.” The past couple of years have seen attempts to create a secondary market for reselling NetJets shares, but the company has not welcomed these initiatives. “We prefer to handle [aircraft share] transactions for service reasons,” said Connor.
“We want to know who is going to be flying in the aircraft and we also want to know that they can meet their commitments.”

Today, the company has approximately 1,600 customers, of which some 800 own aircraft shares and the rest fly through a mix of jet card charter hours or under leases. Connor said that there has been increasing interest in the one-thirty-second share offering; this smallest of fractional shares provides 25 flight hours per year, and some clients prefer it over charter cards. He indicated that some European markets such as France show a clear preference for charter cards, while others–such as Russia–favor fractional shares and leases.

In any case, NetJets Europe is set to achieve, and probably surpass, its goal of cutting expenditure by at least €80 million ($102 million), and the total saving may be as much as €85 million. In addition to reduced workforce costs, the reduced outgoings have been achieved mainly by reining in spending on items such as fuel, FBO handling charges, and staff hotel and travel expenses. “This has made the difference between a profit and a loss this year and it’s been quite an achievement in the [market] upheaval,” said Connor.

NetJets Europe is now working on plans to establish services in new markets such as India, China, North Africa and Russia. “We might offer a slightly different product in these areas,” said Connor, acknowledging that in Russia at least any enterprise would be through a joint venture with a local operator to comply with local legal requirements.

Brought in To Steady the NetJets Europe Ship
Eric Connor, who has been with NetJets owner Berkshire Hathaway since 1992, was on a business trip in Australia when he got an unexpected call from head office asking him to get to London quickly to take over as chairman and CEO of NetJets Europe following the departures of Mark Booth and William Kelly, who had respectively held these positions.

Since May 2003, Connor, who is an electrical engineer by background, was senior vice president and chief procurement officer with Berkshire Hathaway utility company MidAmerican Energy Holdings Company, having previously been president and COO of the UK-based Northern Electric. He has retained positions as director of Casecnan Water and Energy Company, CalEnergy Resources, CalEnergy Gas (Holdings) and CE UK Gas Holdings. NetJets, Inc.’s fresh leadership also came from MidAmerican Energy Holdings in the form of David Sokol, who replaced NetJets founder Richard Santulli last year.

Connor appears to have brought a more robust approach to planning and management accountability to NetJets Europe. Soon after taking office in the fall of 2009 he set 32 separate goals for the company in 2010 covering areas such as safety, customer service and maintenance. The teams responsible for these areas have specific goals and have to provide reports on these on the third day of each month.

180-minute Erops Gives G550s More Direct Routes
NetJets Europe’s Gulfstream G550s are now saving significant flight time and fuel, having received clearance to operate up to 180 minutes flight time from a usable airport, compared with the previous limit of 120 minutes. Portugal’s INAC civil aviation agency granted the extended-range operations (Erops) approval because the fractional ownership group’s operating arm, NetJets Transportes Aéreos, is based in the country and holds its European Union commercial air operators certificate there.

According to NetJets, the 180-minute Erops approval will reduce the duration of some flights by more than an hour and also reduce fuel bills considerably. For example, on a transatlantic flight from London to Barbados, the flight time would be about 60 minutes less and fuel burn would be reduced by about 2,136 pounds.

To achieve the Erops approval, the NetJets operations team had to complete a comprehensive application process, providing five years of data covering aircraft and engine records, company safety information and other operational data to establish its safety record for long-haul flights. The company, which claims to be the only business jet operator to hold IATA’s operational safety audit certificate, recently announced plans to invest more than $950 million in safety measures, such as staff training and aircraft and maintenance facilities.

NetJets Europe currently operates nine G550s. Its 157-strong fleet also includes 18 Dassault Falcon 2000s and a pair of Falcon 7Xs in the large-cabin sector, as well as 83 midsize jets (40 Cessna Citation Excels, 35 Hawker 800XPs and eight Hawker 750s) and 45 light jets (27 Hawker 400XPs and 18 Citation Bravos).

With current levels of demand the NetJets Europe operation does not require anything like the amount of subcontracted charter capacity that it employed in the boom years. It does still make some use of other charter operators, especially for flights out of Switzerland, where there are cabotage issues.