VLJ evolution takes first steps in Europe

 - October 27, 2010, 9:26 AM

Whether it’s entirely the fault of the economic crisis we may never know, but we can be sure the anticipated very-light-jet (VLJ) revolution never happened and there is little sign it will happen any time soon. All the evidence from the fourth annual Light Jets Europe conference, held at the UK’s Oxford Airport in late September, is that insofar as the so-called game-changers are a phenomenon at all, they have blended politely into the aircraft mix while they wait for improved market conditions that might see them fulfill some of their potential to draw new customers into business aviation.

As recently as May 2008, Eurocontrol was predicting that by 2010 some European operators would have orders for some 500 VLJs and no fewer than 300 would be in service–the implication being that the air traffic management infrastructure might not be able to cope with the swarms. Now the air traffic management agency is indicating that the airways will be able to cope just fine with the far fewer numbers of VLJs that are actually arriving in Europe. Speaking at the conference, which was attended by just over 100 people, Alex Hendriks, principal advisor to ­Eurocontrol’s air traffic management ­director, did predict that VLJs could yet deliver a way for operators to circumvent anticipated capacity shortfall because they can access underused smaller airports.

Aoife O’Sullivan, an attorney with specialist London-based aviation law firm Gates & Partners, said a continuing reluctance of banks to lend money for VLJ purchases put significant obstacles in their paths. “Finance companies are back in the [business aviation] market but they don’t want to be bothered with VLJs,” she said. “Their attitude is that if you can’t afford to buy a Phenom 100 with cash then you shouldn’t be buying it. I’ve told them this is utter rubbish.”

In O’Sullivan’s experience, light jet operators with good business plans are failing for the want of adequate funding. But she also criticized the business aviation executives for failing to get the financial community to understand what they are all about. “If the hedge funds in London don’t know what a VLJ is [as she contended they do not] then someone is failing,” she contended.

Successful Business Models

Nonetheless, some commercial operators in Europe are making a go of VLJs. Oxford-based FlairJet is one, and its CEO/training captain David Fletcher told the conference that the company has been profitable month-on-month since May. This was after it took just five months to secure its air operator’s certificate (AOC) to begin operations in January.

FlairJet, which is owned by a group of criminal defense attorneys, has three Embraer Phenom 100s in its fleet and, as of press time, was set to take delivery of a larger Phenom 300. It has 15 employees, of which no fewer than 11 are pilots–albeit pilots who have become adept at multi-tasking during the firm’s critical start-up phase.

“To succeed [as a VLJ start-up] you need robust, tried and tested procedures, from day one” Fletcher told the conference. “We’ve created a platform from which we can expand. Cost control is vital and has been an advantage of setting up in a recession [because goods and services cost less].”

As many as 90 percent of bookings for the FlairJet Phenom 100s come through charter brokers–confounding earlier predictions that brokers would not be interested in VLJs. “We have learned not to fly them at any price and to stand by the aircraft’s worth,” said Fletcher, referring to cut-throat competition during the downturn that has seen some operators accepting charters at revenue that barely covers cost.

Since it received the Phenoms in early January, the aircraft have been unavailable to fly about 9 percent of the time due to a mix of scheduled maintenance and five AOG mechanicals. The fact that 20 service bulletins have already been issued for the type has resulted in “a lot of down time,” said Fletcher.

FlairJet is now tapping its in-house legal expertise to challenge the decision of the European Aviation Safety Agency to insist on a separate type rating for the Phenom 300. “We could have 30 percent fewer pilots if there was a common type rating covering the [Phenom] 100, 300, 400 and 500,” said Fletcher.

London Executive Aviation was a pioneer when it introduced its first Cessna Citation Mustang in January 2008. But ­then came the recession, and today chief executive Patrick Margetson-Rushmore concludes that over the past two years his company has lost money on VLJ operations, despite claiming to be Europe’s largest operator of the type. The main obstacles to making VLJs pay, he told the Light Jets Europe conference, is controlling unexpectedly high variable costs and making empty legs more profitable.

In LEA’s experience, passenger acceptance of VLJs has been good, despite some complaints about turbulence, as well as range and baggage limits. The real issue has been that the lower purchase price of VLJs hasn’t translated into improved margins, especially due to variable cost volatility, and on balance the company’s larger aircraft are still giving a better return.

Based on loans covering 90 percent of the new aircraft value, LEA’s finance costs on the Mustangs have amounted to about £316 ($502) per flight hour based on 500 hours flown annually, falling to £158 ($251) if the aircraft flies 1,000 hours. Direct operating costs have amounted to £870 ($1,383), including crew costs. Margetson-Rushmore said some operators had felt able to charter their Mustangs at rates of £1,100 ($1,749) per hour, which he said meant extremely thin margins that would likely work only in the context of an aircraft management contract rather than pure charter.

In LEA’s experience, manpower costs have proved to be “essentially the same” for its VLJs as for its larger aircraft. It estimates the annual cost of a Mustang crew (two pilots) as £120,000 ($191,000), including training. With the need for two crews per aircraft, and each crew flying about 160 days per year at a daily flying cost of £750 ($1,192), this means that for a two-hour trip the manpower cost is about 31 percent of the selling price. The operator also has seen maintenance costs rising from around £76 ($121) per hour to £132 ($210).

Interest from Airlines

Edwin Brenninkmeyer, an investor in UK-based consultant Oriens Advisors, said that the main reason air taxi start-ups fail is a poor commercial strategy, incorrect scaling of the operation and a failure to attract customers.

“But airlines are indicating that business class in Europe will go because the margins are squeezed and what will emerge is a significant shift up in value,” he stated. “Only private aviation can deliver this and the airlines are looking at this, too.”

In response, O’Sullivan confirmed that her law firm has been approached by two scheduled carriers looking for advice about how to tap the light jet charter sector. Brenninkmeyer urged operators to start opening access to their services by tapping portals such as Expedia and Orbitz.

Another consultant, Jonathan Sumner, managing director of Aerospace Resources, said there is no mileage to be had from using VLJs in the orthodox air-taxi model. He said the ideal VLJ would be smaller than existing types, and he advocated limiting choice to make pricing more attractive and aggregating demand through tie-ups with airlines and hybrid business models, such as fractionals.