NetJets Maintains Flight Path in the Face of Fractional Turbulence

 - February 4, 2014, 3:50 AM

A busy year for upheaval in the fractional ownership and closed-fleet private aviation sectors reached a crescendo in December when Flight Options parent company Directional Aviation Capital completed its $185 million acquisition of Bombardier’s Flexjet program. Last year also saw the collapse of Avantair, the return of Marquis Jet card founder Kenny Dichter with his new Wheels Up membership program and a move by VistaJet to enter the U.S. market.

None of these events, or yet another year of fluctuating market conditions, appears to have ruffled the feathers of fractional ownership pioneer NetJets. In an interview with AIN, NetJets chairman and CEO Jordan Hansell characterized the changes as a cleansing wave of consolidation that ultimately validates his company’s business model and its plans for a $17.6 billion fleet renewal program over the next 10 years.

“Generally speaking, NetJets thinks that the moves in the market are good,” Hansell commented. “We have had several players in the market who were interested in participating but did not have both feet in it. I think this is diminishing a bit now.”

He contrasted the approach of relative newcomers with NetJets’s longevity in the sector. This year marks the 50th anniversary of the founding of Executive Jet Aviation, which, following its 1984 acquisition by Richard Santulli, was to become the foundation for NetJets in 1986. But for Hansell, the key date underpinning NetJets’s ability to play the long-game was 1998, when Warren Buffett’s Berkshire Hathaway private equity group acquired the company.

“That gives us a great deal of stability from a financial perspective and from an operating perspective,” he said. “A benefit of being part of Berkshire Hathaway is the availability of capital and the relatively low cost of that capital. We can make decisions at NetJets that no one else can make. We can take a much longer-term view. We can weather the natural fluctuation and simplicity of the private aviation market in a way that no one else can.”

Hansell estimates that just over 20 challengers to NetJets have come and gone from the market over the last decade or so. But the company hasn’t always been a detached observer of change, as evidenced by its move to buy the Marquis Jet card program in late 2010. “They were having a little trouble at that point so we brought them into our operations and I think that has been a great move for us,” he said, adding that he keeps an open mind about the wisdom of making further acquisitions in the sector while stressing that he has yet to encounter any other opportunities “that make sense.”

Custom Experience

This year will see a stepping up in the pace of deliveries of NetJets’s new Signature Series aircraft, with the arrival of the first of up to 200 Bombardier Challenger 350s. The program, which was launched in 2010 when the market was still depressed in the wake of the financial crisis, will see NetJets refresh and expand its fleet with up to 670 new aircraft from Bombardier (also including Globals), as well as Cessna Citation Latitudes and Embraer Phenoms.

NetJets has been closely involved in specifying the design of the cabin interiors for these new aircraft. Hansell said the company’s commitment to offering a highly customized product that sets its examples of these jets apart from others available in the charter and fractional sectors is the “third stool” of NetJets’s differentiation strategy. The other two stools are what the company says is a higher level of commitment to safety and a smooth, easy-to-access travel solution.

NetJets’s use of the safety card in marketing has been contentious in the past because of the implicit suggestion that other private aviation providers are not as safe, even if they comply with all legal requirements. But Hansell insisted that the company’s policy of not allowing its pilots to fly more than one aircraft type and its annual expenditure of $100 million on training do set it apart.

Also different, claimed Hansell, is NetJets’s policy of setting its own strict operating restrictions for specific flight profiles. The example that most readily came to his mind is when operating conditions in the winter sports resort of Aspen, Colo., breach NetJets’s own limits on one-engine-out operations.

Hansell has personally fielded irate calls from owners indignant that “everyone else is taking off today,” and vehemently defends what remains an article of faith for the company’s safety policy. “I tell them, ‘If we can’t get you out of there on one engine then we’re not going,’” he said. “Do we anticipate that we are going to lose an engine? Of course not, but if we do there is nowhere to turn around.” Hansell went so far as to fly a disgruntled owner to NetJets headquarters in Columbus, Ohio, to let him take a simulator ride to witness a flight ending in a collision with the Rocky Mountains in the event of an imaginary engine failure.

Competitors have claimed that NetJets’s terms and conditions are too complex and restrictive, and that sustained softening of pre-owned aircraft prices since 2008 has undermined the economic case for owning part of a jet. Hansell countered that NetJets’s contracts are now just two pages long and can be signed on an iPad. He added that one factor in the high level of specification for the Signature Series aircraft is that the company expects them to hold their value better than other examples of the same jets. On the question of service flexibility, he pointed out that over the past four years NetJets has introduced 41 different packages, covering an array of jet cards, and options for fractional share or lease terms.

AIN pressed Hansell as to whether the controversial collapse of Avantair, which raised important questions about the security of aircraft share assets, will put people off fractional ownership as a whole. “Not from our perspective,” he insisted. “In its way this is where we can say we are different. We have had people come to us from carriers that have had problems like those at Avantair or who were worried that they could have such problems. We tend to think of fractional ownership as a constant, but you do have to think wisely about these choices.” In his view, fractional share buyers need to do at least as much due diligence as they would for a real estate transaction, and insist on full disclosure about the financial background to the party with whom they are proposing to do business and the terms and conditions under which the acquisition will be structured.

This year should also see NetJets starting to fulfill its ambitions to directly expand into the Chinese market. This month it expects to import its first two aircraft there, a pair of Hawker 800s, and it hopes that its Zhuhai-based company, NetJets China Business Aviation, will have its Chinese air operator certificate by the end of next month. Initially, the service will focus on providing aircraft management services.

As for other emerging private aviation markets, Hansell said that NetJets continues to monitor prospects for getting more permanently established in regions such as Latin America, Africa, the Middle East and Russia. One constraining factor for international expansion has been its conservative approach to finding the suitable local partners who would be needed to comply with cabotage restrictions on flying within these new markets. “But we did fly in and out of 170 different countries last year so in a sense we are there all the time,” he concluded.

Meanwhile, NetJets has seen demand strengthen somewhat in both North America and Europe over the past 12 months. But he acknowledged that economic uncertainty continues to cloud these core markets, making it hard to achieve sustained, robust growth.