Recession boosts share sales claims start-up Jet Republic
New European fractional ownership provider Jet Republic says it is capitalizing on the downturn in both air transport and business aviation. The company, which in September is due to take delivery of the first of up to 110 Bombardier Learjet 60XRs for which it has orders and options, said it is receiving more inquiries than it had anticipated from people who previously owned their own aircraft. At the same time, it is logging prospective sales from individuals and companies that are growing increasingly frustrated at the significant reductions in airline service across Europe.
According to new data from Jet Republic (Booth No. 150), over the past year 15 of Europe’s main carriers have canceled more than 130 scheduled airline routes. Flights in and out of cities such as London, Berlin and Barcelona have been especially badly hit, with just over 100,000 fewer seats generally available on routes to major European cities. The other cities that have seen significant reduction in airline service are Dublin, Paris, Rome, Amsterdam, Geneva, Prague and Vienna.
Jet Republic holds firm orders for 25 Bombardier Learjet 60XRs, the first of which is due to enter service in October, with deliveries to be completed by August 2011. The company’s June 2008 contract with Bombardier is valued at up to $1.5 billion and includes options for a further 85 jets which, if exercised, would be delivered at a rate of one every three weeks.
Alternative to Whole Ownership
The company reported it is receiving about five times as many inquiries as it had anticipated from prospective clients who formerly owned aircraft (10 percent versus just 2 percent of expected new leads) and about three times as many inquiries from large corporations and governments (30 percent versus 10 percent). In January, Jet Republic released new research from data group JetNet which revealed that the UK has the largest proportion of business jets on the preowned market–49 aircraft, representing almost 16 percent of the 310-aircraft total. Ten percent or more of the business jet fleets in Germany, Spain and Austria also are currently being offered for sale. According to the research, the average proportion of Europe’s active business jet fleet for sale has doubled over the past 12 months from around 6 to 12.7 percent.
Depressed market conditions are also playing into Jet Republic’s hands as it seeks to recruit pilots for its new service. It claims to have received 50 to 100 applications each week as it recruits training captains and line pilots.
The company recently introduced a lease option as an alternative to fractional ownership. “The plus side of the lease is that you don’t have the cash exposure up front but, equally, you don’t have title and so don’t have the cash depreciation for tax purposes,” explained Jet Republic CEO Jonathan Breeze. “For cash-rich businesses and individuals, buying the share usually makes better sense but it depends on individual capital depreciation rules.”
Jet Republic’s assumption is that, if market conditions dictated, it could run the whole program on lease finance terms alone. However, several weeks ago, Breeze indicated that the company has sold shares for almost three full aircraft.
The company reported that charter card sales are ahead of expectations and are drawing unexpectedly high demand for larger aircraft types. Card packages will start at 25 hours and will be available for a variety of aircraft categories ranging from light jets, such as the Cessna Citation Bravo, to “global cabin” aircraft including the Dassault Falcon 7X, he said.
Interest from Private Owners
“We are mainly selling to entrepreneurs and independently wealthy customers,” Breeze told EBACE Convention News. “We have seen some interest from people with large corporations, but in smaller numbers. Overall, I’d say there is a relatively small reduction in the business as a whole than might have been expected given the scale of the economic crisis. Our own business is performing as we had hoped in a benign environment. We haven’t used our marketing budget at this point and have money in reserve.”
Jet Republic has debt-free financial backing from Austria’s Euram private bank and a consortium of its clients. According to Breeze, its founders were turning away prospective investors when its launch capital was being finalized last summer–apparently indicating that, despite the worsening squeeze on credit, some still view business aviation as an attractive investment opportunity.
Shares in the Learjet 60XR will start at one sixteenth, providing 50 flight hours per year and running up to a half share with 400 hours. Share prices will be calculated on the basis of a $14.6 million price tag for a whole aircraft. On top of the share price, owners will pay a monthly management fee of ?2,000 ($2,940) and hourly occupied rates of ?3,500 ($5,145) over the course of their five-year agreement.
According to Jet Republic, most European fiscal authorities will permit aircraft shares to be treated as undivided assets, allowing them to be deductible against corporate taxes. It has estimated that clients could therefore recoup around 30 percent of costs from tax allowances.
The start-up operation will be based in Portugal. Breeze described that country as having “an impressive regulatory environment for fractional ownership.” Jet Republic will have its own commercial aircraft operator’s certificate and will base pilots close to its key European markets.
At the end of the five-year term, Jet Republic will offer to buy back an owner’s share at an unspecified “fair market value” rate set by independent experts. Clients can also leave the program after three years under the same terms. According to aircraft brokers, previously inflated prices for business aircraft more than two or three years old and with relatively high utilization rates have been falling this year.
Jet Republic aircraft will be guaranteed available with 24 hours’ notice from share owners and charter customers. By comparison, NetJets Europe guarantees availability with just 12 hours’ notice, but Breeze argued that having less than a 24-hour cutoff damages service levels and encourages customers to book flights late deliberately in the hope of getting an upgrade to a larger aircraft.