Demand recovering but light jets and prices still squeezed
The recovery in the private and business charter industry is continuing in Europe, but with significant variations in terms of where demand is bouncing back and for which types of aircraft. These are the main conclusions from new data generated for AIN by online charter portal Avinode (Stand 843) ahead of this week’s EBACE show.
One key trend that Avinode identified at the end of 2010 is the continued decline in demand for the majority of light jets. This time last year, these accounted for 30 percent of requested trips in Europe. Overall in 2010, light jets on average amounted to 26 percent of requests but as of the end of April this had slipped to just 23 percent (having been as low as 18 percent in January 2011).
By contrast, large-cabin aircraft (or heavy jets, as Avinode categorizes them) are well and truly in the ascendency. When EBACE 2010 opened, they represented 23 percent of all trip requests but this had climbed to 29 percent as of last month (having peaked at 32 percent in January).
According to Avinode business manager Magnus Henriksson, it is light jets like the Cessna CitationJet and Citation II that are feeling the squeeze as demand for smaller aircraft continues to soften in Europe. But, bucking the trend, is the same manufacturer’s Citation Mustang, which clearly has stolen the thunder of its larger, older siblings.
In the past 18 months or so, the number of Mustangs available for charter has more than doubled. With the average flight segment for European light jet users being just one or two hours, and carrying an average of between one and three passengers, the Mustang appears to deliver exceptional value for its price.
Henriksson has predicted that growing numbers of Embraer’s new Phenom 100 and 300 models will have an equally profound impact on the light jet sector over the next couple of years. The Phenom 100 and the Mustang essentially straddle the line between the light and very light jet categories. In this respect they are continuing to benefit from the failure of VLJ contenders such as the Eclipse 500 to get to the marketplace.
The super lights jets (that is, those between the light and midsized categories) as are actually extremely popular in Europe. However, since this is a very small aircraft category they have a fairly limited affect on overall demand (only 15 percent last month). The Citation XLS is a very popular example of a class that also includes the Excel, the Phenom 300 and Bombardier’s Learjet 40s and 45s.
Part of the reason for the overall decline in demand for light jets is the disappearance from the market of customers who were just taking their first steps in private charter before the financial crisis struck in 2008. Most of these people appear to have gone scurrying back to the airlines and the charter sector faces a challenge to coax them back to their entry-level offering.
But thank God for Russians, who to no small measure are behind the further resurgence of demand for heavy jets. “A lot of this demand is driven by eastern Europe,” said Henriksson. “Moscow is too far away [for passengers to fly to and from it in light jets] and Russians generally prefer bigger aircraft.”
Generally speaking, the heavy jet sector also has been bolstered by the fact that those at the top end of the wealth ladder are still very wealthy, even if they did incur some losses in the crisis, and they certainly have little or no inclination to start using the airlines again.
The midsized jet category’s position in the European market continues to be pretty stagnant, having fluctuated between 13 and 15 percent of trip requests over the past 12 months. There are pockets of demand for midsized aircraft such as Turkey, where Hawker 800 and 850s are popular for the somewhat longer trips that the country’s business community has to make into Europe, North Africa and the Middle East.
Similarly, the super midsized category has barely seen its share of the market rise above 20 percent since the last EBACE, and it stood at 19 percent last month. In reality, there aren’t too many of this class of jet in the European charter sector. However, Henriksson indicated that Embraer’s Legacy and Bombardier’s Challenger 300 are proving extremely popular. “They offer a great comfort level at a very good price, compared with heavier jets,” he told AIN.
Avinode’s data for the 12 months since the last EBACE show also shows better stability in flight hour pricing, but with rates still markedly down on pre-crisis levels. This means that charter operators are still some ways from full recovery, especially given that their margins are increasingly being squeezed by rising costs, such as fuel.
The most noticeable movement in Avinode’s pricing index for Europe over the past year has been in the light jet category, and even here the overall swing has never exceeded three points from the starting position in May 2010. Behind these figures, Mustang prices have in fact increased, but the whole category has been pegged back by reduced rates for larger lights jets, which have had to accept lower yields to try to compete with the new Citation.
Unlike the U.S., where the charter market has to a great extent been able to mitigate the impact of higher fuel costs by resorting to fuel surcharges that appear separate from the hourly rate on invoices, European customers just won’t accept this practice. This has left European operators largely having to shoulder the increased cost burden or subtly building some of it into the hourly rate.
So with profit margins generally still squeezed and costs still rising, it has never been more imperative for operators to make more efficient use of their assets by doing more to market availability of empty-leg flights and positioning their aircraft more flexibly to where demand is concentrated at any given time.
This is where Avinode claims it comes in. There is no doubt that its recently upgraded system, which now makes it easier for operators and flight bookers alike to identify empty-leg availability between any given city pair, makes improved asset utilization more viable.
To help users really get to the most from its system, Avinode has launched a series of “academies” to provide guidance and training. The first two events were held in the Swedish company’s home city of Gothenburg and also in Moscow. Next month, the event moves on to Miami. What Avinode wants to avoid is its system being like a top-of-the-range iPhone on which the average user can barely use 10 percent of the functions.
But tapping the technology to its full potential is only part of the equation, Henriksson acknowledged. Some operators offering managed aircraft for charter are constrained by contracts with their owners, which stipulate that a jet always has to return directly to its home base after every flight.
Also, the ability of operators to establish satellite operating bases around Europe can be undermined by high local labor costs and difficulties in accessing airport infrastructure. For instance, there is great demand for charter here in Geneva, but overcrowding at the airport means that non-based aircraft can be required to reposition within 24 hours.
All of these factors only increase the pressure on smaller operators, where efficiencies of scale are hard to achieve. Henriksson predicts increased consolidation in the industry, resulting in a few larger operators. “We are seeing some companies in Europe gaining market share fast,” he said. “And the ones that are doing this are operating in something more like airline mode.”
Avinode’s breakdown of charter demand by country shows the UK and Germany continuing to dominate northern Europe. Further south, Austria and Switzerland both stand out as hives of charter activity (in terms of demand for flights departing these countries), with continued fluctuations in demand between the leading Mediterranean countries: France Spain and Italy.
Interestingly, demand levels do not directly correspond with the apparent economic fortunes of the countries concerned. The economies of Spain and the UK have taken a real battering over the past 12 months, but demand for flights here has been fuelled to a large degree by requests made for travelers who are not based in these countries but nonetheless need to fly from and to them.
Ending on a high note, Henriksson stands by his prediction that 2011 will deliver another good summer for the European charter sector. The summer of 2010 was a huge morale-boost for the industry and Avinode sees more of the same coming, so get ready to make hay while the sun shines.