After a decade, Flexjet is firmly in the black

 - November 13, 2006, 10:14 AM

As recently as four years ago, some observers openly questioned whether Bombardier’s Flexjet fractional ownership operation would still be around in 2006. Today, not only is Flexjet open for business, but it has turned the corner and achieved solid profitability–a milestone accomplishment in the fractional world.

Michael McQuay, president of Flexjet and the Skyjet charter operation, said the company this year became “operationally profitable” for the first time. “We’re having the best year in our history,” he said. “Sales of shares are up 28 percent and revenue is up 30 percent over 2005,”–a year during which Flexjet showed its first positive income, although it was an admittedly small profit.

This will be Flexjet’s first year of “complete profitability” under a new accounting standard that allows reporting of only part of a sale in a given year. When you’re selling fractions of jets, being able to report the sale of a single share on that year’s ledger makes a difference, McQuay noted. But at the end of the day, making a profit on the operation is what’s most important.

“Relying on rollover of sales of shares is a house of cards,” he said. “Churning doesn’t bring real income. Your day-to-day operations have got to be profitable. It’s literally the difference between whether you’re running a successful business or just existing. We began with a refocus on the operational integrity of our business, starting by identifying demand requirements of our owners, and placing assets at sites where we know demand will be present.” (The term churn refers to the rollover rate of fractional customers for a given time period.)

McQuay said that Flexjet’s operations have become profitable for several reasons. “We have a very strong sold to in-service ratio. That is, the airplanes in our fleet are flying and are not merely a bunch of excess inventory. Six years ago we had nearly 20 percent of our fleet in inventory. Now we have backlog [share buyers awaiting new aircraft deliveries] for most models.” Flexjet’s “load factor”–the ratio of shares sold to those available–will be the equivalent of 81 fully sold aircraft by year-end, he said. The current Flexjet fleet numbers 84 business jets.

But profitability didn’t come easy, McQuay noted. “The two biggest  expense trouble areas are deadhead legs and charter,” he said. Flexjet has achieved the lowest deadhead rate among all major fractionals with a range between 36.5 percent and 38.2 percent, McQuay said, and has the lowest charter rate, at 3.7 percent for the year to date, before the peak holiday season. “Even then, we’ll still be below our five-percent guarantee [stating that owners will be forced to fly charter no more than 5 percent of the time], and Flexjet is the only one to offer this charter limit guarantee.”

He added that Flexjet has the fractional industry’s best on-time departure performance, currently at about 80 percent for all types of delays including weather, and the segment’s best aircraft availability, 81 to 84 percent each day. “I won’t be happy until we get 90 percent,” he said, “and then I probably wouldn’t be happy with that.

Bigger not always Better

“Flexjet does not believe the end game is having the largest fleet,” McQuay continued. “Competitors with larger, diverse fleets are still struggling with profitability. That said, Flexjet is indeed focused on reasonable growth. We expect to reach a fleet size of 100 aircraft in two years’ time and to double sales revenue in the next five years.”

McQuay claimed Flexjet was the first operator to focus flying with only on a small number of models. “An all-Bombardier fleet and efficient fleet typing has been significant in our success,” he said. “Also, four years ago we made a commitment to get aircraft more than five to seven years old out into the pre-owned market, and to focus on having one of the newest fleets in the industry.” Flexjet’s now averages three-and-a-half-years old.

The fleet includes the Learjet 40 and 45, Learjet 60, Challenger 300 and Challenger 604. Flexjet is taking orders for the upcoming Learjet 60 XR (first quarter next year) and successfully selling shares in the newly configured Challenger 604, with greater seating capacity and a range of new cabin and telecommunications amenities. The new Challenger 605 will enter service in next year’s third quarter, and McQuay said he expects it to be another significant driver of sales, adding that there are no plans to depart from the all-Bombardier-fleet format.

The super-midsize Challenger 300, in the Flexjet fleet since early 2004, is “the fastest selling and best selling aircraft in Flexjet history, the hottest product currently in the fractional market,” McQuay stated. “The lion’s share of our boost in revenue has been driven by customer reaction to the Challenger 300.” He said Flexjet will end the fiscal year with 24 in its fleet and add another seven next year. He credits Challenger 300 design commonality with Bombardier’s regional airline CRJ fleet, both built to rigorous specifications for higher cycles and hours, for “the Challenger 300’s exceptional reliability, running in the mid to upper 90s.” A Flexjet Challenger 300 is on the NBAA static display line at Orlando Executive Airport.

Flexjet entered the year with a market share of approximately 16 percent versus 13.5 percent the previous year, and expects to increase that figure this year. Flexjet claims that it has not lost a single owner to the competition in the last 18 months. Owners who left did so due to lower travel needs, and 95 percent of owners are renewing their contracts.

McQuay said the 5 percent who did not renew included some who have gone into new or previously owned aircraft, and “a couple have elected to move down to jet cards.” At the same time, Flexjet has captured more than 50 customers from competitive programs, he claimed.