Fractional Ownership: Frax market blues
More than 20 years ago, fractional jet ownership began with NetJets and then expanded rapidly in the late 1990s with the growth of Raytheon Travel Air and Flight Options (now just Flight Options, which is wholly owned by Raytheon), Bombardier’s Flexjet and the Cessna/ TAG Aviation CitationShares joint venture, among others. Despite widespread concern about fractionals taking market share from traditional flight departments, both forms of business jet operation have grown and, in the case of fractionals, matured. It’s no longer surprising to see flight departments supplementing “lift” with a fractional share or two or fractional owners deciding to buy and operate their own airplane. But there are some troubling sides to the fractional industry, say analysts, that deserve watching.
Within the fractional share industry, there seems to be market maturation among the big four providers. NetJets is still the market leader with the most airplanes–400-plus–and the highest market share in terms of airplanes sold into service (52.2 percent). Flight Options is next, with more than 150 aircraft representing 19.6 percent of the market, less than half that of NetJets. Flexjet, with fewer than 100 airplanes and 11 percent market share, is slightly larger than CitationShares at 9 percent, but the Cessna/TAG joint venture has recently grown in both fleet size and market faster than Flexjet and may soon overtake the Bombardier operation. Regional fractionals Plane Sense, which operates Pilatus PC-12s, and Avantair, with a large fleet of Piaggio Avantis, are growing steadily, too.
But while business aviation remains red hot in terms of new orders booked by OEMs, the fractionals aren’t glowing quite as brightly. Overall sales of fractional shares have slowed, according to UBS Investment Research’s August Business Jet Update. For July, new share sales (69) were 58 percent lower than for the same month last year. The rolling three-month average is 121, UBS wrote, which is still 22 percent lower than year-ago levels. Year-to-date sales through July, however, are 5 percent higher than last year, with 971 shares sold, UBS estimates.
A sign of the maturing of the fractional share industry is operational changes to address common customer complaints. Jet cards, which sell available time on what should otherwise be empty airplanes, have a drawback in that card customers want to use their time when fractional share airplanes are flying owners. The result is greater outsourcing to charter providers so that fractional owners can still fly when their airplanes are busy.
New restrictions on jet cards are helping ease the pain for shareowners, but UBS also believes that fractional providers are taking delivery of more new airplanes to accommodate jet card buyers, not just to replace older airplanes. “NetJets accounts for 60 percent of the fractional fleet,” according to UBS, “but for only 48 percent of the installed share base. We believe the larger fleet is mainly to support the 25-hour Marquis Jet card fractional program and its European program.”
James Butler, an attorney and CEO of consulting firm Shaircraft Solutions, said that shareowners are worried about the effects of jet-card programs. “Common sense tells you that accommodating 32 jet-card members per aircraft is more difficult than servicing eight owners,” he told NBAA Convention News. “To their credit, some providers have addressed these concerns by limiting growth in their jet-card programs, but owners are still disenchanted that the extra hours flown on their aircraft to service jet-card holders are reducing the value of their aircraft, while the providers keep all the jet-card revenue.”
Fractional owners also complain about the costs associated with share ownership and usage. Fuel surcharges are a particular headache. These can add $500 and more to the hourly charges for a single trip.
Butler said he believes that fractional providers are simply passing on increased costs due to “increases in maintenance, pilot, insurance and other management and operating costs. Providers have responded by slowly but surely shifting the risk of those cost increases to the owners–often in the form of surcharges. Owners appreciate that fuel prices have increased, but they don’t understand why the providers use below market base rates and owners are wary that fuel surcharges are becoming profit centers. A more straightforward pricing approach that is based on the providers’ actual costs and includes a reasonable management fee would, I think, be welcomed by most owners.”
In early September, Flight Options announced that it is changing the way it charges for fuel, and customers will pay only for the actual fuel cost of a trip, plus the fuel cost for any necessary dead head legs as well.
Flight Options has the highest “churn ratio” of any of the big four, according to research from UBS provided to NBAA Convention News by Kevin O’Leary, president of industry research firm Jet Advisors. Churn ratio is the ratio of the number of shareowners that leave a program to those who join. In the case of Flight Options, 4.5 owners exit the program for every one that enters, according to O’Leary’s numbers, which were current as of the end of last year and also may reflect the transition of the Flight Options fleet to an easier-to-manage four models.
The two companies with the lowest churn ratios, CitationShares and Plane Sense, have distinctive business models focused on controlled growth. With CitationShares, said O’Leary, “you can look at that [low churn rate] and say things are going well. If you look at their churn ratio, you’re confident they’re taking care of their customers and growing at a healthy rate.”
“I think that’s the only real indicator of customer satisfaction,” said Patricia Reed, vice president of sales and marketing for Plane Sense. “We will have people leave because circumstances have changed. But we think it’s important to be profitable [with] controlled growth.”
Tackling Frax Churn
In addition to eliminating the fuel surcharge and charging only for actual fuel used, Flight Options also made other changes as part of its recently announced Fractional First program, which may be intended to help tackle its high churn ratio. Under Fractional First, owners should save up to 15 percent, according to a company release.
Other features of Fractional First include no taxi time deduction from share hours, which means that owners still pay for taxi time, but that time won’t be deducted from the occupied hours that they are entitled to. Owners will also save with distance-based pricing, where longer flights earn discounts. Beechjet 400A/Hawker 400XP owners will receive a 20-percent discount on flight charges for flights more than two hours, and Hawker 800XP, Citation X and Embraer Legacy owners will save 20 percent after flying 2.5 hours. Fuel is not included in this discount. Finally, owners can opt to fly more than their allotted hours without buying additional shares, by paying the applicable monthly management fee.
O’Leary, who also helps people buy and sell fractional shares, believes that fractional shares serve a vital role in the aviation industry. “Fractional is still viable for the right client,” he explained. “The ideal client is someone who utilizes exclusively one-way travel. I rarely factor in the number of occupied hours.”