In a sign of the times, charter firms go on buying sprees
Charter operator XOJet of San Carlos, Calif., announced with Cessna on Monday that it had ordered 30 Citation Xs worth $600 million. Yesterday, Bombardier joined XOJet in announcing that the companies had signed an agreement for XOJet’s purchase of 80 Challenger 300s, 20 firm and 60 on option, the largest single order to date for the Challenger 300. Total value of this order, if all options are exercised, is $1.9 billion. XOJet later announced that it has to date secured funding totaling $542 million.
At an Airbus press conference yesterday, charter operator VistaJet, headquartered in Baar, Switzerland, announced with the European OEM an order for three Airbus ACJs, bringing the privately owned charter operator’s total investment to more than $1 billion.
Later in the afternoon, a new U.S. charter operator, Pegasus Elite Aviation of Kinston, N.C., announced it had begun operations just six weeks ago. It already has 10 aircraft in operation and 25 on order, all financed with an investment of $400 million by Merrill Lynch and the Pegasus Blue Star Fund.
And the industry also has seen over the last few years several fleet orders for very light jets, mainly the Eclipse 500, by budding air-taxi operators, such as the likes of DayJet and Linear Air. These perhaps match the above-mentioned orders in unit volume, but they do not approach their fiscal value.
So, what’s going on? Aircraft orders of this magnitude used to be purview of the airlines and big fractional operators, not charter operators.
What’s happening could be signaling of a trend that changes the makeup of successful charter operations, namely toward a model in which charter companies own the aircraft they operate. Certainly, other charter operators today own their aircraft. But most manage aircraft for owners who allow the operators to charter these aircraft when the owner makes them available. This win-win situation spared charter operators the capital expense of acquiring aircraft and provided owners with some income from the charter revenue. The arrangement also has the tendency to push down charter rates below a level that would support charter operators purchasing their own aircraft and shouldering this capital expense.
But in the U.S. this model could be an endangered species as the FAA and DOT crack down on charter operators with the club of OpsSpec A008 and the battle cry of “operational control.” Charter operators already report that some managed-aircraft owners are pulling their aircraft off charter because of their concerns about A008 requirements. And it’s not just the marginal operators that are under attack. For the last six months, the FAA has been investigating the operational control procedures of AMI Jet Charter of Burlingame, Calif., which is partially owned by TAG Holdings of Switzerland.
Charter operators who own their aircraft avoid this problem.
Both XOJet in the U.S. and VistaJet in Europe have already proved their business models, at least to the satisfaction of their investors. XOJet, which claims it is “the world’s fastest growing private aviation company,” plans to have a fleet of 17 Citation Xs by the end of this year and 47 by 2010. It will begin taking deliveries of its Challenger 300s in the fourth quarter of fiscal year 2008, but said Paul Touw, president and CEO, it would take them sooner if Bombardier could produce them. Financing XOJet are TPG Growth, which has offices in the U.S., China and India, and Lehman Brothers GPS, who together are providing XOJet with $143 million in equity and debt financing. Lehman Brothers GPS is providing an additional $220 million in aircraft lease financing.
Upon delivery of its three ACJs, VistaJet will have a fleet of 31 aircraft that also comprises Learjet 40XRs and 60XRs, Challenger 300s, 604/605s and 850s and Global Express XRS aircraft. All are dedicated to charter, are painted and outfitted the same (like airliners and fractional aircraft), are no more than 2.5 years old (or have no more than 3,000 flight hours) and average about 1,300 hours per year.
Thomas Flohr, chairman and single shareholder of VistaJet, said he’s taking advantage of the fragmented charter market in Europe (980 operators flying 2,900 business jets) by offering a product that appeals to high-net worth travelers. Bing Chen, group CEO, said the company is strong in Russia and Asia and plans to introduce a program soon that will combine the advantages of both fractional and charter. Flohr explained that the program would have two options: one would allow owners to purchase a large share of an aircraft and fly for a portion of direct operating costs, while the other would be more or less on-demand.
Now in its first phase, Pegasus Elite expects to own within a year 16 Hawker 1000s, 15 Hawker 400XPs, four GIVs and one GV. Said Jim Segrave of this structure, “Customers won’t have to wait three hours for a charter estimate,” while a broker or charter operator searches for an available aircraft. The company received Wyvern Wingman status last week and expects to obtain ARG/US Platinum status with three weeks. Pegasus Elite plans to operate 100 aircraft in three years.