Managing Aircraft in a Time of Change

March 2019

“Aircraft owners with internet and apps on their phones want instant answers to questions they didn’t have before,” says Mike Moore, vice president of aviation sales at Meridian, which was established in 1946 and manages more than a score of business jets from its Teterboro, New Jersey headquarters.

At Executive Jet Management (EJM), a subsidiary of Berkshire Hathaway–owned NetJets, “many more first-time aircraft owners” need “realistic strategies for their flight departments and exposure to the practices of owning an airplane,” says Michael Tamkus, senior vice president for client services and management sales.

Meanwhile, the charter arena—a vital component of most management companies’ business models—has grown more crowded and competitive. “There are a lot more choices than there have ever been—operators you can call, brokers you can call, apps you can use,” says Don Haloburdo, senior vice president of flight services at Jet Aviation, a General Dynamics subsidiary with almost 300 aircraft under management.

Charter customers’ expectations have risen in lockstep, notes Thomas Connelly, president and CEO of Gama Aviation Signature, the nation’s largest business aviation charter operator. “Everybody wants new airplanes, beautiful interiors and paint, and Wi-Fi. That’s the world today.”

Adding to the seismic shift, a growing shortage of qualified crewmembers is affecting operations. “It’s a very, very challenging environment for hiring pilots,” says Andy Priester, president and CEO of Priester Aviation, which will mark its 75th anniversary in 2020. “Salaries are going up faster than ever, and management companies need to respond.”

Summed up Brian Kirkdoffer, president and CEO of nationwide aircraft management company Clay Lacy Aviation, which marked its 50-year milestone last year, “The management industry continues to mature and change—certainly more than it has in the past.”

These six management companies collectively operate some 700 business aircraft—more than 500 of them available for charter—and have over 300 years of aircraft operational history. Their scale, experience, and service have established them as industry leaders and bellwethers. We asked their senior executives how they’re adjusting to the changing landscape while meeting the evolving needs of their customers. For as aircraft management goes, so goes business aviation.

Meeting Owners’ Expectations

Amidst the transformative trends, the most basic needs of aircraft owners remain constant. “Asset management is certainly the biggest thing on our clients’ minds—making sure their asset is being handled properly and being operated safely and efficiently,” says Connelly at Gama Aviation Signature. “Those have always been the key tenets of aircraft management.”

Delivering the requisite level of oversight to properly manage the asset requires a robust infrastructure. Gama Aviation Signature, for example, has a Safety Management System, a flight-operations center, and a score of maintenance facilities across the U.S.

It’s difficult for many management firms, let alone those with single-digit fleet numbers, to provide that degree of support and expertise, and that has led to “more consolidation” among these companies, says Kirkdoffer at Clay Lacy Aviation. “The scale and scope of services is becoming much more important. We are managing over 100 aircraft, and there’s significant value we are able to provide our clients with that kind of scale.”

Such scale yields benefits that include reduced rates on fixed costs like insurance, crew training, and hangarage.

Additionally, with regulatory mandates, constantly evolving onboard technology, and other issues making ownership more complex, “management clients want a partner they can trust to help make aviation decisions,” says Priester. “We’re seeing a trend toward service, toward simplicity, and for consultative and advisory services.”

In response to those trends, Priester Aviation, with more than a score of aircraft in its charter fleet based at over a dozen locations, is reinventing itself on the eve of its 75th anniversary. “We approach new clients as not simply a managed customer or a charter customer,” says Priester. “We want to learn their current needs, how they may have changed over the previous year, and how they might change over coming years.”

That led Priester Aviation to create the 1945 Club ownership program and introduce a jet card and even a pathway to fractional ownership. “We’re looking at serving clients over their lifetime,” says Priester. “Our job is to work with them to figure out what’s most appropriate for them now along that evolutionary flight path.”

A growing demand for simplicity and expertise is compounded by an increasing number of first-time owners coming to management companies. Jet Aviation, which celebrated its golden anniversary in 2017, was one of several major firms reporting a spike in first-time buyers among recent management clients. “They’re not unfamiliar with private or business aviation, but they’re new to ownership, and they’re looking for a solution that is as simple as they were used to with fractional or charter,” says Haloburdo. “They would like to stick with that model and be able to make a phone call and have the gears turn.”

But whatever the extent of their experience, owners “are highly focused on service and cost,” Haloburdo says. “Some want service in the back of the airplane that is way better than first-class airline.” Jet Aviation’s 24/7 operations centers (in the U.S., and Zurich, Switzerland; Dubai; and Hong Kong) help meet its demanding owners’ service needs. While raising the bar on service, adds Haloburdo, pricing pressure requires Jet Aviation and other successful firms to constantly improve efficiencies “to remain competitive in the marketplace.”

Additionally, many new owners are purchasing bigger jets than first-timers have traditionally, presenting a correspondingly larger learning curve for the buyers. “Seven or eight years ago, somebody who flew 150 hours a year would buy a Hawker XP or a Citation,” says Moore at Meridian. With the last decade’s crash in residual values, “that same customer coming to market with $5 million is buying a Gulfstream GIV-SP, a Challenger 604, or a classic [Falcon] 2000.”

Owners looking for a management solution needn’t limit their search to firms with large fleets of similar models, according to Moore.

“As long as you have a global flight-operations center, there’s nothing that makes managing one large-cabin jet any different from managing 20 of them,” Moore says. “That’s the biggest misconception out there. You’re either familiar with the product or you’re not. Sometimes there’s too much emphasis on how many airplanes and locations you have, and not on the quality of the people.”

If those people are top-notch, they’ll focus their attention on their clients’ evolving needs. “Owners’ expectations change based on their personal lives, their business ventures and strategies, and overall goals, and we’ve truly customized how we approach each individual flight department,” says Tamkus. “We have seen owners go from flying retail charter extensively on their aircraft to going Part 91, and vice versa. The staffing strategy for each flight department has become more of a focal point for our company and owners alike.”

Meanwhile, EJM is able to offer owners significant benefits through its association with NetJets and its service partners, providing discounts on services including maintenance at multiple MROs, training at Flight Safety, crew lodging, technical publications, and connectivity subscriptions.

Adding Value to Ownership

But while owners often focus on the cost of management, top management companies focus on its value.

“Management fees and what they include haven’t been defined very well,” says Kirkdoffer. “More sophisticated aircraft owners understand the difference in fees and management companies. It gets back to the value proposition—any management company should be able to show clearly and transparently where they’re providing value, from a cost standpoint, from an administration standpoint, and through the services provided.”

Among the services most prized by owners is a management company’s ability to generate charter revenue, and that’s pretty simple for a good company to demonstrate, Kirkdoffer says. “Have them show you their current records for the same or similar size aircraft, and their records for last year and the year before that. Our focus is on safety, service, and value, and if those are the focuses of clients, they’re a good fit for Clay Lacy Aviation.”

Most top management companies have just two revenue sources: management fees and a share of charter revenues, and management contracts are individually priced accordingly.

“Our management fee structure depends on whether the owner charters, and what level of support an owner will require,” says Tamkus. “We look at factors including how an aircraft will operate—Part 91 versus Part 135, whether it will be used domestically or internationally, and how many owners or partners are involved with it.”

EJM has customized reporting software that provides detailed accounting data on owners’ aircraft. “After a year’s worth of operating under EJM’s management, our owners are able to determine the value of our partnership through our ability to deliver efficiency and cost savings,” Tamkus says.

Owners often see the full extent of the value a top management company can provide when they transition to a new aircraft. “We have routinely heard from aircraft brokers and financiers about the condition of the aircraft under our management and the positive impact it has on the residual value,” Tamkus says.

Good management companies also make sure owners’ charter revenue goals are consistent with maintaining their asset’s value. “There are cases where an owner would like to get 300 hours [of charter revenue] but will need another pilot for the last 100 hours,” says Moore. With the delta [between expenses and revenue] after the pay and benefits, they may be better off flying less. We manage your asset. I’m not going to be the guy who says, ‘Yes, hire more people so we can fly more.’ In that case, we’d rather say, ‘Here’s what you would have netted if you had more charter, and at the end of the year you did better financially this way.’”

But, Moore says, owners too often choose a management company based on its fees, not the value it delivers. “They spend $20 million for an airplane and go with a management company because it charges $10,000 a year less.”

Owners need to recognize that “you get what you pay for, and you don’t get what you don’t pay for,” Connelly says. He cites Gama Aviation Signature’s management services, which include having a robust operating and safety infrastructure as well as a charter team that meets daily to ensure that the company is living up to owners’ revenue expectations. “Educated customers who understand the market and want a company that has those resources are good for us,” Connelly concludes.

Management companies with long histories like these also know it’s critical to be ready for all market conditions. “We’ve been in this really strong period of growth for the past couple of years,” says Haloburdo. “Eventually, things are not going to be as strong as they are now. We want to be sure we’re prepared to take advantage of the growth side, but also prepared to operate the business in a down cycle. People don’t sell their airplanes [because of down cycles], but on the charter side, somebody might decide, ‘I’m not going to fly for the next six months.’ How are we going to react and what are we going to do when conditions change?”

In addition to providing clients with reports on their aircraft, Jet Aviation regularly briefs them on macro-economic factors that could impact their operations.

Meanwhile, owners themselves are often the determining factor in the charterability of their aircraft. “Our ability to meet owners’ charter expectations has nothing to do with demand; it’s about how the owners want their airplanes used, and potential restrictions they place on them,” says Priester. “The charter market wants answers [trip approvals] quickly. We’ve encouraged owners who have aggressive charter targets to approve what we call ‘look and book,’ where the aircraft is automatically available for flights that meet their requirements.”

Supporting Charter Clients

In addition to aircraft owners, management companies must meet the needs of charter customers. The job of pleasing both parties is fraught with potential conflicts and complications, but when a program is designed and executed correctly, everyone can come out ahead.

“It’s highly important to have a balanced fleet, and to bring aircraft into your fleet where there’s strong charter demand for that category cabin,” says Haloburdo. “We can be more aggressive to win those management deals and have them be a win for the owner in getting the requisite amount for charter, and a win for us in having the quality aircraft to support the needs of our charter customers.”

Meanwhile, the trend toward simplicity mandates that charter operators offer jet cards. “Card programs eliminate the financial hassle and payment difficulties from charter,” says Haloburdo.

Priester Aviation introduced Centerline in 2018 to meet that demand and add a card program to its “flight path” offerings. “Existing and inbound customers were asking for a simpler [charter] solution,” says Priester. “For a lot of our customers, a card is easier, even though it may be a little more expensive. They said, ‘If you had card program, we’d take it.’”

But unlike those sold by brokerages, jet cards offered by most management companies aim to keep membership growth scalable with that of their charter fleets. Priester, for example, makes the Centerline card available only in primary service regions by invitation. “We want to control the number of cards in each area, so we can control how we deliver the service,” says Priester. “We feel that 200 to 300 cards will allow us to maintain our standards.”

As Priester suggests, in a charter market dominated by price, leading management companies are dedicated to upholding high service levels.

“We look for opportunities to surprise and delight and wow our clients onboard,” says Kirkdoffer. Clay Lacy Aviation’s rigorous cabin crew selection and training process ensures attendants have “the right personality and skill set,” and candidates “spend three to six months training before they step on an airplane” with a customer, Kirkdoffer says.

Clay Lacy Aviation also provides a major service benefit to all its on-demand charter customers: “If an aircraft has a mechanical, we provide a no-cost recovery option on a similar or larger-size aircraft,” Kirkdoffer says. “We’ve agreed to provide transportation, so if something happens, we still get them where they need to go at no additional cost.”

Meanwhile, though management companies typically prefer to use lift from their own fleets for charter, that’s not always feasible or in the best interest of the charter customer. Successful management companies have established networks of vetted providers for supplemental lift.

“We have a large, diverse fleet,” notes Moore. “But if we don’t have an aircraft that’s geographically available, or the client needs to book trips in Europe or South America or Asia, we personally know operators and handlers all over the world we can call on—we’re not just looking them up online. We have strong relationships with our domestic network, and when we attend international trade shows and conferences, we stay to meet brokers and operators and handlers.”

To ensure outstanding service, Meridian holds weekly Ritz-Carlton hospitality training sessions and holds quarterly town hall–style meetings to discuss “what we can do to make employees happier and do better for clients.”

Adding quality aircraft to the fleet is another priority today. EJM is “constantly working to increase the number of approved aircraft and crews available to meet the rising demand,” says Tamkus, “but only when they have satisfied all requirements of our safety audit process.”

Under that process, a full-time team of aircraft transition specialists inspects the aircraft prior to acceptance onto EJM’s air carrier certificate. Thereafter, aircraft are continuously monitored by the Fleet Maintenance Department, and the Standards Department conducts annual aircraft audits.

With its mandate to provide supplemental lift for parent company NetJets and its own retail volume, EJM, like other major management firms, utilizes proprietary technology “to optimize the schedule and match up trips,” even creating charter opportunities for managed aircraft while owners are using them on trips.

Keeping aircraft already in the fleet desirable for charter is also critical. During its annual full budget review with owners, Gama Aviation Signature provides recommendations on aircraft upgrades that impact their charterability. “We talk about the difference that an aged versus brand-new interior and Wi-Fi versus no Wi-Fi can have on the amount of charter they can get and the rates they can receive,” says Connelly.

The approach appears effective. Gama Aviation Signature has no jet card and doesn’t guarantee availability yet is the largest charter operator in the U.S. by flight hours, according to Argus International. The company also operates the Wheels Up fleet of King Air 350is and Citation Excel/XLS.

Challenges Ahead

What keeps top management company executives up at night? There is no shortage of issues demanding attention. “One constant concern is the commoditizing of the services we provide and the consistent downward pricing pressure,” says Priester. That leads potential charter customers to focus on price, not recognizing the difference in service, but in infrastructure, training, safety systems, and other factors that distinguish providers.

Additionally, the spate of new access offerings, like per-seat charter, while potentially enlarging the customer base, could also have the opposite effect, Priester says. “It seems like it’s a moving goalpost, and what customers buy today isn’t necessarily what they’re able to get a year from now, and that can cause frustration,” he continues. “Anytime someone is frustrated by the corporate jet experience, it is bad for the industry.”

Meanwhile, as the pilot shortage draws attention (see sidebar), other support disciplines face similar deficits. “There’s a shortage of talented mechanics and line service people,” says Kirkdoffer by way of example. “We’re not attracting the next generation of team members as quickly as the industry needs.” To help address the problem, Clay Lacy Aviation sponsors a host of scholarships and internship programs. “Our whole industry needs to take the time to introduce talented people to aviation and give them a career path.”

Technology is also a constant focus of management companies. Tamkus notes that EJM is seeing “increased client demand for ‘on the move’ technology solutions providing real-time updates and ease of client interaction.” The company is responding to those needs while seeking to maintain the close customer contact that top management companies encourage. “The most significant updates to our offering are focused on utilizing technology to streamline processes that will allow more time for direct client engagement to enhance the overall charter experience,” says Tamkus.

While consolidation may have provided a path for some management companies to grow in the recent past, that approach may have reached its limits.

“Gama acquired Landmark Aviation Management, which had about 80 airplanes, when Signature purchased the Landmark FBO chain,” says Connelly. “The acquisition of a management company is really difficult and time-consuming, and there’s not as much synergy as people think there is. There’s a real risk of attrition while it’s going on, so I don’t think consolidation of management companies is the easiest way to grow. Organic growth is much more cost-effective in the long run.”

Another concern expressed in many quarters involves current charter rates. “The rates are not keeping pace with increasing costs,” says Moore. “Every broker in the world just wants to keep rates low. The whole sales pitch of a lot of them is, ‘I’ll save you money; I’ll drive down prices.’” Looking ahead, Moore predicts, “People will stop offering their aircraft for charter. They’ll say it’s not worth it. If we in this industry are going to survive, it has to change, but I think it’s going to get worse before it gets better.”

But whatever lies ahead, if history is any guide, top management companies will find a way to turn these challenges into opportunities for tomorrow’s management and charter clients. Haloburdo points to the nexus of technology and marketing that has led to the availability of point-to-point pricing, empty-leg access and shared shuttle flights. “These are revenue opportunities on the charter side that didn’t previously exist,” he says. “It creates an interesting dynamic that allows prices to fluctuate from day to day. We want to provide solutions that protect our customers from the highs and lows with a safe, reliable, fair market price, so I think that can attract more people into the space. I’m cautiously optimistic about 2019.”