Can NetJets Europe defy the doubters?

Business Jet Traveler » February 2012
Can NetJets Europe defy the doubters?
The question now is whether NetJets–or anyone–can get the fractional seed to germinate in the key emerging markets farther east.
Wednesday, February 1, 2012 - 9:00am

Fractional aircraft ownership is a great American entrepreneurial idea that arguably hasn't traveled well. Fifteen years after its main proponent, NetJets, brought the concept to Europe, that company remains the only one to have achieved any lasting traction in the international markets that supposedly have a massive appetite for business aviation.

It took more than 10 years for NetJets Europe to record even a modest profit, which, to its credit, it maintained even in 2010–a veritable annus horribilis for the continent's business aviation industry. Nonetheless, the company has outlasted several challengers and now claims some 1,600 clients and a fleet of just over 150 aircraft.

The question today is whether NetJets–or anyone–can get the fractional seed to germinate in the key emerging markets farther east, which supposedly offer fertile ground for private aviation. The tenacity of NetJets in Europe gives some grounds for believing that the company might yet pull it off. Certainly its main backer, Warren Buffett, still appears to be a believer.

Faltering demand and tough competition from an increasingly vibrant executive charter sector have forced NetJets Europe to offer a more varied mix of fractional-share and block-charter card options. Demand for charter in Europe today is still significantly exceeded by the supply of aircraft available for hire. Charter clients have probably never had a better choice of aircraft and at extremely competitive rates, making it that much harder for NetJets to convince them to make a long-term commitment when it can seem so attractive to shop around.

On the fractional side of the equation, clients can now start out with a mere 1/32nd share in an aircraft for as little as $125,000, giving them 25 flight hours per year. On top of this, they pay management and flight costs that collectively run €4,000 to €10,000 (about $5,600 to $14,000) per occupied flight hour, depending on the aircraft type. Shares are priced in U.S. dollars, but ­operating costs, which are generally quite a bit higher in Europe than in the U.S., are billed in euros.

NetJets also now markets shares in preowned aircraft–quite a turnaround from the days when it made a great point about how it offered only the newest jets. This move is grounded in making a virtue of a necessity, with older aircraft harder to sell on the open market. Nonetheless, it provides clients with a more affordable entry point to the fractional world.

Light and midsized jets now typically remain in the fleet for eight years and the average age for these is nearly six years. Larger aircraft are being retained for 10 to 12 years. In both cases, NetJets says, it invests in refreshing cabin interiors. And new aircraft are on their way, including a batch of Embraer Phenom 300 lights jets, as well as Bombardier Global 5000s and 6000s.

With its charter card offerings, access to light jets such as the Hawker 400 and the Cessna Citation Bravo starts at €143,000 ($188,400) for 25 hours. For the burgeoning Russian market, NetJets Europe introduced a split card option through which customers can have 15 hours per year on a Dassault Falcon 2000 and 15 hours on a Hawker 800. Another new take on the concept was the 10-hour card that it launched for holders of the American Express Centurion card.

Winning business is one thing; retaining it can be quite another. European critics of NetJets–mainly the charter operators and brokers–claim to be adding many of its former fractional owners to their client lists. According to such critics, these customers are eager to escape from excessively restrictive contracts and dwindling aircraft asset values.

NetJets Europe won't reveal its client renewal rates, but sales director Emily Williams said that "we now have a dedicated team focused on retaining customers and we also have a dedicated commercial team to help customers look at the different options. Overall, we're fairly happy with our renewal rates."

One reason customers don't renew fractional shares–or don't buy them in the first place–is the fear that values will tumble. NetJets claims that until 2008 light jets were typically depreciating 5 to 7 percent annually, while larger aircraft were holding their values. But the company concedes that customers ending standard five-year contracts are now generally selling shares for 50 percent of their prior value.

"But you still have complete liquidity," Williams argued. "Even if worse comes to worst, you can sell your share and in 90 days get your money back." But, to be clear, the money the owner gets back in this scenario is the "fair market value" assessed at that time by NetJets and in current market conditions that certainly means taking a hit on the depleted asset value, with preowned-aircraft values still soft.

Customers now include first-class frequent flyers with German airline Lufthansa. NetJets Europe is once again providing lift for the carrier's Lufthansa Private Jets service through which clients can book flights as if they were scheduled services with regular tickets and billing.

NetJets has been proactive in taking innovative steps to ensure a smooth passage for its clients through some of Europe's worst aviation bottlenecks. In London, it controversially established a long-term lease to have preferential use of the Northolt Royal Air Force base, which had largely been a gateway for the exclusive use of Britain's Royal Family and senior politicians. On the French Riviera, it secured landing and takeoff slots at Nice-Cote d'Azur Airport to allow its passengers to beat the unseemly dash to the prime Mediterranean resorts. And in Germany, it got so impatient with delays at Frankfurt Airport that it simply bought the nearby Egelsbach Airport to keep it open as an option.

NetJets Europe has been tapping expansion of business aviation demand in Russia and its program also now extends into North Africa and Lebanon. Close by, it still has an interest in the Middle East franchise, which is based in Saudi Arabia and run through a joint venture with a local company called National Air Services, offering a fleet of Hawker 750s and 800XPs, Dassault Falcon 2000/2000EXs and Gulfstream G450s/GIV-SPs. Meanwhile, NetJets Europe itself–headquartered in London and with an operating base in Portugal–has a "ventures unit" looking into establishing a more permanent presence in Russia and India. Separately, the NetJets team in the U.S. is probing prospects for fractional ownership in China, almost certainly via a bridgehead in Hong Kong that could be established within 12 to 24 months.

NetJets Is a Transatlantic Bridge

One benefit of being a NetJets client is the ability to use its fleets on either side of the Atlantic through its interchangeability program. As with currency markets, an exchange rate applies. Costs in the U.S. fractional program are markedly less than those in its European cousin and so an occupied hour costs more–on a sliding scale–in a NetJets Europe jet than it does in a U.S. aircraft.

NetJets has adjusted to shifting levels of demand in Europe and the U.S. by temporarily transferring aircraft (usually American jets heading East) to the other continent to provide additional capacity. To avoid breaches of market access rules, the aircraft in question are temporarily transferred to the NetJets Europe aircraft operators certificate. This is legally significant because fractional ownership in Europe has to operate under full commercial air-transport rules, whereas in the U.S. it benefits from the special private aviation rules outlined in the Federal Aviation Administration's Part 91 Subpart K code.

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CHICK
on May 14, 2014 - 2:13pm

As you are all aware, NetJets Europe has over the last few years faced unprecedented market conditions.

The prolonged downturn in the economy has led to a fall in demand generally for business aviation. In the circumstances, we have had to look at whatever steps we can take to control and reduce our own costs to safeguard the competitiveness of our business.

We have already implemented a comprehensive set of measures to reduce and control costs. Both the Voluntary Options and the more recent Voluntary Separation programme sought to minimise impact on pilots as far as possible and were initiated in good faith to avoid having to terminate employment on the grounds of redundancy, in the hope that in due course the economy would pick up.

As the Voluntary Options programme comes to an end within the next 15 months and following the final swap of most crew members to their job share year on, we have had to look again at the number of pilots we employ and compare this with anticipated demand.

Last year, when we launched the Voluntary Separation programme, we informed you that our forecasts indicated that at the end of the Voluntary Options programme, the probability was that we would still have too many pilots when compared with likely flight demand. The Voluntary Separation programme was therefore intended to help address this. Although the offer of voluntary separation was taken up by 152 employees, unfortunately, in the light of continued lower flight demand, this was not sufficient to address the issue of over-capacity of pilots. We expect that trading conditions across Europe will remain fragile and, based on our current forecasts, we do not expect to see a return to the levels of demand that would require our present crewing levels for several years. In the circumstances, it is critical for the future of the business that we take steps now to address this issue.

Currently, we employ 780 pilots of whom 529 are pilots-in-command (PICs) and 251 are seconds-in-command (SICs). Our assessment is that, whilst we do not have any excess of SICs (and they are not therefore affected by this proposal), we need to reduce the total number of PICs by 128.

In addressing this matter, we have to take account of another issue facing the business which is a significant change in European social security regulations. As you are aware from previous communications, the current position is that under EU law the UK system of social security contributions applies to crew employed by NetJets Management Limited (NJML). However, a new European regulation that has come into force now affects the social security regime applicable to crew based upon the country in which their gateway is located. We estimate that based on current crew levels and social security rates, these changes will cost the business an additional €6.3m per year in employer contributions.

Proposals

In light of the position outlined above, we have formulated proposals to address the issues we face as a business. Unfortunately these proposals would involve job losses. These proposals are subject to consultation with employee representatives to be elected by the affected employees.

Our proposal is to reduce the number of PICs employed by NJML from 529 to 401, i.e. a reduction of 128.

If possible, we would like to avoid the need to make any compulsory redundancies. We therefore propose to offer voluntary redundancy to PICs with gateways in the six countries with the highest employer social security rates. These are listed below in descending order (i.e. of the six countries France has the highest rate and Hungary the lowest):

Country Number of PICs with gateways in that country as at 5 October 2012
France 105*
Belgium 61
Czech Republic 2
Sweden 9
Italy 10
Hungary 1

* PICs with Basel and Geneva gateways have been included in the total number of PICs with gateways in France and will be given the opportunity to opt for voluntary redundancy. Further clarification is required from the authorities regarding the treatment for social security purposes of PICs with these gateways before we can confirm whether or not such PICs would be included in any compulsory redundancy exercise.

PICs with gateways in these countries will under the proposal have the option to leave with a one-off compensation payment equivalent to 15 months’ base salary (less applicable tax and social security payments) regardless of seniority. This sum will include any individual notice pay and redundancy payment entitlements but, clearly, will be well in excess of the value of those entitlements.

If the necessary reduction in the number of PICs cannot be achieved through voluntary redundancy, then the proposal is to select PICs for compulsory redundancy based first on the employer social security rates of their gateway country and secondly, where employees have gateways in the same country, by reference to their salary costs. It is proposed that PICs who are made compulsorily redundant would receive their contractual notice and a redundancy payment calculated in accordance with UK law but not any enhanced severance package.

In addition to the proposals outlined above, we have decided that, while gateways in the following countries will remain open for PICs and SICs already operating from those gateways, they will be closed to new moves:

France Belgium
Czech Republic Sweden
Italy Hungary
Finland Norway

A revised gateway policy reflecting these changes will be circulated to all crew members today and comes into force with immediate effect.

From today all permanent gateway moves will be suspended for the duration of the consultation period.

Consultation and Election of Employee Representatives

As stated above, these proposals are subject to consultation with employee representatives to be elected by PICs with gateways in France, Belgium, Czech Republic, Sweden, Italy and Hungary.

Details of the main functions of these representatives can be found at: http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074477056&typ....

The company therefore invites PICs to elect:

• two representatives for PICs with gateways in France (the France Constituency);
• two representatives for PICs with gateways in Belgium (the Belgium Constituency); and
• two representatives for PICs with gateways in Czech Republic, Sweden, Italy and Hungary (the Third Constituency).

As a PIC with a gateway in one of the relevant countries, you are entitled to nominate an individual for election as an employee representative. You may nominate yourself or any other PIC with a gateway in the same constituency as yourself. For example, PICs with gateways in France can only nominate themselves or any other PIC with a gateway in France. PICs in the Czech Republic may nominate themselves or any other PIC with a gateway in the Czech Republic, Sweden, Italy or Hungary.

Your nominee must be an employee of NJML. Please also check that your nominee is willing to stand as a candidate for election.

Employee representatives will serve until the end of the consultation process which is anticipated to last until 31 January 2013. It is anticipated that the first meeting with employee representatives will take place on 31 October 2012 and that subsequent meetings may take place at regular intervals thereafter.

If you wish to nominate yourself or someone else for election, please complete the nomination form (at the end of this email and attached) and return it to Carla Pombeiro by e-mail at cpombeiro@netjets.com by 12pm Lisbon time on 12 October 2012. In the case of a nomination of a colleague, your form must be accompanied by an email from the nominee agreeing to stand for election. Nomination forms received after this date will not be considered.

If more nominations are received than the number of vacancies, then a secret ballot will be arranged to elect employee representatives. Each PIC in a constituency will be entitled to two votes. The ballot will be conducted by Electoral Reform Services (an independent body) in order to ensure fairness, accuracy and confidentiality.

Questions

If you have any questions in relation to the proposals set out above or the consultation process, please send them by email to Lis-PICConsultation@netjets.com. I have also attached answers to some FAQs for your information.

I appreciate that the announcement of these proposals is likely to cause significant concern and great uncertainty. As soon as the representatives have been elected we will commence detailed consultation with them and in addition we will keep you informed of developments throughout the consultation process. In the meantime, I would ask you to continue to focus on delivering to our customers the highest standards of safety and service.

Yours,

Mark
MARK WILSON
Chief Operating Officer

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“When you get into the larger aircraft it becomes like a hotel, with dozens of staff supporting the plane based in a galley area down below. You have very comprehensive cooking facilities, and on larger aircraft we have looked at theatres, with spiral staircases and a Steinway grand piano. The limitations for what you can put inside a plane are pretty much the limits of physics, and even money cannot always overcome that. Even so, people are still always trying to push [the limits]. ”

-Howard Guy of Design Q, a UK-based consultancy