“You’re absolutely right—and you can’t stand up in your [expletive] Rolls-Royce, either.”
Fractional Jet Market Update
The fractional share market "has passed its period of rapid growth," according to a report prepared by consulting firm Velocity Group for XOJet, a company that sells flight time in hourly increments. Fractional shareholder growth averaged 2.2 percent per year from 2003 to 2006, but the fractional share fleet actually shrunk a bit, according to Velocity.
One reason for this could be saturation of the marketplace. The relationship between the number of shareholders (4,362 in December 2006) and the number of U.S. business jet operators (about 7,000) is significant, said Velocity. In the little more than 20 years since NetJets launched the fractional jet industry, it has grown to include well more than half as many owner-participants as the rest of the business jet field. Because of that, said Velocity, and because of characteristics of the shareholder and fleet growth, "we anticipate a slower growing market in the years ahead." Velocity noted that the U.S. business jet fleet grew about 6 percent per year as the fractional fleet stabilized.
Since December 2006, Velocity reported, the number of unique shareholders has grown about 1 percent, which correlates with the 2.2 percent per annum growth rate previously noted. But there are significant differences in the four major fractional share programs, according to Velocity: "Citation Shares, Flexjet and NetJets have collectively grown almost 4 percent since December , whereas Flight Options participation has declined by 7.5 percent."
The fractional operators all report that they continue adding airplanes, but as noted above, the total fleet has actually shrunk. That's because operators are simultaneously retiring older aircraft. Still, said Jim Christiansen, president of NetJets, which has 612 airplanes and adds 80 a year, "we're seeing robust activity."
Steve O'Neill, president of CitationShares, said, "We will grow our fleet 15 to 20 aircraft per year for the foreseeable future. I will not grow for the sake of being bigger."
At Bombardier's Flexjet, "The growth rate is faster than the average that the industry is experiencing," according to vice president of sales Bob Knebel. "We're taking delivery of more than 20 new aircraft per year."
Flight Options said it is still growing, but primarily because of jet card programs, which allow customers to fly privately with a smaller investment than a fractional share or whole-airplane purchase would require.
Here's a closer look at the state of some major fractional jet providers.
NetJets-the Oldest and Largest
NetJets, based in Woodbridge, N.J., but with a main operations base in Columbus, Ohio, is the oldest and largest fractional-share operator, with 61 percent of the fractional fleet and a 48-percent market share, according to UBS Market Research. From a loss of $19 million in the first quarter of 2006, NetJets' U.S. operation rebounded to pretax earnings of $143 million, wrote Warren Buffett in his 2006 letter to shareholders of Berkshire Hathaway, which bought NetJets in 1998. In Europe, where NetJets signed up only 80 customers during the first five years of operation, the company added 589 customers in 2005-06. While NetJets' cumulative pretax loss by mid-2006 was $212 million, the company is profitable in Europe, according to Buffett.
"We've got a very strong order book," said NetJets' Christiansen, "out through, in some cases, 2015."
Last September, the company announced that it is waiving ferry fees (charges for flying an empty airplane to or from a customer's departure point or destination) to many locations, including Israel and Moscow, and for up to 80 countries between the U.S. and those destinations. Ferry-free service is available to different zones, depending on airplane type. Critics have claimed that NetJets was running into trouble because of its size, but now NetJets seems to be able to put that size to its advantage. "A year or two ago," Christiansen said, "people were saying how the NetJets model was broken. Clearly, the results we're enjoying show that was an ill-conceived response."
Flight Options Boasts 1,500 Owners
Flight Options, with about 130 airplanes in its fractional fleet and 1,500 owners, combines fractional shares, aircraft leasing, jet card membership, aircraft management and charter under one umbrella. [See interview with CEO Michael Scheeringa on page 52.-Ed.] After a rocky start with a highly varied fleet, the Cleveland-based company now employs only a handful of models. The simplified fleet has driven improved financial results, according to Flight Options. Also helping is growth in the company's JetPass membership card program.
Flight Options, now owned by Miami-based H.I.G. Capital, has made other changes that have improved results, both for financers and customers in its Fractional First program. For example, shareowners can now fly 80 to 120 percent of their allocated hours each year, without paying penalties; discounts are available for longer missions and off-peak days or times; and the company no longer deducts taxi time or marks up fuel charges.
Flexjet Talks Churn Rate
Bombardier's Flexjet operates 90 airplanes, ranging from the Learjet 40XR to the just-arriving Learjet 60XR and the soon-to-arrive Challenger 605. The company, based in Richardson, Texas, is the only large fractional-share operator willing to discuss churn rate, or the number of customers buying shares versus those leaving. Flexjet's churn rate is currently 0.4, which reflects 96 new owners and 39 owners leaving the program. "Our churn rate has improved, with the previous year being 0.7-with 94 new owners inducted and 65 owner exits," the company said.
Like other fractionals that are owned by larger companies, Flexjet doesn't release its financial data. But, the company noted, "Flexjet is fully profitable under all GAAP accounting methods."
Flexjet is adding more than 20 airplanes per year, according to sales vice president Knebel, and is growing faster than the industry average, both in the fractional share and Flexjet 25 card program.
The company has launched a program called Flexjet One, where customers can buy all the shares in one airplane but still enjoy the benefits of a fractional share. Features include access to Flexjet's entire fleet, ability to fly in more than one airplane per day, predictable expenses, no startup costs and no decisions on which pilots to hire, where to do maintenance or how to store the aircraft. Participants also don't have to pay ferry fees for flights to the secondary service area outside the U.S. and may share unused hours with other owners, like any Flexjet member. Flexjet One applies to any airplane in the company's fleet.
CitationShares Targets Smaller Jets
Based in Greenwich, Conn., and owned primarily by Cessna Aircraft and partially by TAG Aviation, CitationShares targets a slightly smaller airplane size than many other fractional share companies. CitationShares' 85 aircraft include the Cessna Citation Bravo, CJ3, XLS and Sovereign. The reason for this tight focus on smaller jets is that CitationShares found that only 15 percent of customers buy shares in airplanes larger than the Sovereign. "Eighty-five percent of the marketplace is big enough to chase," said president O'Neill. "We don't want to be [everything] to all people."
CitationShares' planned annual growth of 15 to 20 new airplanes does not include adding the Citation Mustang VLJ or the upcoming CJ4. "The LCC [large-cabin concept jet] could fit us well, if they decide to build it," O'Neill said. He added that CitationShares is the only fractional operator to offer customers financial incentives to avoid peak days. "We do not subscribe to the theory that they should pay the same price regardless of the day," O'Neill said.
Avantair Addresses Financial Woes
Clearwater, Fla.-based Avantair started as a fractional-share operator exclusively selling shares in the Piaggio P.180 Avanti, but Avantair has also ordered 20 Embraer Phenom 100 very light jets, with first delivery scheduled for 2009. The five-year-old company is the only publicly traded standalone fractional-share operator in the U.S. Currently, Avantair operates 39 Avantis, with 46 more on order.
According to the company's marketing department, Avantair's gross revenues have grown 68 percent year-over-year since it was founded. According to a prospectus for a share offering Avantair filed with the Securities and Exchange Commission on September 7, it also had net losses of $21.7 million through the end of its fiscal year last June 30, about $1 million more than it lost during the previous year. The company's accumulated deficit reached $56.2 million as of last June.
Avantair raised $11.2 million in private stock placements in November and another $4 million in December. As a result of increased sales of aircraft shares and charter cards, higher share prices and management fees and growing revenue from maintenance, Avantair's income in the first quarter of fiscal 2008 climbed to $25.7 million from $16.8 million in the same period last year. However, its net loss for the same time period grew to $4.8 million, an increase of $1 million compared with the first quarter of fiscal 2007.
In a statement on financial results, CEO Steve Santo explained that as Avantair takes delivery of a planned 15 additional Piaggio Avantis during fiscal 2008, "we expect the demand we experienced in the first quarter for hours on our fleet to translate into demand for shares in the airplanes we are planning to have delivered during the remainder of fiscal 2008 and beyond." He also expects Avantair to "break even on a quarterly basis sometime during fiscal 2008."
PlaneSense Shareholders Exceed 150
Alpha Flying, program manager of the PlaneSense fractional share operation, is moving from Manchester, N.H., to the huge Pease International Tradeport in nearby Portsmouth. The company is building a 40,000-square-foot hangar, and eventually all of Alpha Flying's activities, including PlaneSense, will be based at Pease.
PlaneSense has been operating for 11 years and is adding an average of seven Pilatus PC-12s per year. The current fleet includes 29 PC-12s and shareholders exceed 150, according to Patricia Reed, vice president of sales and marketing. The owner base has grown 30 percent during the past year, but privately held PlaneSense won't reveal specific owner or financial numbers.
Last September, PlaneSense announced that it is joining the jet fractional share market with an order for 25 Grob Aerospace SPn utility jets. Deliveries are to begin late next year. The jets will feature a six-seat cabin and help speed customers to new destinations such as Bermuda.
With a fleet of PC-12s, PlaneSense generally limits trips to east of the Mississippi River. "We're the largest regional fractional," said Reed. The advantage of the PC-12 is that it can safely operate from 2,500-foot runways. This opens up many more airports for customers and helps them avoid larger metropolitan airports with higher fees and prices, according to Reed.