Special Report

THE FRACTIONAL market special report

RECESSION RAISES QUESTIONS ABOUT

THE VIABILITY OF THE

FRACTIONAL MODEL by Matt Thurber

he recession has dealt an enormous That huge changes have occurred decline in flight operations revenues pri- NetJets president and COO; and Bill Noe blow to the fractional share industry. among the fractionals was evident when marily due to lower flight revenue hours.” from president of NetJets International to T Rapidly declining used-aircraft prices holding company Berkshire Hathaway For the first six months this year, pre- NetJets North America president, oversee- and fewer flying hours have affected the released second-quarter financial results tax losses at NetJets were $349 million, ing NetJets Aviation, NetJets International, industry to the point that most fractional for its NetJets property in early August. reflecting asset writedown and other charter/management subsidiary Executive operators have shrunk during the past year, Compared with the first six months of downsizing costs of $447 million during Jet Management and NetJets Large Air- deferred new aircraft deliveries, cut last year, this year NetJets revenues that period. Last year in the first quarter, craft. Jim Christiansen remains president staffing and explored new ways to keep declined $550 million or 43 percent, NetJets recorded $45 million in pre-tax of NetJets Aviation. flying. Business has been so bad at the according to Berkshire Hathaway. “The earnings, compared with a $96 million fractionals that some pundits are question- declines reflected an 81-percent decline loss in the same period this year. Accord- Broken Business Model? ing whether the business model is broken. in aircraft sales as well as a 22-percent ing to Berkshire Hathaway, “NetJets owns The surprising news that Richard San- more airplanes than is required for its tulli, widely considered the father of present level of operations and further fractional aircraft ownership, is leaving the Graph 1: Business Aircraft Activity (hours ﬂown) downsizing will be required unless company raised a weighty question: is the July 2009 vs July 2008 demand rebounds.” fractional share business model broken? On August 4, NetJets announced that That question is underscored by the huge Richard Santulli, founder and chairman of losses at NetJets and scuttlebutt that the Turboprops Small-cabin Jets Midsize Jets Large-cabin Jets All Aircraft Combined 25 the company, resigned, although he plans to company is ﬁnally undertaking the process 21.5 20 remain with the company for a year as a of matching its resources to the customer consultant. Berkshire Hathaway bought base and amount of flying. Most of the 15 NetJets in 1998 for $725 million. Following fractionals have consistently laid off 10 Santulli’s departure, David Sokol, chairman employees as business soured, but some 5.4 5 of Berkshire Hathaway’s MidAmerican speculate that Santulli was protective of .3 Energy Holdings, was named chairman and employees to the point that it might have

e 0

g -1.2 n interim CEO of NetJets. interfered with rightsizing measures during a -5 -4 -3.3 h As this issue went to press, NetJets the recession.

-6.8 -7.1 -7.9 t -10 n announced staff reductions of 5 percent, NetJets declined to comment as this

c -11.8

r -12.7 -15 -13.1 -13.6 -13.8 -13.9 and the company has implemented other article was being written. One source e -14.2

P -16 -17.6 cost-cutting moves, such as moving the obtained by AIN, however, indicated that -20 -18.5 corporate headquarters to Columbus, Ohio, the company has taken steps to dispose -25 where operations are located. In addition, of its Citation 560 fleet. According to -30 S

U there have been numerous executive data provided by Paris-based fractional

: changes. The company promoted Ben researcher Pierre Parvaud, as of the end of -35 e

c -35.1 r

o S Murray from president of NetJets sub- June, NetJets had 76 Citation 560s and a -40 Part Part Frax All Part Part Frax All Part Part Frax All Part Part Frax All Part Part Frax All 91 135 91 135 91 135 91 135 91 135 sidiary Executive Jet Management to total ﬂeet of 500 jets.

20aaAviation International News • October 2009 • www.ainonline.com Fractional Players

The fractional business model is bro- ers that didn’t need to buy another full AVANTAIR such as doing more heavy maintenance in-house ken, asserts Michael Riegel, a former airplane. Fractional providers offered bet- at Avantair’s three FBOs, at the Clearwater, Fla., Bombardier executive who now runs Avia- ter service than many charter operators, Avantair reports its fiscal year results in headquarters; in Camarillo, Calif.; and Caldwell, tionIQ. “There are a lot of irate consumers Riegel said, but with fractional costs mid-September, so the latest numbers were not N.J. Night shifts at those facilities allow mainte- monitoring what’s going on,” he said. Net rising, many travelers are shifting to available for this report. But, said nance to be done more efficiently, sales of fractional shares have been declin- high-quality charter operators. Avantair president and CEO Steve when the fleet generally doesn’t fly. ing steadily, went negative in 2008 and In the case of NetJets, some of its prob- Santo, “We have had record sales in Avantair also is leaving JSSI’s mainte- have dropped quickly year-to-date. “The lems are because its business is so July and have been doing really well nance cost-per-hour program and decline has been going on for seven years,” complex, he explained. “NetJets in particu- financially.” The ARG/US TraqPak Riegel said, and the fractional industry is lar has tried to be all things to all people.” switching to Dallas Airmotive for numbers bolster Avantair’s claim, engine maintenance. “For us, [JSSI] not, as some have suggested, experiencing The company’s Marquis jet card program, showing consistently positive flight a blip due to the recession. “Can the busi- free flights outside the normal service area did a terrific job,” said Santo, “and they hours for the fractional turboprop ness model be fixed?” he asked. “Yes, but and need to buy charter to fulfill fractional are awesome to work with, but we got segment (which also includes Exec- changes are needed.” flight requests layered in additional costs, to a size in terms of the fleet where it’s utive AirShare and PlaneSense). The fractional industry could be com- he said, “and it’s not surprising they dived Avantair CEO better for us not to pay a middleman.” Steve Santo pared to real estate timeshares, which into the red. The only way to dig out is to “We continue to see people leaving Through 2013, Avantair is commit- suffered from a reputation as bad invest- try to make money by selling shares.” But other higher-cost fractionals and ted to buying another 55 aircraft from ments long before the current recession for many of the fractional providers, share charter card companies and coming to us for Piaggio and should receive five or six new Avantis began. While fractional shares of aircraft sales are nonexistent. value,” he said. by the end of this year. may be at risk of that perception, Riegel Although NetJets’ Marquis jet card The economy is affecting Avantair, and Santo said, the fact remains that people still need sales offset some of the shareowner depar- said that the company sold no new shares during CITATIONSHARES to fly. “At the moment, they’re not being tures, “card activity creates as many the first three months of this year, although Avan- treated very well.” problems as it solves,” Riegel said. Across tair Edge charter card and Axis block charter sales Woody Harford, senior v-p and chief revenue What that means, he explained, is that the fractional industry, he explained, there have grown rapidly and resales of used shares officer for CitationShares, believes his company in a time when costs ought to be dropping, are an average of nine to 10 owners per air- continue to be strong. has transitioned into something more than a frac- shareowners are facing price increases plane, and each of those owners places a One factor that is attracting former owners of tional share provider and operator. “Our business across every aspect of share ownership. certain amount of demand on each air- shares in jets at the major fractionals to Avantair, model has evolved to the point where we’re not The amount that owners receive for their plane. Marquis jet card buyers, however, Santo said, is the much lower hourly cost for just in the fractional business,” he said. “Our used shares when they exit programs is average about 20 per airplane. “The more Avantair’s fleet of Piaggio Avanti twin turboprops. business is providing private transport, whether much lower, due to rapidly dropping used card business you do, the more people can When owners factor in the cost of ownership of a through owning a whole airplane, a jet share, jet aircraft prices, Riegel said. “Hourly fees demand the airplane,” he said. jet share, including monthly management fees, card or through our corporate solutions supple- are up well ahead of inflation, and the cost NetJets’ losses for the first six months fuel surcharges, hourly cost plus the added mental lift product.” Customers have access to a of being an owner is far higher than of this year translate into nearly expense of an asset that is rapidly decreasing in fleet “of around 80 jets,” he said, “so we don’t before. A lot of owners are saying it’s $700,000 per airplane. “Those are terri- value, flying in a roomy and fast Avanti at half the look at ourselves as a fractional company.” [Note: become too expensive and they don’t want fying numbers,” Riegel said. “Almost hourly cost suddenly looks much more attractive. Fractional market researcher Pierre Parvaud’s to keep doing this. The industry has dug anything they do [to fix the problem] is One Avantair customer who left one of the jet end-of-June figures show CitationShares with 73 itself into a hole.” going to take years.” fractional companies paid $400,000 for a one- aircraft, 16 of which are core company-owned The main attraction of the fractional Riegel, who launched AviationIQ as a sixteenth jet share and left the program after and 57 owned by shareowners (see Graphs 4 industry has always been that it offered consumer club aimed at helping fractional lower barriers to entry for new business share owners gain more buying power by selling the share for $68,000, according to Santo. and 4a on page 26).] aviation users and an easy way to add working together, thinks that there remains “The residual values become part of your hourly “We’re pretty well balanced between fractional supplemental lift for companies and own- a need for the fractional concept but that cost,” he said. owners and whole aircraft owners, and we man- the major providers need to Much of the growth at Avantair is from card age a fair number of full aircraft owners,” Harford revise their business models. and block charter customers, with sales in the said. Having the whole aircraft available to fly NetJets, he said, has too many Edge and Axis programs up 81 percent year over charters to fulfill Vector jet card flights or provide airplanes to serve its customers year, according to Santo. People who can afford supplemental lift to shareowners when their share and should cut its fleet to 160 to to buy fractional shares still have a need to travel, aircraft isn’t available is a distinct advantage, he 170 airplanes, which may be but they are wary of owning capital assets. said. “Because we’re managing our own cus- what the company is doing with “Everybody is looking at costs,” he said. tomers’ aircraft, it alleviates pressure to find lift the reported disposal of its Cita- Unlike the jet fractional companies, Avantair outside the fleet. Our customers don’t feel like tion 560 fleet. NetJets was not does not guarantee to buy back used shares at they’re being chartered because the flights are able to confirm that information the end of the contract period. “Buybacks have flown by CitationShares pilots in CitationShares by press time. really driven down the values of aircraft,” Santo aircraft. It’s a win-win.” According to Riegel, NetJets said. “Guaranteed buybacks are certain death.” To further the marketplace’s perception of is allowing some owners to idle Avantair does help customers remarket their CitationShares as serving the “private aviation” their shares by stopping flying, share if they don’t want to renew their contract or market, the company announced on August 6 that letting them retain ownership of if they want to buy a share in a newer Avanti. it hired former General Motors executive director the share but not charging the During the first quarter, Avantair had 18 cus- of worldwide travel services Ken Emerick as a monthly management fee. He tomers come up for renewal, and 17 renewed, consultant to help it reach out to corporate flight expects these aircraft–which he while the remaining share is for sale. “We’re not departments. Emerick will be responsible for estimates to number approxi- getting the kind of defections other companies “developing relationships with flight department mately 160–to sit idle for a few are seeing,” he said, “because we’re at the bot- leaders around the country and sharing with them months before NetJets asks the owners to resume paying man- tom of the food chain.” the full range of programs that CitationShares has agement fees or sell their Avantair had 55 aircraft as of mid-August, to service their need to become even more effi- shares. “Many will pull the according to Santo. Revenues have climbed signif- cient and effective,” according to CitationShares. plug,” he said, having held their icantly, up 15.7 percent for the first quarter of this “We found there’s been a high level of interest shares in the hope that used air- year compared with the same period last year. The with a fair number of large corporate aviation craft prices would recover. climb in revenue came from increased sales of departments,” Harford said. “We’re not going to see signifi- shares (up 12.8 percent), a 20.2-percent increase June and July have turned positive for sales, cant recovery for another 18 in maintenance and management fees and 49.7- according to Harford, and at the same time Cita- months. A lot of owners will percent-higher revenue from sales of Edge card tionShares has continued trimming staff to match and Axis Club memberships. Maintenance costs the level of customer flying. In June CitationShares While many of the fractionals have suffered during the recession, punch out and worsen the prob- Avantair has seen increased demand for its turboprop Avanti, lem for the fractionals.” have dropped because of cost-cutting measures Continues on next page u which sips jet-A but gives passengers a comfortable cabin. Continues on next page u

www.ainonline.com • October 2009 • Aviation International Newsaa21 THE Fractional Players

FRACTIONAL Continued from preceding page market u laid off 41 office staff and furloughed 52 pilots, and services is as follows: “Aircraft ownership uContinued from preceding page about 16 percent of the company’s employees. and management services, namely arranging and Given the slowdown in fractional share ARG/US’s TraqPak evaluation of business According to Harford, most shareowners that coordinating the purchase and sale of aircraft by sales and customer flying at NetJets and aircraft activity reflects a similar drop in needed to sell their shares to raise some capital multiple owners for sole or joint ownership of the the other major fractional operators such fractional activity during July 2009 versus have done so by now. “We’ve seen significant sta- aircraft; offering fractional ownership programs to as CitationShares, Flexjet and Flight July 2008, with a 17.6-percent decline. bilization of people exiting,” he said, “and we’re others; enabling travelers to pre-purchase and use Options, it’s unlikely that the aviation ARG/US further breaks that down into under budget for those giving notice and wanting blocks of airplane hours; and managing aircraft industry will see orders to the tune to leave.” Some continue to fly by purchasing ownership for others.” of NetJets’ $1 billion order for 96 Vector jet cards. new Cessnas announced at the To help make the process of owning a share EXECUTIVE AIRSHARE 2007 Paris Air Show. Indeed, easier, from late March until June 30 Citation- OEMs have acknowledged large Shares offered buyers of used shares a This small regional fractional-share operator reductions in backlogs, and frac- 100-percent residual value guarantee plus special continues to grow steadily and cautiously, with tional operators are deferring new pricing on used shares. The program required most of the new growth occurring in the com- purchases as they struggle to size their infrastructures to match cus- that owners exercise the guarantee from the 13th pany’s new fleet of Embraer Phenom 100 very tomer demand more efficiently and month through the 36th month of the contract. light jets. As of mid-August, Executive AirShare cost effectively. “The guaranteed program gave people confi- had taken delivery of four Phenom 100s this dence that we stood behind the value [of year, and another five were expected to be deliv- Flying on the Mend CitationShares share ownership],” said Harford. ered by year-end, as well as at least one Phenom The news isn’t all bad, and “We had a huge take-up.” 300. Executive AirShare’s 19-airplane fleet con- some recent statistics support the Harford did not provide specific figures for sists of four Phenom 100s, five Beechjets, five prevailing view that the aviation industry Provider Flexjet has seen a drop in traditional deferred orders of new jets, but noted that King Air 350s and five King Air C90s. The com- fractional business, offset by an increase being part of Cessna helps the company adjust pany is headquartered in Kansas City, Mo., and is bumping along the bottom and poised in jet card sales and leases. for a rebound. According to flight-track- its new aircraft needs as the economy fluctu- has bases in Kansas and Texas, with plans to ing service FlightAware, fractional flying ates. “As our demand expands, working with open a new location in South Texas with one of activity climbed 11.1 percent in July ver- aircraft categories, showing that small- our parent company, we can find our way to get the new Phenom 100s. sus June 2009, although compared to the cabin jet activity dropped the most, while aircraft [as necessary],” he said. “It’s in our “I’m pleased we’re a lean company and have previous July, the fractional segment’s turboprop activity grew 21.5 percent (see collective best interest. We’re flexible. Part of stuck to our guns with a regional concept,” said activity was down by 17.1 percent. Continues on page 24 u our mission is to make sure we can take care of Keith Plumb, president and COO. The first Phe- customers and bring them into the Cessna fam- nom 100 is being used as a demonstrator and the Graph 2: First Half 2009 Shareholders ily. We’re feeling bullish about the future; as other three are already fully sold in fractions. long as we’re willing to modify the business Some Beechjet shareowners are trading in shares Avantair CitationShares Flexjet Flight Options NetJets 100 for the Phenom 100, which the company did not expect, as the Phenom 300s are expected to 55 replace the Beechjets eventually. Although Execu- 50 tive AirShare’s first Phenom 300 (for a managed 14 7 6 2 customer) will be delivered this year shortly after 0 -1 -8 Embraer receives certification, fractional opera- -26 -24 tions in the 300 won’t begin until early 2011. -50 “We’ll probably sell one of our Beechjets this -65 -71 -78 year,” he said, “then two next year.” -100 -92 During the first quarter of this year, business Fractional owners benefit from a consistency their was quite slow, according to Plumb, but in June, charter counterparts do not. When they get to the flight revenues jumped by $70,000 compared -150 -150 airport, they can expect to find their specific with June 2008, primarily due to the addition of airplane and a familiar crew.

v the Phenom 100 to the ﬂeet.

-200

r -205 r e Executive AirShare is also seeing a number of

u buyers who have left larger national fractional

S -250 programs in favor of meeting their travel needs New Owners Lost Owners Net New Owners with a strategically placed regional ﬂeet. “We’ve definitely found our niche,” said Plumb, “a Graph 2a: Number of Fractional Owners–Totals regional fractional with lower costs, basing where 1H/07–1H/09 customers are located.” 1H/07 1H/08 1H/09 Still, Executive AirShare isn’t immune to the 400 recession and has lost a handful of customers 335 this year to ﬁnancial distress. However, none of 300 model to meet the needs of our customers the buyers of Phenom 100 shares has cancelled. 216 200 there’s no reason we can’t be successful.” Besides being a regional operator with a small

110 Although CitationShares acknowledged that it fleet, Executive AirShare also owns a separate 100 84 planned a big announcement sometime in the charter certiﬁcate holder, Executive Flight Services

0 third or fourth quarter, no information was avail- in Fort Worth, Texas, which flies a Falcon 50EX 0 able by the time this issue went to press. The and Gulfstream G150. For shareowners who need

-100 company declined to comment on reports that a larger jet occasionally, being able to move into AIN received from industry experts that it plans to the Falcon or Gulfstream, Plumb said, “is a good -200 change its name to CitationAir and focus on a ﬁt for everybody. They know the aircraft is main- -225 -216 variety of business aviation transportation options tained by us, crewed by us and managed by the -300

d and not on fractional shares. CitationShares has same company that manages their share.”

-318 u

registered the trademark CitationAir with the U.S. Executive AirShare has no charter card pro-

-400 i

-402 P

e Patent and Trademark Office. In the application, gram. “We believe cards dilute the level of service

S -500 dated March 12, 2009, the description of goods Continues on page 24 u New Owners Lost Owners Net New Owners

22aaAviation International News • October 2009 • www.ainonline.com THE Fractional Players

FRACTIONAL Continued from page 22 market u provided to shareowners,” he said. “Cards are although per-hour costs tend to be slightly higher uContinued from page 22 used to try to maintain revenue streams, to the than a traditional fractional share, he explained. Graph 1 on page 20). It is interesting to traded Avantair does release relatively detriment of selling a share.” Business aviation is suffering now from a note that according to ARG/US, fractional detailed information on its operation, at Earlier this year, Executive AirShare elimi- significant amount of under-flying by customers, aircraft activity decreased the most in that least compared with NetJets, Bombardier- nated peak days for shareowners, who pay for a Reid said, “whether they own aircraft or frac- time period, compared with Part 91 and owned Flexjet and Cessna-majority certain number of days per year rather than by tional shares or in some cases even with jet 135 operations. owned CitationShares. Flight Options, the flying hour. “A national model will not per- cards.” Although the amount of flying by cus- According to J.P. Morgan’s monthly Executive AirShare and PlaneSense are mit [customers] to do that,” said Plumb. “It’s tomers “has recovered somewhat,” he added, business jet activity analysis, business air- privately held. None of the major frac- theirs for a day and gives them ultimate sched- “and is trending upward, we are seeing the craft flight operations grew during July, to tional operators divulges detailed fleet ule flexibility.” under-flying is still there.” 304,000, the first time that number was information publicly. higher than 300,000 since November France-based researcher Parvaud ana- For the first six months of this year versus the For Flexjet, this trend is helping the company 2008. “Monthly flight ops are now up 16 lyzes the activity on the public FAA same period last year, Executive AirShare’s total sell fractional shares to business aircraft operators percent off the February bottom,” the Registry to determine what is happening to revenues were down by $100,000. “We’re pleased that might be avoiding adding another aircraft to report noted, “and have increased sequen- the fleets of the major U.S.-based fractional with that,” said Plumb. “In this economy we see their fleet. “We’re seeing some flow of corporate tially for three consecutive months.” Flight operators. According to Parvaud, 2009 is that as a success. We’re doing all right; we’re dis- business into our coffers,” said Reid, with compa- operations, however, are still depressed shaping up to be a bad year for most of ciplined in our strategy and hopefully poised for nies buying fractional shares for needed additional below the historical level of 360,000 per the fractionals. bigger and better things in the second half.” flight hours. And Flexjet is also seeing owners sell- month and for July are down 15 percent on During the first half of last year, ing their shares and moving into jet cards. At the a year-to-year basis. according to Parvaud’s statistics, the FLEXJET same time, several dozen new customers become new business aviation adopters by chartering from Most fractional operators are either not five national U.S. fractional operators– Like CitationShares and other fractional large enough parts of their publicly traded Avantair, CitationShares, Flexjet, Flight Skyjet, then learning about fractional shares and providers, Bombardier’s Flexjet also focuses on parent companies to warrant release of Options and NetJets–broke even in num- buying from Flexjet. more than just fractional shares, detailed statistics or are privately held and ber of shareowners added and lost. Thus, According to research by Paris- according to Fred Reid, president of do not share such information. Publicly Continues on page 26 based fractional analyst Pierre u Flexjet and Skyjet. “It’s important to Parvaud, Flexjet’s fleet grew to 103 step back and understand we at Flexjet aircraft by the end of June this year are in a number of businesses,” he compared with 96 at the end of the Graph 3: Fractional Aircraft Acquisitions and Sales said. These include fractional shares, same period last year although more 1H/09 aircraft leases, jet cards and retail of those (20) are core aircraft (see charter via sister company Skyjet. Graphs 4 and 4a on page 26). In Avantair CitationShares Flexjet Flight Options NetJets Flexjet One is a whole-aircraft owner- December last year and January this 4 ship program under which Flexjet Fred Reid, 4 year, Flexjet experienced higher than 3 3 contractually purchases a set number president of Flexjet and Skyjet normal exits from its fractional pro- of charter hours from the owner so 2 gram, according to Reid. that owner enjoys a predictable annual income. 1 11 “We took quick action in terms of attractive This year, sales of traditional fractional shares 0 0000000 extension programs, and the consequence was 0 have been soft, according to Reid, but that drop rapid and strong stabilization of our customer has been counterbalanced by “an unexpected base.” Basically, Flexjet offered some customers -2 surge in jet card sales” and growing numbers of the opportunity to keep their shares at the same leases. This is driven by buyers’ quest for more cost so they wouldn’t have to consider selling -4 flexibility in the way they own and use aircraft -4 their share at what have become lower fair market assets during the financial turmoil. -5 values or buy a new share at a higher cost. Flexjet “I do not subscribe to the notion that frac- -6 -6 also offers a 15-percent discount on qualifying tional is dead,” Reid said. Looking at Flexjet and round-trips where owners return on the same or

a not including whole-aircraft owners, fractional

-8 the next day. “That program was developed as a

-8 e

r r shares still make up 85 percent of Flexjet’s busi-

: response to owner feedback for more affordable

-9 -9 r

u ness, he said.

o -10 S short-term travel,” he said. Added Sold Net Added Net Sold Flexjet has also laid off personnel in response to the recession, both ﬂight crew and staff at the company’s headquarters in Richardson, Texas. Graph 3a: Fractional Aircraft Fleet Status The company has also deferred some new aircraft 1H/07–1H/09 orders and “disposed of used aircraft,” Reid said. “Exits have somewhat exceeded entries so we’re

1H/07 1H/08 1H/09 not [expanding] the ﬂeet now.” 50 47 FLIGHT OPTIONS 40 38 Last year, the ﬁnancial meltdown that swept the

30 world “took us all by surprise,” said Flight Options

22 vice president of sales and marketing Jay Heublein. 20 18 “By November we began to realize that we had no Flexjet had more than 100 airplanes in its ﬂeet at idea how long it was going to last. Based on what 9 the end of June, compared with 96 at the same 10 time last year. we saw, it didn’t look good, and it got a lot worse.” Flight Options developed an action plan last 0 Flexjet’s walk-away lease program has grown November and quickly started scaling operations in popularity, according to Reid, and accounts for to match the business that was taking place. This -10 an increasing number of fractional-share sales. included laying off pilots, maintenance personnel

-14 a Under the walk-away program, buyers can leave a and administrative support staff. “Those deci-

v -16 r

-20 r r lease with no consequences after 90 days. The sions were difficult,” he said, “and they involve

-23 e

c r upfront commitment is much lower because the changing peoples’ lives.” Ultimately, the goal is to

-29 o

S -30 buyer is leasing the aircraft or the fractional share, Continues on page 26 u Added Sold Net

24aaAviation International News • October 2009 • www.ainonline.com THE Fractional Players

FRACTIONAL Continued from page 24 market u bring all those employees back to Flight Options. Portsmouth, N.H., benefits from customers’ uContinued from page 24 But to do that, “We have to protect the organism desire not to own expensive capital assets. A while sales efforts delivered 216 new 360 owners were lost, for a net negative of in that process,” he said. share of a single-engine PC-12 is much less shareowners during that period, the same 192 shareowners for the second half and Flying is also down at Flight Options and costly than one for a jet or twin-engine turboprop. number left the programs. the entire year. In the first half of 2009 there are more airplanes available, according to “PlaneSense is in a sweet spot,” said In the second half of last year, the (the latest date for which information was CEO Michael Silvestro. But Flight Options has George Antoniadis, president and CEO of Alpha effects of the recession hit home, and available), the trend accelerated, with 402 also seen an uptrend in buyers who don’t want Flying, which manages the PlaneSense frac- while the five fractional operators man- owners lost versus 84 added, for a net loss to own an airplane outright or who plan to fly tional program. “Clearly buyers and users are aged to sell shares to 168 new owners, of 318 shareowners (see Graphs 2 and 2a less and see a fractional share as meeting their trying to streamline or optimize their expenses on page 22). needs. Aiding the fractional cause is the issue of and their asset commitments. In that environ- Most of the fractional oper- visibility. “We have to be sensitive to the fact ment, we believe our program, being most cost ators added aircraft during the first half of 2009 but, except that it’s been politically incorrect to own an air- effective, is going to benefit.” Like Avantair and for Avantair and Flexjet, dis- plane,” he said. “The industry’s had a black eye, Executive AirShare, PlaneSense has gained posed of more than they added and there are a lot of people who just don’t want customers who have left the more expensive jet (see Graphs 3 and 3a on to own an airplane today. We’ve seen a little fractional programs. page24). The total of negative bump because of that.” For PlaneSense, keeping costs low isn’t just 14 aircraft added during the The Flight Options fleet has shrunk, accord- about having the lowest-cost airplane or imple- first half contrasts markedly ing to Parvaud’s research (see Graphs 4 and 4a, menting cost-cutting procedures only during a with the 18 and 22 net aircraft this page). For the first six months of this year, recession. “It’s not something you do occasion- added to the five operators’ the fleet dropped to a total of 105 airplanes, ally,” Antoniadis explained. “We always need to fleets during the same periods down 16 from the same period last year. The be looking to optimize our costs and our opera- in 2007 and 2008, respectively. core Flight Options fleet grew by two aircraft to tion. Like everybody in this downturn, we have Overall, however, the major 24 total, up two from last year, so most of the had to roll up our sleeves a little bit more, but fractionals’ total fleet numbers attrition resulted in aircraft leaving the fleet. it’s always high on our minds. That’s why we CitationShares operates a fleet of nearly 80 aircraft. In an effort to keep up with market have remained relatively stable, when “There are more airplanes for sale today as a think we can deliver a cost-effective program demand, it is becoming an ownership comparing the end of June 2008 to the percentage of the in-service fleet than ever with a high service level.” and management provider. Continues on page 28 u before,” said Silvestro. “The market has certainly PlaneSense’s business is holding steady, seen a decline in values–precipitously–in the last according to Antoniadis. “We’ve had some cus- nine months.” tomers request to exit, but remarketed shares have Graph 4: Fractional Fleet Numbers Another way of looking at fractional owner- all been placed with new customers. We’ve seen a ship, according to Heublein, is that in terms of healthy intake of new customers, particularly since

2009 2008 owning a capital asset such as an airplane during April, both in remarketed shares and new shares.” a recession, having a one-sixteenth-share expo- The PlaneSense fleet has shrunk slightly since last sure financially is much easier to handle than year, down to 32 PC-12s, which includes five core Flight Options Flight Options owning an entire airplane. “If you’re a buyer, the aircraft. Flight hours had dropped but are picking 105 121 opportunities are unprecedented,” he said. “This back up, and Antoniadis expected August numbers will spur new growth into our world.” to be nearly the same as flight hours flown during Flexjet Flexjet 96 103 Flight Options, which started as a lower-cost the same month last year. provider offering shares of used airplanes, will While cost is always an issue when operating NetJets NetJets CitationShares 493 later this year take delivery of its first Embraer any kind of aircraft, Antoniadis doesn’t believe CitationShares 500 82 73 Phenom 300, likely either the first or one of the that fractional share owners and potential cus- first Phenom 300s to enter service. The jet will tomers are shying away or not flying just Avantair Avantair 42 begin flying fractional shareowners right away, because of the expense. “The driver is still the 46 according to Heublein. “It is a game-changing severe recession,” he said. People who can airplane. We’re excited to get that first airplane, afford to fly are choosing not to, and it did not and it’s going to drive excitement.” Flight help that some politicians jumped on the populist

Total Fleet: 827 Total Fleet: 824 Options has ordered 100 Phenom 300s and has bandwagon suggesting that private flying is

* As of June 30 options on 50 more. somehow not appropriate. “There was a witch Source: Pierre Parvaud Flight Options has no specific plans to phase hunt for a while,” he said. out airplanes in its fleet as the Phenom 300 PlaneSense doesn’t guarantee to repurchase Graph 4a: Frax Fleet Composition– comes online. “We’ll let the marketplace dictate shares from owners but, said Antoniadis, “we will Aircraft Bought by Shareowners vs Core Fleet what our product mix looks like, and the quan- always facilitate people who want to exit. We want tity,” Heublein said. people to be happy.” So far this year about 3 The company recently introduced the Jet Pass percent of shareowners asked for help in remar- 2009 2008 Flight Flight Select 25-hour jet card tied to a specific aircraft keting their shares, he said, “and we’ve managed Options Options type. “It’s a great value compared with some of to place all of them. We want to be able to show 24 22 the other options,” said Heublein. Instead of buy- that there is a secondary market that is viable and 81 99 ing a jet card to provide access to the entire workable, and we’ve proved it.” 20 Flexjet Flexjet 9 model lineup from Hawker Beechcraft 400XPs to PlaneSense is not immune to the recession the Embraer Legacy 600, Jet Pass Select is and last year reduced its workforce by about 10 83 87 restricted to one aircraft type, so the per-hour percent, which included 7 percent related to nor- cost is lower because customers can’t choose to mal attrition. PlaneSense has also deferred some 462 471 16 18 fly other aircraft types. “It’s as much as 30 per- PC-12 orders, although the company planned to 57 cent less than what a competitor would offer for take delivery of three new PC-12s by year-end. CitationShares 64 5 the same service,” he said. PlaneSense retires aircraft after about five years 4 41 CitationShares 38 of flying, and the average age of its PC-12 fleet is Avantair 38 22 about three years. Avantair PLANESENSE NetJets NetJets Earlier this year, PlaneSense expanded its ter- Like Avantair, PlaneSense, the regional Pilatus ritory to include parts of Texas and Oklahoma as Dark: Customer Fleet PC-12 fractional-share operator based in well as new destinations in the Bahamas. –M.T. Light: Core Aircraft Source: Pierre Parvaud

26aaAviation International News • October 2009 • www.ainonline.com THE FRACTIONALmarket

uContinued from page 26 end of June 2009 (see Graphs 4 and 4a tional companies were weak links in the on page 26). order chain. Indeed, the August news that While the numbers for the first half of European fractional start-up Jet Republic this year are dismal, the fractional share had run out of funding and cancelled its industry remains a key component of gen- order for 110 Learjet 60XRs underscores eral aviation, accounting for a significant Foley’s observations. portion of the overall fleet, thousands of The fractional business model suffers jobs and hours flown on behalf of cus- from overexposure, too many players in tomers and an important entry point for what is a small marketplace, according to new consumers of business aviation Foley. “I think the demand for fractional travel. For the fractional operators, their shares might have been overestimated,” he business model is not so much broken as said. “It may even be analogous to VLJs, more in need of adjustment to reflect the where early providers talked up the market reality of the current economic downturn, to the point where others decided to get in according to industry observers. No one on it, but core demand wasn’t there.”

Regional provider Executive AirShare operates a In North America, Foley said, “We’ve fleet of 19 airplanes, including four Phenom 100s, largely met that demand.” Even though the from bases in Kansas and Texas. fractional industry points out that many companies and wealthy individuals could on the outside knows if the massive losses afford to own a fractional share, he added, at NetJets have soured Berkshire Hath- “I fall back on the data. Fractionals ramped away chairman Warren Buffett on his up quickly in the late 1990s then started company’s investment in the fractional smoothing out. Lately the fleet hasn’t share industry, but the fact remains that increased at all. That tells me a lot of the every operator has many remaining share- current demand has been satisfied.” owners who need service and operators Foley believes that the fractional continue to add innovative features and providers need to learn how to operate effi- programs to attract new buyers. ciently in a mature, not a growing, industry. When the industry was growing, providers The Weakest Link sold aircraft at list price and used the differ- Consultant Brian Foley Associates has ence between the discounted amount they commented, “The fractional business is a paid for the aircraft and the list price to sub- marginally workable business model when sidize operations. If fractional providers times are good. Look how long it are going to survive, they need took NetJets to become profitable. to improve their efficiency and The fractional model doesn’t charge enough to shareowners so work so well in a downturn.” that when a downturn occurs they He sees the model as the weak still make money, or at least lose link in the industry order chain. less, he said. In fact, he issued a press release Foley predicts “there’s a big on September 19 last year warn- shakeup coming,” with one of ing that business jet “deliveries the big three making a major will fall precipitously from peak Brian Foley, announcement. “Fractionals will and could take many years to market analyst survive, but there will be fewer return to [pre-correction] levels. players, which is better for those The OEMs have grown fat, dumb and remaining.” There will always be a need for happy with their current order backlogs some owners to keep their use of business and are oblivious to how quickly things aircraft “under the radar,” he said, “and will change.” fractionals are a great way to do that, but Part of the problem, Foley explained, is eventually they have to find a way to remain that the many start-up air-taxi and frac- profitable while in the mature stage.” J

28aaAviation International News • October 2009 • www.ainonline.com