On Fractionals, Security, Issues

Following this year’s FBO Leadership Conference hosted by the National Air Transportation Association, incoming NATA chair James P. ‘Jim’ Miller agreed to sit with AIRPORT BUSINESS to discuss the state of business aviation and the services sector, and the challenges ahead. Long a fixed base operator himself with Miller Aviation in Binghamton, NY, he sold out and joined Corporate Wings in 1998, later becoming aligned with fractional provider Flight Options. Today Miller is president of Nextant Aerospace. Following are edited excerpts of the discussion ...

AIRPORT BUSINESS: You served in a number of roles at Flight Options. Can you relate the experiece over the past decade or so?

Miller: It’s safe to say that there are very few things at Flight Options that I haven’t touched. From my perspective, we were the first in the market with pre-owned aircraft and certainly the most successful in that endeavor. We grew the fleet from one airplane in 1998 to a high of 246 aircraft in 2004-05. Subsequent to that, we’ve retracted considerably, as has the whole industry. We now operate a little over 100 aircraft.

Early on, we saw the downturn in general aviation and the fractional business coming in 2006/2007. At the time we had a lot of aging aircraft that we desired to get out of the fleet. We were owned by Raytheon, and they encouraged us to divest ourselves of 30-year old Citation 3s and older Gulfstreams and so forth in favor of brand new airplanes.

It turned out to be fortuitous. We ended up selling the airplanes at prices that one would dream of today. We sold the CJ fleet in 2006 for an average price of $2.5 million. Today, they’re worth about a million dollars apiece. So we were able to capture a lot of the equity we had in the airplanes.

Raytheon elected to sell the company at the end of 2007 to HIG Capital; ultimately, HIG sold the company to a group of investors led by Ken Ricci a year later. Our balance sheet is strong; we’re making a little money.

But we see a very, very slow recovery. We think the biggest product out there for the next year or so will be charter and cards, with fractional sales picking up speed in the out years.

AB: Some say the fractional model is broken. Your thoughts?

Miller: The model is broken; I don’t think it’s broken forever. In the ‘70s, airplanes were reasonably inexpensive; today they’re quite expensive adjusted to inflation. As time went on into the ‘80s, fewer companies could justify buying a whole aircraft. The thing that made fractional particularly attractive is you didn’t have to get involved with operating the airplane; you paid for a portion of the airplane commensurate with what you expected to use; and you paid a fair price for the operating cost.

As time went on, we went through a cycle of rapid growth. NetJets came out with Marquis card, which today virtually everybody offers. You could have access to the same quality of fleet but didn’t have to invest any capital.

That went really well, but the genie is out of the box. People find it difficult paying for a portion of an aircraft when they can own the same thing for a little more per hour. The hourly charges are very competitive because there’s an excess in available aircraft today. I dare say that any fractional operator out there has airplanes parked, or grossly underutilized. Supply and demand forces prices downward.

There will come a time in the future when the capacity of the fleet diminishes and demand increases. Then the charter rates and fractional card rates will rise again.

AB: Tell us about Nextant.

Miller: Recently, Ken Ricci asked me if I would run Nextant Aerospace, which is separate from Flight Options but has many of the same investors. What we’re up to is breathing some life back into the Beechjet products. We’re going to deliver an airplane that has performance that compares to the CJ4 or the Embraer Phenom 300, at about half the price or less. These are pre-enjoyed aircraft. Our emphasis is strictly on the used airplane.

AB: The past decade has seen significant growth in the charter market, particularly involving aircraft management. What are your thoughts on the state of that segment?

Miller: One of the major expenses for Flight Options was additional lift from charter operators. Some say as much as 40 percent of lift for charters was for the fractionals. I dare say there’s virtually none of that today. Common sense would say the charter market is off considerably. When I look at some of the UBS and Teal Group reports on operations, their studies indicate the same thing.

AB: Regarding FBOs, there are some who predict a big fallout — maybe as high as 20 percent or more — in that sector in 2010; others say the industry has weathered the storm. What do you foresee?

Miller: I think I fall into the latter category. Many FBOs are under a lot of stress right now; there will be some failures — not 20 percent. If that occurred, the ripple effect would be a great concern to everybody — to the lack of services at an airport for a charter operator to the municipalities which rely on revenues from the FBOs, and of course the employees.

If that were to happen, then FBOs might take on a different character. If you’re a sole FBO at a rural airport, it’s likely the local government will step in and pump fuel. I don’t want to disparage the government entities that are in the FBO business but as a lot, their service is not anywhere near what privately owned FBOs offer. It would be a concern to high-end operators like us. We rely on them to finish the customer experience that our clients expect.

A properly sized FBO can weather the storm. Not sure about the charter operators that have their own rolling stock. Those folks are in for a lot of trouble.

AB: Regarding issues, what are your hot buttons?

Miller: The economy, of course.

The regulatory environment that we’re in today, in that everybody from the President on down in the Administration finds us as an attractive target to strike out against. The current President flies Air Force One more than any other President. Just as he needs that global reach, so does corporate America. It ignores the reality that it may be the only way to get the job done in a timely fashion, and time kills deals.

The fiscal crisis that the government is in today is having a continued effect on NextGen. I’ve lost track now, but the fact that you can have Congress issue continuing resolutions for anything like some 13 times is a disgrace. The current administration is high on the environment, and so I am. I have a long history of leading toward environment responsibility; I’m on NATA’s environmental committee as well.

I would tell you that one of the biggest things we could do to lower greenhouse gases and lower the fuel consumption of aviation would be to enact NextGen. It would cut up to 20 percent of the time in the air; which translates to 20 percent less fuel burn.

Instead of attacking it in a meaningful way, we’re being threatened with cap and trade; and you essentially have it in Europe now. The Nextant project that I’m on will lower the fuel consumption on the Beechjet by 30 percent without losing any performance.

Those are just two examples of things we can do for the environment. We just need the government to get out of our way.

Of course, security; Part 135 flight and duty time issues. We need to tighten up safety in certain areas, but we need to do so intelligently and in a cost-effective manner.

Whether or not the new TSA proposal for LASP makes sense or not, the original proposal didn’t make any sense, like not carrying golf clubs on an airplane.

AB: Any final thoughts?

Miller: One of major accomplishments of the associations this year has been an alignment of common interests, to the point that we often can go to the Hill with a collective voice. It’s had noticeable effect, such as the creation of the Aviation Caucus in the House. Sometimes the darkest hours are just before dawn.