More Owners, Fewer Players
The fractional business is strong, but being a provider is difficult business
by John Boyce
eBizjets TheFractional Alternative
eBizjets of Boston sells private jet membership to users who want to fly privately without the commitment to ownership.
Steve Morton’s company has cut a deep niche right out of the heart of the fractional aircraft ownership business. "We occupy a middle ground between fractional and charter," says Morton, eBizjets’ VP for marketing, "and the big points of difference are cost, affordability, convenience, flexibility, and certainly response time. Because of the sheer size of the fleet we have a faster response time than anyone in the industry."
eBizjets has a master services agreement with certified charter companies across the country to provide ondemand charter service to eBizjets customers. As a result, eBizjets has 1,400 jets of all sizes at its disposal. Customers, comprised of sports and entertainment figures as well as business fliers, buy travel membership cards in incre ments of $100,000, $250,000, or $500,000. Each time they use the service, the charge is deducted from their accounts. Billing takes place after the flight and eBizjets has oneway and round trip rates.
"Because of the sheer size of the fleet," Morton says, "we have a faster response time than anyone in the industry. Because we track the 1,400 jets through proprietary software we have the ability to use the best positioned jets in the fleet to fulfill each mission. Ultimately, the passenger is only paying for the time they actually fly."
"It’s nothing more than prepaid flight time. They (customers) make the deposit like a debit card. We deduct from the balance and when the balance gets low they replenish their accounts. They are only paying for actual flight time. The benefits are lower flight cost, fixed hourly pricing, complimentary upgrades to larger aircraft, and earned upgrades.
"...We offer our clients to those jets in five hours or less at any airport in the country. There are no up front acquisition costs, no membership fees, no management fees, no fiveyear commitment." While the number of participants (owners) continues to grow, the number of companies offering the service is shrinking through failure or consolidation. It’s a measure of just how tough it is to fund, manage, and grow a fractional business.
According to Kevin Russell, senior VP at industry leader NetJets, 57 entities have attempted a fractional program over the years and only four majors remain: NetJets, Flight Options, Bombardier Flexjet, and CitationShares. In addition to being the smallest among the four, CitationShares isn’t a national program. It will fly anywhere but it sells only east of the Rockies.
As of midMay, Aviation Data Service in Wichita, KS, reports 653 aircraft in the fractional fleet, up 22 from the end of 2001 and up from 530 in 2000. According to National Business Aviation Association figures, fractional shares increased from 3,834 in 2000 to 4,900 at the end of 2001.
Flight Options is the only fractional company with a used or preowned aircraft program in addition to a new aircraft program. Darnell Martens, assistant to the chairman, reports that during the past two quarters — the fourth of 2001 and the first of this year — business has been "up significantly" but only slightly over what the company projected for itself and the industry. Martens attributes the spike in growth in late 2001 to the events of 9/11 moving prospects to buy who may have been sitting on the fence.
CitationShares, the newest and smallest of the four major fractional companies, doesn’t consider itself in competition with the industry leaders. Business has been phenomenal, but as sales and marketing senior VP John Hall points out, growth is relative
"Our business is growing quite rapidly," Hall says, "but that’s more a factor of our size than it is we’re doing so much better than anybody else. In the last 12 months we’ve doubled in size but today we have 25 airplanes and almost 200 owners. For somebody else to grow 100 percent they would have to have 300 airplanes."
Started two years ago, CitationShares is limiting itself to using smaller jets. "We’re not offering a broad spectrum of products," Hall says. "We’re try ing to offer a program that is the most valueoriented program for the typical fractional flier — typical being one who flies less than three hours (per trip) with four or fewer passengers."
CONSOLIDATION
Most of the 53 failed programs simply gave up the ghost while others merged with others. Most notable among those getting out of the business was Avolar, the United Airlines startup. Consolidation became significant news with the recent merger of Raytheon’s Travel Air program with that of Flight Options, which holds a 50.1 percent share to Raytheon’s 49.9 percent interest in the new concern, doing business as Flight Options.
"I think you will see (continued) consolidation in this industry," Russell says at NetJets. "If you project out to the year 2003, instead of seeing four or five players as you see today, I think you might see two or three... It’s already started. Raytheon launched their program in 1997 and suffered tremendous financial losses trying to put Travel Air on the market and spent almost two years trying to find a buyer, and eventually came to an agreement with Flight Options.
"They went looking for investors who could buy out the Raytheon share in that program. And as witnessed by the lack of success that Avolar had as they went out to the investment community looking for money, they discovered that investors are not looking for an investment in something that turns a profit for them in seven to 10 years. Smart investors want to turn a profit in 12 to 24 months.
"That same phenomenon is going on now. Flight Options is looking for investors and they’re knocking on similar doors that Avolar knocked on. There are just so many people in the world who can afford to step up and write you a check. They want a lot for their investment. It will be interesting to survey the scene in about 18 months from now and see who’s still playing... It took us eight years to turn a profit."
IMPACT OF 9/11
Nobody, it seems, has yet tracked the impact, statistically, on the fractional business or on business aviation in general of the September terrorist attacks. However, there is some evidence that business aviation experienced a spike in business.
Although he doesn’t have precise numbers, Steve Phillips, director of marketing for Bombardier Flexjet, says, "What happened after 9/11 (is) that we saw a significant increase in the number of inquiries we received. The phone was ringing a lot.
"The sales cycle is longer when you’re purchasing a business jet compared to something else. We saw the people we had been talking to in the months leading up to the event (9/11) deciding, after the event, to do it right now. We had a lot of people make a quicker decision as a result of that."
Hall at CitationShares says his company experienced much the same thing. "Post 9/11," he says, "we saw a surge in activity. The question was, is this a spike that will pull back to where it was or is it a new level of activity in between? Enough time has passed to get a feel for it and it has pulled back to somewhere in between."
COMPARABLE PRODUCTS
While competition is keen among the providers, there doesn’t appear to be a large difference in the pricing of the product. Each of the companies, with slight variances, has the same cost structure, depending on the size of the aircraft. Each aircraft is broken into 16 shares and a buyer can buy as many shares as he wants. Each share represents 50 hours of flying time. After the initial share purchase, each company charges a monthly management fee and an occupied hourly rate.
Martens says that each of the companies is extremely aggressive in the marketplace. "We all believe there is a large market yet to be tapped.... All the buyers look at all the major programs. All the programs are good programs. Everybody operates at a very high standard in terms of safety and all of those operational issues. It really comes down to the aggressiveness of the marketing."
Russell at NetJets, the first company in the field and the industry leader, disagrees. "There’s a big difference between us and everybody else in a number of different ways. Nobody spends the money we do on safety and security. No one comes close." But Russell doesn’t disagree that fractional ownership in general has been good for business aviation.
"Eighty percent of our owners," he says, "have never owned a private aircraft in their entire lives. Fifty percent of our owners have never even chartered a private jet in their entire lives. "
Fractional ownership is "absolutely changing the industry," Phillips says. "It’s bringing new people into business aviation, people that have not had prior experience. There’s a little bit of switching from one area to another but for the most part it’s brandnew people. More than 70 percent of the people who come in and purchase a Flexjet share don’t have any prior business aviation experience."
What fractional ownership has enabled the industry to do, Martens says, "is to offer a product to a much broader group of consumers. Companies and individuals who could never have had access to business aircraft can now afford it. It’s been good for manufacturers —they’ve sold a lot of aircraft that they wouldn’t have sold. It’s been great for employment (pilots, mechanics, et. al). It’s been excellent all around."
