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Aviation History
2004
2004-09 - 1935.PDF
NBAA: fractionate EXPANSION Struggle to conguer Europe Europe has been a tough nut to crack for fractional ownership providers. Traditional operating practices, such as leasing and block charter, have been a mainstay of the business air craft industry and the concept of shared ownership has long been regarded with scepticism. Only NetJets and Flexjet have offered their fractional brands to a cynical European audience. But two years after it began, Flexjet withdrew its programme because of hefty finan cial losses, and was convinced Europe was not ready to embrace the concept. Although Flexjet has remained in Europe offering upscale block charter programmes through the Flexjet and Skyjets brands to a widening customer base, it is sure it was right to pull out of fractional. NetJets, on the other hand, has held its resolve despite a very slow start. Eight years into its venture, it now boasts an expanding fleet of 52 aircraft and more than 300 sharehold ers, but the process has been very costly. Warren Buffett, chairman of NetJets' parent company Berkshire Hathaway, said last year: "The European loss is painful. But any com pany that forsakes Europe, as all of our competitors have done, is des tined for second-tier status." For the years from 2001 to 2003, NetJets Europe recorded gains of 88%, 61 % and 77% in European management- and-operating revenues. "We have not, however, yet succeeded in stem ming the flow of red ink," says Buffett. Rob Dranitzke, NetJets Europe business development manager, is bullish about prospects in Europe and says the programme could break even next year, when significant orders for the European programme are expected. "With so many more people entering fractional ownership here, we should be the fastest-growing pro gramme in the world in two years in terms of net aircraft growth." As in the USA, the jet membership card has been a blessing to NetJets Europe, prompting its acquisition of Marquis's three-year-old European subsidiary. And the investment seems to be paying off. The now-renamed Private/Corporate Jet Card has nearly 200 members and a 90% renewal rate, says Dranitzke. In May alone, NetJets sold more cards than Marquis Europe did throughout 2003. "At some point the card customers will surpass the fractional owners," he adds. MWMWMMMM| 900 800 700 600 500 400 300- 200 L FLEET GROWTH 1998 - 2004 779 wsj***5^ 5J1*>^****'^ 402^1 262^<"^ 825 846 FLIGHT Source: AvData 1998 1999 2000 2001 2002 2003 2004 SHAREHOLDER AND SHARES GROWTH 1998 - 2004 1998 1999 2000 2001 2002 2003 2004 our shareholders." He concedes this is par ticularly hard during an economic slow down. Raytheon was forced to increase its holding in the venture in 2003, taking a controlling stake after financial problems at Flight Options. The recapitalisation has included more aircraft, equity and capital, says Nahill. This year Flight Options will remove 25 "old and inefficient types", such as Cessna Citation Ills and Hawker 800As, and replace them with 25 new-generation aircraft, including the Citationjet, Citation X and Embraer Legacy. The two companies' merger, coupled with the fleet rationalisation, has pushed Flight Options' fleet to 225 aircraft. "It's been a bloody road, but we have now reached critical mass," says Nahill. He admits a programme can be successful only if it has reached the coveted status of critical mass, where the shareholder base is large enough for management fees to sus tain the operation and generate profit without having to sell more shares. Conversely, Bombardier-owned Flexjet is the only fractional programme that has seen fleet numbers fall. According to AvData, the Dallas, Texas-based operator's decline began two years ago. Flexjet's fleet, then 114 aircraft, slid to 100 in 2003 and only 89 this year. Shareholders have fallen from 636 to 564 during the same period and shares have dropped from 900 to 717. Mike McQuay, president of Bombardier Aircraft Services, admits Flexjet has gone through a difficult and challenging period over the past two years, but says the pro gramme is now 50% ahead of last year's sales and expects to take delivery of six more aircraft by the end of the year, com prising Challenger 300s and Learjet 40s. Exchange scheme McQuay says that, although the pro gramme has picked up few new sales, it has retained a "high percentage" of renewals. "The models worst hit by the downturn are the Learjet 45 and 31A," he says - types commonly used by less-affluent customers that are hardest hit by fluctuations in the economy. To help boost aircraft utilisation, Flexjet last year introduced its Versatility Plus scheme, which allows owners to place up to 25% of their annual hours into a pool. Owners requiring more hours in a year can draw from the pool rather than borrowing from future years. McQuay says Flexjet is the first fractional to offer an exchange scheme, and the take-up has been strong. McQuay says the recession has brought a lot of instability to the market. As aircraft prices have plummeted, customers with contracts coming up for renewal have found themselves facing big losses. "We offer owners attractive incentives [high 52 5-11 OCTOBER 2004 FLIGHT INTERNATIONAL www.flightinternational.com
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