JUSTIN WASTNAGE / LONDON

The success of fractional ownership schemes has led to refinements of the concept as operators aim to attract less-frequent fliers

Since the concept of fractional ownership was introduced more than 15 years ago, over 500 business aircraft have been sold to almost 3,000 owners. For manufacturers, the success of the concept has proved that when the cost of flying by business jet begins to approach that of first-class airline travel, board-level executives are willing to purchase at least part of an aircraft. Now the challenge is to attract the less-frequent travellers and lower-ranking members of corporations, which is where the increasing popular option of block charter comes in.

The three leading fractional operators, Bombardier Flexjet, Flight Options and NetJets, all require share owners to sign a five-year management contract and make a large upfront payment to cover the cost of a fraction of the aircraft, commitments some potential customers would prefer not to make. Some corporations, particularly in Europe, also dislike having a corporate jet share as an asset on their balance sheets, either for depreciation reasons or image concerns. Lastly, small to medium-sized companies may not require the 50h or 100h of annual flying time that comes with a share purchase.

Block charter is essentially the resale of business-aircraft fractions. Last year, New York-based Marquis Jet Partners struck a deal to provide access to NetJets-operated aircraft in 25h chunks, while in April Bombardier launched Premier Fleet to sell similar-sized blocks of flying time on US-based aircraft through its charter brokerage subsidiary Skyjet.

Skyjet general manager Nicholas Houseman is candid about the programme's aim. "We are here to sell more Bombardier aircraft," he says. The programme, which is structured with a membership fee and an hourly occupied rate, starts at a 25h minimum, one-quarter of the 100h minimum share in Flexjet. Customers come from Skyjet's pool of ad hoc charter users and those requiring more than 75h are encouraged to "trade up the chain" to Flexjet, with salesmen given incentives to persuade clients to make a share purchase. Charter customers also get incentives to join the fractional programme: a 5% discount on the cost of a share. For corporate flight departments, this soon adds up if it charters different aircraft, says Houseman.

Software refinements

In its efforts to cover the entire market, Bombardier has refined Skyjet's database software, which matches available aircraft with customer requests. The software initially suffered glitches, largely due to incompatibility between the systems used by aircraft operators, leading to first-time users sometimes being given inaccurate prices. These problems have been largely ironed out, says Houseman, and the system is being tweaked to include any aircraft within 100km (60nm) of the airport requested.

The Skyjet Premier Fleet business model allows Bombardier to focus on the sales and marketing, with operations handled by 75 vetted charter operators that are "encouraged" to use Bombardier aircraft.

In Europe, meanwhile, Bombardier still faces a challenge in selling aircraft, while the business aviation community still has a tough case to make for aircraft as a business tool. James Hoblyn, managing director of Flexjet Europe, says that Europeans are less willing to have an aircraft, or even a share of an aircraft, appear on their balance sheet, for fear of shareholder perceptions. Different tax laws, chiefly relating to depreciation, could also play a part, he says, and late last year Bombardier abandoned its embryonic Flexjet Europe fractional programme and replaced it with a block charter programme of the same name.  Mark Booth, managing director of Netjets Europe, dismisses tax and ownership issues as disingenuous, however. More likely, he says, Bombardier finds the task of operating so many aircraft in Europe daunting.

Despite these differing views on the state of the European market, NetJets was still happy to shift some of the risk in Europe to Marquis Jet Partners, which launched its European arm earlier this year, a block charter reseller of Netjets Europe shares.

In Europe and the USA, Marquis buys shares from NetJets, signing the five-year management contract and paying the monthly management and hourly occupancy fees. It then resells access to the aircraft under its Jet Card one-year membership scheme. Typical costs are $109,000 for a 25h stake in a Cessna Citation V, which is one of seven aircraft types available in the USA, with four types available in Europe.

Rahul Bakrania, Marquis Jet Europe's chief operating officer, says that, on both sides of the Atlantic, the scheme is attractive to companies and high net-worth individuals wishing to avoid a large capital expenditure and long-term commitment. One customer, professional golfer Jim Furyk, uses the aircraft to return home to Florida after tournaments across Western Europe and the USA. Despite owning two 25h blocks, equal to a one-sixteenth share in Netjets, Furyk is typical of those using block charter, since his continued success and, therefore, need for a jet, is not assured.

Although the Marquis Jet programme was launched at the start of last year, it took several months to reach agreement with the US Federal Aviation Administration on how the aircraft should be operated, as the passengers are not the owners. As a result, flights for Marquis customers are operated by NetJets under Part 135 rules governing charters and not Part 91 rules applicable to private aircraft. This places restrictions on minimum runway length, weather reporting and crew rest periods. The Part 91 rulebook, which already separates private aviation from mainline and regional air transport, is being updated with a new subpart K to improve the regulation of fractional programmes. Block charter companies have been lobbying the US Federal Aviation Administration to have their programmes included under subpart K.

Flexible product

Marquis was preceded into Europe two years earlier by European Skytime, which also re-sells NetJets shares. Steve Westlake, managing director, says the company has now acquired six one-eighth shares, at least one in each of the NetJets aircraft. The company backs up the availability of its NetJets aircraft with ad hoc chartering, which Westlake says creates a more flexible product, since most of the customers are private individuals, for whom guaranteed availability of a particular aircraft and short lead times are not an issue. European Skytime is not restricted to NetJets and has also introduced a piston-twin block charter programme called First Step in a bid to stimulate the small business market. Westlake hopes customers will trade up to an entry-level jet.

Flight Options says it has no plans to partner with a chain of charter brokers or launch its own block charter programme. Under its fractional programme, owners can buy as little as a one-sixteenth share, equating to 50h, which is half of the minimum requirement for its two competitors. Added to this, following its merger with Raytheon Travel Air last December, customers now have a choice of either new aircraft (from Raytheon) or pre-owned aircraft. These options make joining the fractional programme more affordable, the company says. Flight Options estimates the difference in price is enough to convince customers dipping their toes into business aviation to purchase a 50h share in a used aircraft for around the same price as a 25h share with new aircraft.

Price is not always the deciding factor, however. Chapman Freeborn, a charter broker with offices in 19 countries, says the Marquis and Premier Fleet programmes can be around double the price of ad hoc chartering. In a study carried out on behalf of a leading UK sports professional, the broker calculated the cost of flying to major tournaments and back to London using a variety of aircraft and charter operators and came up with a price 40% cheaper than block charter.

Chris Martin, the company's corporate aviation business development manager, cites an example: "When flying from London to Geneva in a light jet such as a Cessna Citation Bravo, the typical flight time is 3h for a round trip. This would cost around £4,500, or £1,500/h ($2,290)." Marquis charges $4,520 per occupied hour. "If a customer were to commit to 50h a year, then we could negotiate that price even lower," says Martin.

Martin also points to the ultimate flexibility of ad hoc chartering. The majority of Chapman Freeborn's clients come from the music industry and the brokerage is used to the last-minute changes of plan that accompany the whims and schedules of rock stars.  The use of various different aircraft types at short notice would not be possible on block charter or fractional programmes without incurring significant charges, says Martin.

An established way to buy a block of time is timeshare, under which customers prescribe which routes and which days they will use the aircraft, which is then advance booked through charter brokers. Timeshare is relatively inexpensive, not least since most of the routes flown are popular business routes with ample aircraft capacity for charter brokers to use, but it is not very flexible. But there are two emerging business models that use timeshare as a foundation for new fractional-style operations.

ShAirForce uses a business model similar to the brokers of "covoiturage" in Quebec, Canada, who match cars embarking on long-distance journeys with passengers. In the ShAirForce fractional programmes, customers purchase a seat in a particular aircraft flying a set route to a set schedule.

The programme will use a fleet of Boeing Business Jet BBJ2s, in two different configurations depending on level of ownership. ShAirForce One owners will fly in first-class style with a maximum of 35 other passengers, while the ShAirForce Exec layout will have 60 business class seats in each aircraft. The company is initially offering 250 US city pairs and 58 international routes. Chief executive Art Brown expects to have enough customers to acquire the company's first aircraft next year, with others following.

A 50h stake in ShAirForce One will cost $62,500, plus a $938 monthly management fee, and buys the owner a 1/960th share in the aircraft. For the 50h minimum contract, a ShAirForce Exec owner will make a $37,500 payment, followed by a $625 monthly fee, acquiring a 1/1,600th share of the aircraft. Piedmont Hawthorne will operate the aircraft under its Part 121 scheduled air transport certificate.

ShAirForce One owners will pay around $350 per occupied hour, almost half the price of some fractionals and around a tenth cheaper than first-class airfares, claims Brown. He says that customers will "occasionally" be able to use their personal flight hours on routes other than those specified, but the scheme's profitability lies in controlling the resale value of the aircraft. Flying either two or three round-trips a day, each BBJ2 will only be used for around 2,000h a year, compared with the 3,500h average for major airline utilisation of a Boeing 737 and 4,500h for a low-cost carrier. "Because the 737-800, on which the BBJ2 is based, holds its value so well, at the end of the five-year contract, we are confident that owners will be able to dispose of their asset easily," Brown says.

Middle market

ShAirForce sees potential in selling the scheme to middle-ranking executives, whose travelling needs are less time-sensitive than their superiors. ShAirForce is not alone in chasing this emerging market. At June's European Business Aircraft Convention and Exhibition in Geneva, start-up venture Aviace ordered 112 Eclipse 500 personal jets. Through its business model, the Swiss company shifts operational responsibility to the owners, who are organised into "clubs" in a designated airport, flown by established business aircraft operators.

For a standard membership, owners enter a five-year contract costing €75,000, which entitles them to 50h a year. "In essence, each club is an Aviace franchise," says Hilmar Hilmarsson, chief executive. "We set the minimum standards, control the brand and pay all the set costs." The scheme offers 12h availability and each owner, typically a corporate flight department, will eventually have access to aircraft belonging to other airport clubs.

Initially, the company is concentrating on the Benelux countries, France, Germany and the UK, but it foresees clubs being established throughout Europe. Aircraft will be allocated on a first-come-first-served basis from the 112-aircraft order once clubs have sold eight 50h blocks, with most aircraft having around 10 owners.

Aviace was formed to respond to the need for smaller jet travel, since 80% of all business aircraft flights carry fewer than three passengers. The Eclipse 500 carries four passengers. Diamond-level membership, at $1 million, pays for one entire aircraft and provides 700h a year for 10 years, but would typically be split between several clubs to allow a corporation with more than one office to use various aircraft simultaneously. Hilmarsson says most interest so far has come from banks and that a Frankfurt Aviace club is likely to be the first to be established.

Several operators of turboprops have established fractional schemes in an attempt to capture the lower end of the market. In Europe, Luxembourg-based Jetfly and Swiss company Lions Air's Time Jet programme, which use EADS Socata TBM 700s and Pilatus PC-12s, respectively, are able to operate from runways as short as 600m (1,950ft). The advantages of a turboprop are most apparent in countries such as Switzerland, where single-engined turboprops can operate under instrument flight rules and are easier to land than jets at short, high-altitude strips. A 150h share in Time Jet costs SFr12,000 ($7,900) a month.

The case for these new business models is not tested. But with all of them aimed at reducing the barriers to business aviation, there is likely to be serious interest from corporations looking for safer, easier and more reliable ways to transport employees.

Source: Flight International