Fractional ownership was once the darling of the business aviation industry. During its heyday in the late 1990s and 2000s, this niche sector drew new customers into the industry by the hundreds, with its unique and innovative method of acquiring a new business jet.
Multibillion-dollar aircraft orders were commonplace during this era, endorsed by a burgeoning community of fractional ownership providers – including a handful of opportunist manufacturers, which saw these programmes as a vehicle by which to swell their orderbooks.
“It was certainly a great time for fractional ownership and the industry as a whole,” says Pat Gallagher, senior vice-president of sales and marketing for fractional ownership pioneer NetJets.
The US programme was launched 30 years ago by mathematician Richard Santulli. From its beginnings with a handful of Cessna Citations, NetJets quickly grew into the largest business aircraft operator in the world, boasting a fleet of over 600 aircraft in the USA at its 2007 peak. Today, this tally stands at around 500.
TOUGH TIMES
“The market has gone through a lot of upheaval since 2007,” Gallagher says, in a nod to the global financial crisis, which struck the business aviation market especially hard the following year.
“Although we have been through bumpy periods before – post 9/11 and the 2003 economic downturn for example – the 2008 crash was the worst yet. The whole industry dropped off a cliff, and fractionals suffered a great deal,” he says.
Flight Fleets Analyzer supports Gallagher’s assertion. It reveals the US fractional ownership fleet climbed steadily from 377 units in early 2000 to 855 at its 2008 peak. By March 2016, the inventory had fallen by 20%, to 670 units.
“New deliveries screeched to a complete halt in the immediate aftermath of the crisis, and the sharpness of the downturn suggests that fractional programmes probably had little financial disincentive in doing so,” says aerospace analyst Rolland Vincent.
“Deliveries were beginning to recover in early 2015, but slowed sharply in reaction to the softening of economic growth forecasts and slowdowns in corporate profits,” he adds.
UNSUSTAINABLE PROGRAMMES
During the heady boom years, fractional programmes seduced customers with huge concessions such as extra hours and guaranteed upgrades. However, when the downturn struck, their operating costs became unsustainable.
Similarly, owners were hit by plummeting residual values and when contracts came up for renewal, many deserted the programmes in their droves. Others downsized to smaller aircraft or shares, cut down significantly on their flying or moved to risk-free alternatives, such as pre-paid jet card programmes or leasing options.
This upheaval had a catastrophic effect on the industry. Most providers were forced to close down – Piaggio P180 Avanti provider Avantair and Cessna’s CitationAir were notable casualties in 2013 and 2014, respectively. Other companies, including Flight Options and Bombardier’s Flexjet, were snapped up in 2009 and 2013, respectively, by US private investment firm, Directional Aviation Capital. DAC’s founder Kenn Ricci launched Flight Options in 1998. The operator merged in 2002 with Raytheon’s Travel Air programme, in which the airframer owned a majority share.
Since 2008, the fractional ownership industry has shrunk from around 10 to three key players – NetJets, Flexjet and PlaneSense – with manufacturer-owned ventures now a thing of the past. “I don’t think that fractional programmes sat well in the OEM’s portfolios,” says Vincent. “We won’t see them getting back into this business.”
TIME TO RETRENCH
Mike Silvestro, chief executive of Flexjet and Flight Options, agrees: “The crisis forced the entire industry to retrench and re-evaluate their business models. The financially weaker players were forced to leave the market and we saw an opportunity with Flexjet and Flight Options.”
Since its acquisition by DAC – owner of business aviation ventures Sentient Jet, Nextant Aerospace and Constant Aviation – Flexjet has evolved from an all-Bombardier aircraft programme, with a fleet of Learjets and Challengers, to a multitype provider of fractional and leasing programmes.
The current line-up includes Learjet 75s, Legacy 450/500s, Challenger 350s and Gulfstream G450s. The company also has a growing order backlog of around 150 business aircraft from the Bombardier, Embraer and Gulfstream stables, including the ultra-long-range G650 and in-development G500, which is scheduled for delivery in 2018. Flexjet also gave a critical boost last year to the 12-year-old Aerion AS2 supersonic business jet programme, with an ambitious fleet order for 20 of the high-speed type.
To differentiate the Flexjet offering from other providers, the company has equipped its latest models with a bespoke interior, with each carrying the exclusive LXi suffix. The premium product is also marketed under the "Red Label" banner, to enhance the programme’s appeal.
While Flexjet's new aircraft programmes are going from strength to strength, Flight Options used aircraft business model no longer has the appeal it once had, and has now been closed to new entrants. "Today’s market dynamics are not generating as much interest in the pre-owned fractional model as it once did," says Silvestro. "For now, we are servicing our existing Flight Options customers just as we have in the past, and we will continue to evaluate the marketplace and will position Flight Options in the future based on what makes the most sense given the marketplace," he adds.
Over the past eight years, the fractional sector has transitioned from a growth-based business model to one focused on operational efficiencies and customer service. “We’ve gone back to our core focus of safety and service,” says Gallagher. “We are also keeping our Marquis Jet card business to a manageable level.”
Gallagher refers to the overselling of jet cards during the heydays of the programme – which it acquired in 2010 to support and complement its fractional business. “We let it grow too much and this put considerable stress on the fleet,” says Gallagher. “We are now limiting card sales so this business does not account for more than 22% of overall demand. Fractional ownership is our main focus.”
ON THE REBOUND
Following a period of restructuring and hefty cost cutting, NetJets bounced back, and the spending sprees that were synonymous with the Columbus, Ohio-based venture since the early 2000s returned.
Since 2010, Berkshire Hathaway-owned NetJets has notched up $17.6 billion-worth of business jet orders, as part of a complete top-to-tail overhaul of its fleet. The new line-up includes up to 125 Phenom 100 light jets, 150 midsized Citation Latitudes, 275 Challenger 350/650s and 120 top-end Global business jets. As with Flexjet, all NetJets' aircraft are fitted with a bespoke interior, known as the Signature Series.
“We are streamlining the fleet to increase our operational efficiencies,” says Gallagher. “Older jets are being replaced with the new models – the Gulfstream G200s, Hawker 400XPs and Falcon 7Xs have all gone. We are adding new aircraft virtually daily and disposing of aircraft at the same rate.”
The strategy is paying off. According to Gallagher, the company is in a strong position financially and remains a very popular choice for travellers. “Our level of debt is smaller that’s it’s ever been; NetJets flights account for 14% of all the business aircraft movements across the USA and we are bringing new fractional owners into the business daily,” he says. Across the card and fractional programme, NetJets boasts around 7,500 owners.
He admits the unstable global economic climate is still generating some nervousness in the market, which could be holding potential customers back.
CHANGING LANDSCAPE
The business aircraft landscape has also altered significantly since the 2008 downturn. A host of new players have moved into this sector hoping to woo high-end travellers and businesses with their innovative programmes and disruptive technology, which have helped to revolutionise the online aircraft booking process and draw new entrants into the market.
“The real growth right now is in leasing-style products such as jet cards, membership clubs and branded charter,” Vincent says. “With these programmes, the customer is not required to take an aircraft ownership position, nor have to contend with residual value risk.”
Vincent's views are borne out by Flight Fleets Analyzer, which records a steady increase year on year in the US charter fleet. In March 2008, the inventory stood at over 1,400 aircraft – equivalent to 12% of the US business aircraft line-up. Six years later, the tally had risen to more than 2,330 aircraft: 21% of the fleet.
In contrast, fractional ownership’s share of the US fleet fell – from 9% to 6% – during the same period. Michael Lapson, senior valuations analyst with Flight Ascend Consultancy, attributes this upsurge in charter movements partly to a readiness from more owners and operators to utilise their aircraft more heavily in the current climate. “Aircraft values have fallen across the board, so many owners and operators want to maximise their aircraft during its economic lifetime in order to boost their return on investment,” he says.
Fractional companies are unconcerned by these recent arrivals. “We have been in this industry for a long time and seen many competitors enter this space,” says Gallagher. “In the early days, there were many companies offering products with a spin on the NetJets model. Many of these programmes no longer exist. Today, we have a myriad of companies who want be the next Uber, but we [fractionals] are in a category by ourselves."
SENSIBLE APPROACH
This view is supported George Antoniadis, president and chief executive of PlaneSense, the largest commercial operator of the Pilatus PC-12.
“There has been, is and always will be a market for fractional ownership,” he says. “If you want a high level of safety, great service, guaranteed availability and need to travel more than 50h a year, fractional ownership is the ideal solution for you. It truly is the surrogate of the in-house flight department.”
Launched by Antoniadis in 1995, Portsmouth, New Hampshire-based PlaneSense is one of the oldest fractional ventures and the only programme to offer a single-engined turboprop as its core product.
“The PC-12NG has been a great choice of aircraft,” Antoniadis says. “It has weathered the ups and downs of the resale market very well,” he adds – a nod to the contrasting fortunes of its counterparts in the business jet sector. “Resale values of many business jets were blown to smithereens after the crash, which was a huge concern to people who had purchased shares,” he says.
Despite its financial resilience, the PC-12 did not cushion PlaneSense entirely from the aftershock of the 2008 crash. “We did see a drop in business, but there was no mass exodus from our customers on the scale experienced by the other fractional providers.”
Antoniadis says PlaneSense’s resilience can also be attributed to the consistent approach to selling fractional shares and its focus on providing a service at sensible overhead costs. “We have never discounted or oversold and I always resisted the temptation to launch a card programme,” he says.
Like Gallagher, he believes these low-entry, no-commitment-based offerings were oversold by the fractional providers at the height of the market, to the detriment of their primary business. “People jumped out of fractionals into jet cards, which compromised the quality and availability of aircraft,” says Antoniadis.
“In a world of non-infinite resources such as aircraft, of course there will be repercussions on your core customers – the fractional owner. These programmes are operated at a manageable level today, so it shouldn’t happen again.”
FUTURE ASSURED
Antoniadis is sanguine for the future of PlaneSense and the fractional ownership industry as a whole. “There are now only three core players in this market, each with different aircraft offerings,” he says.
The financial crash has flushed out many of the superficial and rash business aircraft users, leaving only the serious players as owners of fractional shares.
“Today you are dealing with the sophisticated user, who is willing to look through aircraft values,” Antoniadis says.
“The key difference, post-2008, is that potential buyers are more careful and considered before purchasing a share,” he adds. “Those people who have a true need will always come back. What we lost in 2008, we have got back again, and are continuing to enhance the product.”
As well as its fleet of 37 PC-12NGs, PlaneSense also operates a trio of Nextant 400XTi light business jets for longer-range missions. The company is also the launch customer for the in-development PC-24 superlight business jet, for which it has an order for six units. “We hope to get the first production aircraft – serial number 101 – next year,” says Antoniadis. “We can only get six aircraft in first order round, which will be delivered over a three-year period. But we will buy more when the orderbook opens again [in 2020].”
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Source: Flight International
