Worst appears over for fractional jet providers
05/23/2011 10:24 AM
08/08/2014 10:03 AM
Like the rest of the aviation industry, the nation's large fractional-ownership companies — long Wichita's biggest business jet customers — have been hard hit by the recession.
Now, the market has stabilized and business is improving, they report.
During the downturn, the number of new customers fell, and customers exited programs early.
Providers delayed and canceled orders.
During the first quarter at Flight Options, sales were up significantly. And customers are flying more.
"Things are getting better," said Cleveland-based Flight Options CEO Mike Silvestro.
Some furloughed pilots are being recalled.
CitationAir made offers to all 85 pilots furloughed in 2009. Fifty-three have been recalled, it said recently. The company now employs 334 pilots.
Flight Options recalled 25 of the 200 pilots it furloughed, Silvestro said.
Fractional providers sell shares of business jets and charge monthly management and hourly fees for usage. They also offer jet cards with a set number of flight hours. In addition, some manage aircraft for owners.
The fractional industry has been important to Wichita business jetmakers for many years.
They have taken 10 to 15 percent of the total number of business jets delivered in each of the past 10 years, except for 2009 and 2010 when deliveries fell dramatically.
The fractional fleet contracted an estimated 14 percent overall from peak levels in 2008, according to a study this month by UBS Investment Research.
NetJets, the largest of the fractional providers, canceled orders with Cessna and Hawker Beechcraft in the downturn.
The fractional market is dominated by four providers who share about 95 percent of the market: Flexjet, a subsidiary of Bombardier; Flight Options; CitationAir, a subsidiary of Cessna Aircraft; and NetJets, a subsidiary of Berkshire Hathaway.
Cessna and Hawker products make up roughly 70 percent of the fractional fleet, UBS Investment Research estimates.
But Wichita's share of the fractional market is beginning to change.
NetJets and Flight Options have each placed large orders with Brazil-based Embraer for Phenom business jets.
Flight Options ordered 100 of the jets, while NetJets ordered 50 planes with an option for 75 more.
Regional fractional provider Executive AirShare has bucked much of the downward trend during the economic downturn.
"We've been impacted way less than the nationals," said chairman and CEO Bob Taylor.
Executive AirShare had year-over-year growth in sales and flight hours in 2008, 2009 and 2010, Taylor said.
"We feel like... 2011 will be our best year ever," he said.
The company, founded in Wichita, has headquarters in Kansas City. It employs 116 people, including 21 in Wichita.
Most of its growth has been related to the acceptance of its fleet of Embraer-built Phenom 100 and 300 aircraft, Taylor said.
The company has eight Phenoms in its fractional fleet and another 28 on order for delivery between now and 2014.
Executive AirShare is also expanding its U.S. presence.
It recently opened a base in Buffalo, N.Y., and will add a base in Houston this year.
Taylor also attributes its growth to being a local company with programs costing less than the national providers.
It's been helped by a strong oil industry. About half of its business is in Texas; more than 75 percent of that business is related to oil and gas.
In addition, "we're just closer to the customer than the national programs," Taylor said.
The company has 115 share owners, up from 95 in 2010 and 75 in 2009, he said.
Less than 15 percent of customers left during the financial crisis, he said. More came in than got out.
The biggest impact of the recession was a dramatic drop in the value of used business jets, he said. That's affected all fractional providers.
When customers wanted to trade to a different aircraft, the value of their current aircraft had declined, he said.
"The biggest impact was the reduced value of the Beechcraft fleet," Taylor said.
Operationally, Executive AirShare is profitable, he said.
But because of the reduction in the value of its used fleet, the company posted negative net income in 2008, 2009 and 2010.
NetJets, based in Columbus, Ohio, was formed in 1986. It's the largest fractional provider and has the largest and most diverse fleet, with more than 20 models.
NetJets' fleet consists of 573 aircraft, not counting aircraft in its management and charter businesses. That's down about 11 percent from the peak, UBS Investment Research said.
Last year, NetJets returned to profitability, it reported.
In 2010, NetJets reported pre-tax earnings of $207 million, compared with a pre-tax loss of $711 million in 2009, its parent company reported.
The results included $676 million of asset writedowns and other downsizing costs.
"After a rough couple of years, the company is again hitting its business targets," NetJets said in a statement about results.
The company added about 100 customers last year after a loss of customers in 2009.
A NetJets spokeswoman did not return a call for comment.
CitationAir founder and CEO Steve O'Neill said things are beginning to show signs of improvement.
"We've got our flight activity up this year — not a lot, but it's up," O'Neill said.
There's strong interest in the company's jet card and jet management businesses. That's driven the need to recall pilots.
"The fractional market is still quite slow," O'Neill said. But it's stable.
Six years ago, its fractional business was 100 percent of the business; now it's 50 percent.
"We've diversified away from the fractional product line," he said. "We believe it works better in conjunction with other products and services."
The jet card and fractional programs have fed customers into CitationAir's aircraft management program, he said.
It likely will add eight airplanes into its fleet this year, O'Neill said.
A subsidiary of Cessna, CitationAir operates only Cessna aircraft.
CitationAir operates a fleet of 80 aircraft, down from 95 at its peak.
At Flight Options, fractional jet sales in the first quarter were up 457 percent and jet card sales rose 46 percent, the company reported.
The company recorded operating profits for each of the past two years.
In the downturn, customers were leaving fractional programs because they "were spooked on residual values" of the aircraft, Silvestro said, and turned to jet cards.
"They just didn't want to make a commitment," Silvestro said.
Now, with aircraft prices down, customers say it's time to buy and get a relatively attractive rate compared to three or four years ago, Silvestro said.
Some models cost about half of what they did before the downturn, he said.
Part of the company's sales increase came from capturing market share from the competition, Silvestro said.
Its Phenom 300 aircraft are popular. And it's putting winglets on and modifying its Citation X aircraft.
It's also updating its fleet of Beechcraft aircraft.
"We feel pretty good about our fleet and our strategy" going forward, O'Neill said.
Bombardier subsidiary Flexjet is seeing a continued recovery of the market, building on modest but growing demand last year, its president Fred Reid was quoted as saying said in an e-mail.
During the downturn, jet cards and on-demand charter services were more popular, because they didn't require a long-term commitment or a large capital investment, he said.
But as the economy returns, fractional jet ownership is gaining greater appeal, and customers are returning, Reid said.
The company responded to the financial crisis in 2008 by downsizing and modestly reducing its aircraft.
By late 2009, Flexjet had returned to profitability, Reid said.
For fractional companies, the biggest challenge going forward is to constantly evaluate the mix of aircraft they offer and be knowledgeable about the new airplanes coming into the market, he said.
There is opportunity for growth in China and India.
"It will be important to monitor growth in these markets," Reid said.