Fractional ownership industry seems poised for growth
09/28/2013 4:23 PM
08/08/2014 10:19 AM
The fractional ownership industry has been flat for about five years, which made it a good time for an acquisition, said the head of Directional Aviation Capital, which this month announced it is buying Bombardier’s fractional ownership business, Flexjet.
Directional Aviation already owns the fractional ownership company Flight Options, charter company Sentient Jet and other aviation companies.
“I think we’re starting to see some revival in the industry,” Kenn Ricci , principal with Directional Aviation, said of the fractional market. “We’re very optimistic.”
Even before the recession hit, there was a tremendous amount of capacity in the industry.
“Because of that excess capacity, I think (the industry) struggled a little bit,” Ricci said,
The sale of Flexjet lets Bombardier focus on its core business of manufacturing airplanes, the company said.
Fractional ownership programs let buyers purchase a portion of a business jet, then pay monthly management fees and fees per flight hour. Customers can also buy jet cards that afford them a specified number of flying hours.
Three things affect the fortunes of the fractional industry: corporate profits, which have been good; the inconvenience of traveling on the airlines; and whether being wealthy is in vogue, Ricci said.
Buyers tend to act more luxurious and extravagant during times when it’s popular to be wealthy, Ricci said.
But today, he said, “I don’t think it has been popular, so that’s been a negative in our industry,” he said. “But these things do cycle. ... When you lay off, downsize or rightsize a business, it’s hard to stand up to the scrutiny on traveling on a corporate jet until you start growing again. That’s when you can.”
Taking a dive
The industry has gone through some consolidation in recent years, as some companies went out of business, scaled back or merged.
During the downturn, the number of jets used by the fractional industry dropped by about 25 percent, said Brian Foley, a consultant with Brian Foley Associates.
In North America, the fractional industry fleet in 2013 totals 684 airplanes. That’s down from a record 958 planes in 2008.
“At one time, the fractional providers wanted us to think the sky was the limit,” Foley said. “In fact, it is a finite market. We learned that painfully through the downturn. Customers sold their shares and didn’t renew their shares. It was a pretty painful time for the industry.”
Today, the industry is more “right sized,” Foley said. “There’s not as many players. They have a little more flexibility in their pricing now.”
It’s a tough business, he said.
“I think they’re still learning to tweak the business model to stay profitable,” Foley said. “They’re still adapting and changing and finding a niche in the market that works for consumers.”
Potential for Wichita
That evolution can help Wichita as companies add customers and buy airplanes.
During the sale expected to close this year, Flexjet placed a firm order for 55 Wichita-built Learjets along with other Bombardier jets in a deal valued at $1.8 billion based on 2013 list prices.
Berkshire-Hathaway’s NetJets, the world’s largest fractional company, is updating its fleet.
Regional fractional ownership company Executive Airshare, based in Kansas City, is adding three Cessna-built Citation CJ2-Plus planes.
And Beechcraft Corp. last month received the largest-ever propeller aircraft order in general aviation history from a new private aviation company, Wheels Up.
Wheels Up was founded by Kenny Dichter and a group of investors. As the founder of Marquis Jet, a jet card with prepaid flight hours, Dichter is no stranger to the industry. He sold the business to NetJets in 2010.
Creating a niche
Consolidation on the national level is good for regional fractional operators like Executive Airshare, said Keith Plumb, Executive Airshare president and chief operating officer.
National fractional companies tend to focus on midsize and larger jets. That helps Executive Airshare, which was founded in Wichita, to focus on the light jet market, which is less capital intensive, Plumb said.
“There are more businesses and individuals that can afford that kind of (light) jet flying compared to flying a (larger) Gulfstream or a Falcon,” he said.
The company has seen a resurgence in flying, Plumb said. Flight activity for July was up 49 percent from July 2012, for example.
“People have returned to normal activity ... continuing business normally and seeing clients,” he said. “We’ve come to a point where we’re steadily seeing 35 to almost 50 percent increases in flight hours compared to a year ago.”
The company is hiring pilots to keep up with demand.
In general, the consolidation has been good.
“Instead of having a lot of operators losing money, it gives them the opportunity to develop a profitable company,” said Plumb, whose business concentrates on Kansas, Texas, Oklahoma, Nebraska and the Great Lakes region.
Executive Airshare, which employs 155 people, including 85 pilots, grew during the recession.
“For every one of our shareowners who had to get out for financial reasons, we were adding three to four new shareowners,” he said.
About a third of its customer base represents people who shifted from national programs, Plumb said.
“The timing was good for us. People had to look for lower-cost options, and we had positioned the company at the right place at the right time,” he said.
Some customers use a national company when they want a bigger plane that can fly long distances, and they have a share of a King Air with Executive Airshare for other flights, Plumb said.
A changing model
The fractional industry continues to evolve to meet customers’ needs.
“The market has changed,” said Deanna White, president of Flexjet. Consumers have driven variants in products, including membership programs, jet cards and leasing arrangements.
The company doesn’t plan to merge Flexjet and Flight Options together.
Instead, Flexjet is the premium luxury brand with a higher level of service. And Flight Options is the value brand with airplanes slightly older on average than Flexjet’s fleet.
Before the downturn, traditional fractional ownership accounted for 85 percent of Flexjet’s business, while the remaining 15 percent came from jet cards or leasing.
Today, that’s shifted to 70 percent fractional.
“I believe that is going to shift even more,” White said. In the future, she expects the split to shift to 50-50.
During the downturn, many aircraft values diminished along with the overall economy.
“People realized the aircraft they purchased actually had a depreciation with it,” White said. “They rethought that.”
Still, it ends up being less expensive to own a fractional share of an airplane in the end, she said.
“We are very flexible,” White said. “We’re the spoke. We can customize to their needs.”