Recession clobbers fractional-jet industry

The recession that crippled the business jet industry also hurt Wichita's biggest customers for aircraft — the fractional-ownership providers.

Last year, a slump in sales forced fractional providers to delay and cancel jet orders, lay off pilots and, in the case of Jet Republic, go out of business entirely.

Michael Riegel, who advises fractional-jet customers, said 2009 was the worst year the industry has ever seen.

"By a wide margin," said Riegel, who owns AviationIQ.

Fractional companies bought 10 to 15 percent of all business jets delivered in each of the past 10 years, UBS Securities estimates. Cessna Aircraft and Hawker Beechcraft products represent more than 70 percent of the fractional fleet.

NetJets — the biggest buyer of Wichita-built business jets and the largest fractional-ownership company — canceled a $2.6 billion jet order with Hawker Beechcraft last month. NetJets also has canceled orders with Cessna and some manufacturers outside Wichita.

Providers and observers say the market appears to have stabilized, and consumers are starting to return. But they're doing so at lower levels.

Still, many experts agree that changes to the fractional model are needed.

"I think one of the benefits of coming out of this bubble bursting is that it will probably be a better industry," said David Sokol, chairman and CEO of NetJets. "It creates an atmosphere where everybody has to sit back and say... let's figure out where it should be."

Fixing the cost side

NetJets founder Richard Santulli, who left the company last year, created the fractional concept in 1986 to let buyers buy a part of a business jet instead of a whole airplane.

The idea was to make private aviation accessible to more people. The concept expanded, such as selling flight hours and offering aircraft management.

As long as there are new sales and a liquid market for used aircraft shares, the business model works, said Hawker Beechcraft CEO Bill Boisture , who also is a former NetJets president.

But without sales, fractionals still have to maintain and fly the aircraft, which they collect fees to do, and have money to live up to any obligations to buy back shares when owners turned them in.

In the past 12 months, customers hit by the recession sold back hundreds of aircraft shares to the fractionals. That left some providers with unsold aircraft and write-downs as aircraft values declined with the used aircraft market.

"What we have to do is fix the cost side," Boisture said.

NetJet's Sokol compares the business jet industry to the housing market. Both became overheated.

"I think the (aviation) industry, like many industries, had a big party in the first seven years of the 2000s and had a hangover in 2008," Sokol said. "It will take a while to recover."

One of the biggest problems facing fractional companies is they have too much capacity, Cessna Aircraft CEO Jack Pelton told the Wichita Aero Club last month.

"I think it will be a much smaller market," Pelton said of the long-term outlook.

Some bright spots

Good things can come out of the downturn for the fractional industry and for producers of business jets, experts say.

Recent business model changes at CitationAir, which is majority-owned by Cessna, have improved sales, allowing the company to recall 16 of 80 pilots it furloughed.

An official at Flexjet, which is owned by Bombardier, said the company is operationally profitable and the market has stabilized.

Sokol said NetJets hopes to become slightly profitable in 2010 after taking pretax losses of $531 million in the first nine months of 2009.

The downturn gives NetJets an opportunity to spend time with customers finding out what they like, don't like and what they want in the future, he said.

He wants to use the data to work with planemakers in the design of aircraft.

"If we're going to buy 50 or 75 of a cabin type, let's make sure we're buying what the owners want," Sokol said.

NetJets won't help with fuselages, wings or engines. But the data would be helpful in designing storage compartments and interiors, and in working to extend the time items need maintenance or replacing.

That's important for companies who put more hours on a plane than the typical operator.

Using NetJet's data to improve products is a "great idea," Boisture said.

Operating hundreds of aircraft and flying them lots of hours, gives NetJets a "gold mine" of data — more than a manufacturer can get from individual buyers, he said.

That can help improve reliability of aircraft or shorten the time it takes to put a plane through a maintenance cycle.

"It will improve all of our products," Boisture said.

NetJets also plans to operate fewer aircraft models, Sokol said.

It may cut the number from 18 to about nine over the next two or three years. That would reduce pilot training and other costs. It also would bring down the aircraft's price and cost of spares, because volumes of each model would be higher.

For the next three years, Hawker Beechcraft doesn't expect to deliver any aircraft to fractional companies.

Eventually, Boisture said he expects the percentage of the company's deliveries to fractional companies to return to previous levels of about 15 percent, but the numbers will be lower.

However, Hawker Beechcraft will work with fractional companies a little differently going forward.

For one, it will get larger down payments for orders. And it wants to partner with fractional companies to give the best aircraft prices if it also gets the parts and maintenance business.

"But if all you want to do is buy the new airplane, then the prom's over, you have a kiss and you go out with somebody else... the price you're going to pay for my new airplane has to be higher," Boisture said.