View Point - A Sea Change in Business Aviation
August 2012
Category: World Aircraft Sales Magazine Columnists
Author: Gil Wolin
A Sea Change in Business Aviation
One benefit of the free market system is that competition does keep the cost of goods and services low. Sometimes it keeps them too low…a fact that is abundantly evident in business jet charter. But maybe – just maybe – that is about to change. The charter client never has paid the fully-loaded cost to fly a business jet. And it’s been that way since business jet charter first surfaced with EJA in 1964. EJA owned its original fleet of Learjet 23s and 24s – but as a dealer/distributor, its capital cost was low, as was Jet A fuel (at less than twenty cents per gallon).
What’s more, pilot services were relatively inexpensive. Recently-retired Air Force colonels were available from Lockbourne (later known as Rickenbacker) Air Force base near EJA’s Columbus, Ohio headquarters. These were seasoned jet captains who needed a relatively small salary to supplement their government pensions and retirement benefits.
That, coupled with EJA’s position as a “loss leader” for its original parent, the Penn Central Railroad, meant jet charter in the 1960s was a very good deal, especially since other charter companies had to match EJA’s pricing in order to compete.
Even when a new operating model surfaced in 1967 with the advent of jet charter management company Executive Air Fleet (EAF) at Teterboro, NJ, the cost of charter in the US remained unusually low. EAF managed a range of aircraft makes and models for owners who were willing to have their aircraft chartered to third parties when they weren’t flying.
This enabled charter clients to fly mid-size and large cabin aircraft paying only the trip’s direct operating costs plus some modest contribution to fixed costs, while the aircraft owners shouldered the burden of the cost of capital. Charter remained a very good deal, even when it required paying a higher price for non-military pilots. This was all in direct contrast with the European charter model, in which fleet aircraft were dedicated to charter, and the charter client had to pay a fully-loaded price per hour.
That began to change with the advent of fractional operators. While ostensibly shared aircraft ownership, fractional simply was a repackaging of the original EJA charter model, with the capital cost broken out as “share ownership.” The tax advantages – investment tax credits and bonus depreciation – made the cost to own a share quite attractive for those who had been charter clients, as did the uniform standard of safety, equipment, personnel and service.
On the heels of fractional came jet cards. Originally developed by charter brokers to sell flights aboard fractional fleet aircraft without any capital investment, “pure charter” jet cards soon were developed by other charter brokers, offering a guaranteed discounted rate in exchange for a pre-paid deposit. The Internet then enabled brokers to shop for “empty legs” and/or auction each individual trip to the lowest bidder. Again, charter became a terrific deal for the client – providing that the “low bidder” is also a high-quality, properly-audited operator.
Today, there is a sea change afoot in business jet flight services. Several new charter sales organizations and aircraft management companies have surfaced recently, each with key employees with former national charter broker or jet card company experience – perhaps they sensed a coming shift in business jet travel buying habits... That shift in buying habits certainly does appear to be the case. Data indicate that there may be a migration of fractional owners into jet cards, once their five-year share commitment expires. The jet card gives them more flexibility without the capital commitment, increasingly important during this sluggish economy.
Some fractional programs are moving into straight charter. CitationAir already has migrated to that model and it appears that Flight Options is moving in that direction, with its recent purchase of Sentient Flight. CitationAir has defined a smaller area of operations (the Eastern US) to avoid the excessive non-revenue flying required to cover West Coast operations. There will be a higher rate for flying outside of that primary area – exactly what EJA did during the 1970s, where guaranteed rates and response times were available only east of the Mississippi.
Fractional programs rarely have made money on the operating line, but they have on the resale of the depreciated aircraft – hence the five-year contract term. Restricting the guaranteed response time and creating differential pricing should help them move toward operating profitability. But if customers are moving away from fractional ownership and into jet cards or pure charter, then the fractionals are still faced with the cost of owning the aircraft.
That leaves them with two choices – follow their clients into charter and convert (as CitationAir has). Alternatively they can move into leasing their fleets much as the airlines have done for the last thirty years, via either captive OEM finance companies or third-party leasing organizations. The lessors would make the fleet purchases at significant discounts and garner any tax or depreciation benefits. The fractional operating company then gets lower equipment costs, which will be critical if they are to compete with pure charter management companies, whose owner-clients continue to carry the cost of capital.
Charter remains the best deal in Business Aviation. But the rules – and prices – are about to change.
Gil Wolin draws on almost forty years of aviation marketing and management experience as a consultant to the corporate aviation industry. His aviation career incorporates aircraft management, charter and FBO management experience (with TAG Aviation among others), and he is a frequent speaker at aviation, travel and service seminars. Gil is a past director of the RMBTA and NATA, and currently serves on the Advisory Board for Corporate Angel Network and GE Capital Solutions-Corporate Aviation. Gil can be contacted at gtwolin@comcast.net
One benefit of the free market system is that competition does keep the cost of goods and services low. Sometimes it keeps them too low…a fact that is abundantly evident in business jet charter. But maybe – just maybe – that is about to change. The charter client never has paid the fully-loaded cost to fly a business jet. And it’s been that way since business jet charter first surfaced with EJA in 1964. EJA owned its original fleet of Learjet 23s and 24s – but as a dealer/distributor, its capital cost was low, as was Jet A fuel (at less than twenty cents per gallon).
What’s more, pilot services were relatively inexpensive. Recently-retired Air Force colonels were available from Lockbourne (later known as Rickenbacker) Air Force base near EJA’s Columbus, Ohio headquarters. These were seasoned jet captains who needed a relatively small salary to supplement their government pensions and retirement benefits.
That, coupled with EJA’s position as a “loss leader” for its original parent, the Penn Central Railroad, meant jet charter in the 1960s was a very good deal, especially since other charter companies had to match EJA’s pricing in order to compete.
Even when a new operating model surfaced in 1967 with the advent of jet charter management company Executive Air Fleet (EAF) at Teterboro, NJ, the cost of charter in the US remained unusually low. EAF managed a range of aircraft makes and models for owners who were willing to have their aircraft chartered to third parties when they weren’t flying.
This enabled charter clients to fly mid-size and large cabin aircraft paying only the trip’s direct operating costs plus some modest contribution to fixed costs, while the aircraft owners shouldered the burden of the cost of capital. Charter remained a very good deal, even when it required paying a higher price for non-military pilots. This was all in direct contrast with the European charter model, in which fleet aircraft were dedicated to charter, and the charter client had to pay a fully-loaded price per hour.
That began to change with the advent of fractional operators. While ostensibly shared aircraft ownership, fractional simply was a repackaging of the original EJA charter model, with the capital cost broken out as “share ownership.” The tax advantages – investment tax credits and bonus depreciation – made the cost to own a share quite attractive for those who had been charter clients, as did the uniform standard of safety, equipment, personnel and service.
On the heels of fractional came jet cards. Originally developed by charter brokers to sell flights aboard fractional fleet aircraft without any capital investment, “pure charter” jet cards soon were developed by other charter brokers, offering a guaranteed discounted rate in exchange for a pre-paid deposit. The Internet then enabled brokers to shop for “empty legs” and/or auction each individual trip to the lowest bidder. Again, charter became a terrific deal for the client – providing that the “low bidder” is also a high-quality, properly-audited operator.
Today, there is a sea change afoot in business jet flight services. Several new charter sales organizations and aircraft management companies have surfaced recently, each with key employees with former national charter broker or jet card company experience – perhaps they sensed a coming shift in business jet travel buying habits... That shift in buying habits certainly does appear to be the case. Data indicate that there may be a migration of fractional owners into jet cards, once their five-year share commitment expires. The jet card gives them more flexibility without the capital commitment, increasingly important during this sluggish economy.
Some fractional programs are moving into straight charter. CitationAir already has migrated to that model and it appears that Flight Options is moving in that direction, with its recent purchase of Sentient Flight. CitationAir has defined a smaller area of operations (the Eastern US) to avoid the excessive non-revenue flying required to cover West Coast operations. There will be a higher rate for flying outside of that primary area – exactly what EJA did during the 1970s, where guaranteed rates and response times were available only east of the Mississippi.
Fractional programs rarely have made money on the operating line, but they have on the resale of the depreciated aircraft – hence the five-year contract term. Restricting the guaranteed response time and creating differential pricing should help them move toward operating profitability. But if customers are moving away from fractional ownership and into jet cards or pure charter, then the fractionals are still faced with the cost of owning the aircraft.
That leaves them with two choices – follow their clients into charter and convert (as CitationAir has). Alternatively they can move into leasing their fleets much as the airlines have done for the last thirty years, via either captive OEM finance companies or third-party leasing organizations. The lessors would make the fleet purchases at significant discounts and garner any tax or depreciation benefits. The fractional operating company then gets lower equipment costs, which will be critical if they are to compete with pure charter management companies, whose owner-clients continue to carry the cost of capital.
Charter remains the best deal in Business Aviation. But the rules – and prices – are about to change.
Gil Wolin draws on almost forty years of aviation marketing and management experience as a consultant to the corporate aviation industry. His aviation career incorporates aircraft management, charter and FBO management experience (with TAG Aviation among others), and he is a frequent speaker at aviation, travel and service seminars. Gil is a past director of the RMBTA and NATA, and currently serves on the Advisory Board for Corporate Angel Network and GE Capital Solutions-Corporate Aviation. Gil can be contacted at gtwolin@comcast.net
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