KATE SARSFIELD / LONDON
Airlines are turning their hand to business aviation in an attempt to stem the loss of high-yield customers
A revolution is taking place within business aviation. In a surprising turn of events, the mighty commercial airlines have begun to snap at the heels of this booming aerospace sector - one it has long dismissed as a minor player and an irritant.
Now as the world's airports and airspace become increasingly congested, crevices are emerging in the air transportation infrastructure. Airlines are running the gauntlet of unreliable services, crowded terminals and slot delays, while their disaffected customers seek a more convenient, flexible and direct form of air travel.
Business aircraft, although faced with a similar or often worse fate at the busiest hubs from where they are practically shunned during peak hours, are more than ever providing a highly desirable alternative to airline travel.
Jack Olcott, president of the National Business Aviation Association (NBAA), explains: "Business aircraft have access to over 5,000 airports throughout the USA alone. These airports can be situated close to major commercial centres and in remote locations not serviced by airlines.
"At the top five airports," he adds, "business aircraft is responsible for only 5% of traffic. At the top 20 airports it accounts for less than 10%. The operating structure of airlines is based on the hub and spoke system, with 90% of their revenue deriving from 10% of the city pairs. Business aircraft operations, however, are random as they are not tied to schedules," Olcott says.
This versatility, combined with the seamless travel experience, the generally high quality of customer service provided by fixed-base operators and the reassuring safety record of business jets, are the key drivers in the growth of business aviation, and are proving an irresistible draw for beleaguered airline customers.
It is still unclear how many high revenue passengers are defecting to business aircraft, but their loss is being felt across the boardrooms of many carriers, some of whom are devising methods to stem the flow of defection while others are merely keeping a watchful eye on the market.
Wait and see
American Airlines, Delta Air Lines and Air Canada have dipped their toes into the water in various forms, albeit briefly, but each has opted for the "wait and see" approach. In Europe, meanwhile, Virgin Atlantic is evaluating the purchase of ultra long-range business aircraft. It originally looked at the Boeing Business Jet (BBJ) and the Airbus Corporate Jetliner (A319CJ), but has also recently been evaluating the Bombardier Global Express to establish an all-business-class premium airline, possibly called Virgin Jetset.
"Our business passengers are looking for value for money and flexibility," says the company. "The concept is still in the planning stages but it is feasible and desirable and it could be a goer."
Virgin says the operation would be launched as an entity separate to its airline business, flying on high-yield transatlantic routes and making use of smaller airports such as Farnborough, near London, and Teterborough, New York.
A similar concept has been adopted by Qatar Airways, which earlier this year acquired an A319CJ to provide a dedicated premium class service on scheduled routes from Doha to Europe and the Middle East. The aircraft, which is also available for Qatar Royal family use and private charter, has yet to enter scheduled service.
In the UK, in April, British Airways (BA), linked up with international air charter broker Air Partner to launch a global executive jet service. Called "Business Jets in association with British Airways", it requires no investment from BA, whose primary involvement is marketing the service to UK companies with travel agreements with the airline and to selected members of its Executive Club scheme.
"The service is also designed to complement our scheduled service network, providing our customers with the ability to charter a business aircraft to airports which we do not currently serve", says Business Jets manager Sam Scrimgeour. Under the initial one-year agreement with Air Partner, BA gets a percentage of the revenue the new business generates.
The involvement of airlines in business aviation is nothing new, points out Jim Vance, co-owner of US business aircraft broker Vance and Engles. He says the concept has been examined by several carriers over the years. In 1968, the now-defunct Pan American World Airways became one of first carriers to operate a business aircraft. Vance says: "Pan American business jets operated five [Dassault] Falcon 20s on the airline's charter certificate."
Vance says the business waned in the early 1970s when Pan Am opted to use its annual charter allocation (2% of the airline's total scheduled miles for the previous year) to transport troops to Vietnam. He concedes: "It seemed more lucrative to shift troops in Boeing 747s for the Pentagon than to move passengers around in Falcon 20s." The death knell came later, says Vance, when Pan Am, also sole distributor for the Dassault Falcon 20, was successfully sued for operating illegally as an arm of the aircraft manufacturer.
More than 20 years on, the business aviation market has become a highly profitable and sought-after market, and not merely a minor sideline for the carriers, a fact which United Airlines is seeking to prove through its stand-alone venture United BizJet.
Luxury product
"We are doing something that is hugely different to the other airlines," says United BizJet president Stuart Oran. "BA has not spent a nickel setting up its business, while Virgin is [looking at] taking a commercial aircraft and converting it into a uniform luxury product." Oran admits United had examined a similar business model to Virgin's but decided not to proceed. "It was dismissed as an uneconomic use of slots."
"In recognition of our most important customers, we are making a meaningful $250 million investment in a brand new company which has nothing to do with scheduled airlines. We feel we can do a better job if we can control the process and the product. This will also provide a more profitable return [on our investment]."
United's foray into business aviation was spurred, Oran says, by nearly two years of costly yet revealing studies by research company Booz, Allen & Hamilton. "Our customers told us they were dissatisfied with airline travel and were looking for alternatives."
United BizJet eventually plans to provide three types of service, fractional ownership, corporate shuttle and charter, although its initial focus will be on fractional ownership. This is arguably the fastest growing sector within commercial aviation. Oran says: "Of those surveyed who said they would be interested in becoming involved in fractional ownership, 74% expressed a preference for a commercial airline-backed service. Also, one-third of those who said initially they were not interested in fractional ownership said they would reconsider if the operator was an airline."
Such is the demand for fractionals, that despite the economic slowdown in the USA, United BizJet is set to launch its dedicated programme within the next few weeks, or possibly as early as next week's NBAA convention in New Orleans, and begin operations in the second quarter of next year. Oran enthuses: "The fractional ownership market is much larger than the existing pool of owners, we have barely scratched the surface."
United BizJet has already embarked on a multi-billion dollar spending spree clocking up orders and options with Dassault (a mixture of Falcon 2000/EXs and 900s) and Gulfstream (GVs and GV-SPs), for 125 aircraft as well as maintenance and support.
"We are set to take the first six to eight aircraft in April and have 22 in operation by the end of next year. By 2006 we expect to be operating 200 business jets [from super-light to large cabin types]," says Oran.
Oran says the subsidiary has benefited from its parent's dominant aircraft purchasing position, not to mention its forte for fuel purchasing, marketing and operations. He is confident these factors, coupled with the airline's "operational heritage" which spans 70 years, will position United BizJet as a key player within the fractional ownership market.
"We are older, more established and sophisticated operators than our competitors, most of whom are manufacturers [Bombardier Flexjet, Raytheon Travel Air]," he boasts. "Although United BizJet will operate under the same [shared ownership] concept as other programmes, we plan to offer a higher level of service and luxury than is already available."
Fractional competition
Existing operators, however, argue that new customers are more likely to join an established fractional operator, than approach an airline with little or no experience of the business aircraft market.
United BizJet faces stiff competition, notably from market leader NetJets, owned by Executive Jet. Richard Santulli, formerly owner of Executive Jet and now chief executive since its acquisition four years ago by Berkshire Hathaway, pioneered the concept in 1986.
NetJets now has programmes in the USA, Europe and the Middle East and, as of 1 September, operates a fleet of 377 business jets, from the Cessna Citation Ultra to the Boeing BBJ. The programme also has 580 aircraft on order, including 124 Falcon 2000s, 68 GIV-SPs and 33 GVs.
Kevin Russell, senior vice-president of Executive Jet, says: "NetJets created the concept of fractional ownership and we will continue to be one the major beneficiaries. We are adding six to eight new aircraft and 40 to 50 new owners a month and all aircraft being delivered next year are committed to owners."
Russell cautions: "Only six out of 57 companies which have entered the fractional ownership market in the last six years remain. The majority of these are subsidiaries of original equipment manufacturers [OEMs] which offer aircraft types sold by their parent."
These remaining players have, nonetheless, established successful and profitable programmes in their own right and like NetJets, will be hard to imitate.
Raytheon Travel Air operates a fleet of over 100 aircraft and has around 330 on order. Flight Options operates nearly 90 pre-owned business jets and has ordered 25 Fairchild Dornier Envoy 7s. Bombardier's Flexjet, the second largest fractional programme, operates a growing fleet of around 120 aircraft.
The latter two companies are also seeking to penetrate the European market. Flight Options, through its joint venture with UK operator Chauffair, essentially provides lift for US customers travelling on the Continent. Bombardier's FlexJet Europe, which was established on similar grounds with joint venture partner ExecuJet, has also signed "significant numbers" of Europe-based customers.
Oran acknowledges the potential of the European market to United BizJet, and the possibilities for expansion, perhaps through its parent's Star Alliance partners, notably Lufthansa. He claims, however, not to be examining any such move, saying: "We must focus 100% of our efforts on the US programme."
United's decision to jump feet first into the business aviation market has blurred the line between airline and business aircraft travel and has been greeted with surprise and cautious optimism by the industry.
Another level
NBAA's Olcott says: "This is the ultimate validation of our community, signifying a bend in the road with a whole new set of signs which have never been read before."
Vance of Vance and Engles agrees: "It has placed the industry on another level of sophistication and credibility and given OEMs a shot in the arm, increasing their order backlogs still further."
The new venture has drawn its cynics who doubt that United, with such a powerful airline heritage, can make a success of a business aircraft venture. Says one critic: "No matter how much it claims not be influenced by United Airlines, it is. United BizJet is essentially an airline trying to do the job of a business aviation operator, but the two cultures are very different."
Olcott also sounds a cautionary note: "Business aviation is a unique activity. To what extent is any airline able to handle it as a separate entity? Furthermore, what are the consequences for our industry when these airlines [with established business aircraft fleets and order backlogs] decide to pull out?"
Conversely, as the demand for business aircraft increases - as is widely predicted - the allure of this booming aerospace sector might prove too irresistible for new airline entrants to resist.
Source: Flight International
