Kate Sarsfield/LONDON
In 1986, fractional ownership pioneer and Executive Jet (EJI) founder and chief executive Richard Santulli presented his NetJets programme to a jeering US business aviation audience. The often-fearful manufacturers and operators met the concept with trepidation, believing shared ownership had no place in a market traditionally synonymous with outright ownership.
Now, 14 years on and with millions of dollars invested, the status and acceptance of fractional ownership in the USA have altered radically. Countless players have entered the market, including manufacturers Raytheon and Bombardier, striving to carve a lucrative share of this aviation phenomenon with their dedicated fractional programmes, Travel Air and Flexjet respectively.
Fractional ownership has revolutionised the US business aviation market. Statistics suggest that nearly one-third of all business aircraft sold worldwide are destined for US fractional programmes. EJI alone, through NetJets, manages a fleet of 270 aircraft averaging 300-400 flights a day. Its expanding order book of 550 aircraft is valued at around $10 billion.
Sceptical voices
Similar success is now being sought in Europe, where traditional operating practices, such as leasing and block charter, are the mainstay of the business aircraft industry. The world's second largest aircraft market boasts an expanding fleet of 2,000 business jets and a raft of untapped potential. This is partly due to increased globalisation, pushing up the demand and range of flying for top executives, who increasingly regard business aircraft as essential business tools. Although great strides are being made by business aircraft operators, Europe is proving to be a tough nut for fractional providers to crack.
Five years into its venture with Portuguese commercial aircraft operator Air Luxor and with an expanding fleet of 18 aircraft and more than 100 shareholders, NetJets Europe is believed to be the only programme offering pure fractional ownership. Its position is continually undermined by criticism from a vociferous army of sceptics.
"Nobody in Europe wants to own a share in an aircraft - the demand simply is not there," says Jurgen Viethen, director of sales and marketing for Bombardier's Flexjet Europe programme.
Viethen's comments are reflected in the Canadian aircraft manufacturer's decision not to sell its European customers a share in an aircraft which, unlike its US programme, which boasts 350 aircraft and 100 owners worldwide. Instead, Flexjet Europe is essentially a rental scheme whereby customers pay a refundable deposit on a share, and, to make up the shortfall, Flexjet charges higher monthly management and occupied flight hour fees compared with typical fractional schemes.
For a one-eighth share in an $11.4 million mid-sized Learjet 60, for example, customers will pay a "fully refundable" deposit of $343,750 and a monthly management fee of $28,929, as well as $2,387 for each occupied flight hour. For this, the customer can expect up to 100h annual utilisation and a guaranteed response time of 10h.
By contrast, with NetJets Europe, owners of a similar mid-sized Hawker 800XP will pay a $1,596,500 acquisition fee (with a guaranteed buy-back option at market value after 30 months), a monthly management fee of $13,145 and an hourly fee of $2,345. This allows for 90h of flying time and a guaranteed response time of 10h. Viethen adds: "We watched and waited and have come up with a programme which is better suited [than NetJets] to the demands of the European market."
Nick Probert, founder and chief executive of Farnborough-based aircraft operator and management company Chauffair, believes that EJI and Bombardier are offering their customers an expensive ready-made charter service. He says: "It's all financial jiggery-pokery. Customers want clear pricing, no hidden costs and no long-term commitment. What matters is the standard and quality of service provided. Who cares if you own the aircraft?"
Probert speaks from experience. Earlier this year, he was forced to reinvent his Chauffair Share fractional ownership scheme less than three months after it was launched because of a lack of interest in his leasing method of shared ownership - not unlike Flexjet Europe. He says: "I realised that the system was far too complicated. It made people's eyes spin. I simplified the programme by taking away the acquisition and monthly management costs and rolling in one easily understood figure."
Chauffair Share now offers customers a minimum annual commitment of 25h at a charge of £2,800 ($4,250) per occupied flight hour. All shares are pre-purchased in blocks. A 25h block on a Citation SII or V, for example, is priced at £75,000. An extra £700 per hour is added for the larger Raytheon Hawker 700/800 shares. A guaranteed response time of 24h is required, which Probert believes is what "most customers demand". The price is based on operation within the "Euro Zone" and an additional fee is charged for journeys beyond.
Probert has ordered seven Citation Excels, which will be phased in from August next year and offered at a higher tariff. "We hope to offer a homogeneous fleet of Excels, once all the aircraft are in service in early 2002."
Probert joins a growing line of sceptics questioning the viability of traditional ownership in Europe. Mike Hamlin, owner and chief executive of UK business aircraft management company Hamlin Jet, says: "Fractional ownership will never work over here. If a person buys a share in an aircraft, the inference is he can't afford a whole one."
Hamlin says he is "the first person to lose money in fractional ownership" after his ill-fated attempt to establish a programme in 1993. He says: "We started off with two Cessna Citation SIIs [and two more on order] and had no difficulty in attracting interest in the programme." The problem, he says, were lawyers who regarded shared ownership as a legal minefield.
"They argued that their client had no control over their asset. So if, for example, one of the other owners used the aircraft to commit a criminal offence, say drug smuggling, it would be impounded and you with it. We were forced to close down the business after two years."
Hamlin is one of a handful of European entrepreneurs who have tried in vain to operate traditional fractional programmes in Europe over the past decade. Jet Partner of the UK was forced to close down its JetCo scheme after it failed to meet sales forecasts. No aircraft were ever ordered.
Critical mass
Geneva, Switzerland-based Corpavia Club shut down its fractional programme, which operated two privately registered Raytheon BeechJet 400As, due to a lack of funding by its Saudi/Swiss-owned parent company, Air Harbour Technologies. Gary Palin, Air Harbour's director of aviation, says: "To make a fractional ownership programme work, you need critical mass of a minimum of four aircraft. This requires substantial investment, which the parent was not willing to commit to."
Probert agrees: "You need enough machinery on the ground from day one. If you can't provide back-up, you won't sell the programme. People are not stupid."
These remarks are compounded by the collapse in May of UK-based fractional AirShare after just over a year of operation. Although the company declines to comment, a source close to the programme blames AirShare's downfall on a lack of foresight by a founding member. "Investors and executives were led up a blind alley, believing they could operate a successful fractional programme with only one aircraft [a CitationJet]. This bad advice cost them dear," says the source.
Palin concedes that although the barrier to entry is formidable for most companies, both NetJets and Flexjet benefit from tremendous foresight and the financial might of their parent companies, which are "prepared to throw money at their programmes until they succeed".
NetJets Europe's fleet comprises four ageing Citation SIIs 3 Citation VIIs, two Raytheon Hawker 800As, seven 800XPs and the first two of 10 large cabin Falcon 2000s. EJI recently announced its plans to order up to 10 Citation Bravos for the European programme and plans to have up to 50 aircraft in its fleet by 2003.
The Flexjet fleet consists of seven aircraft: two Learjet 31As, three Learjet 60s and a Challenger, with a further three jets expected to join the fleet in October. Around 60 aircraft are forecast for Flexjet's European fleet in five years.
The manufacturer's decision to ditch the ownership concept was driven by its desire to avoid the mass of regulatory and legislative tangles synonymous with Europe.
When NetJets moved into Europe, it discovered that archaic laws made multiple, cross-border ownership impossible in all European countries except Portugal. Santulli says EJI hired lawyers in every country to provide advice on the national laws and to examine the fiscal legislation. It took the company around three years to define the legal framework to enable it to handle fractional ownership in the same way as its US stablemate. EJI vice-president Kevin Russell says: "Europe has many different countries with different legislation. It was imperative to find a structure that would permit us to have customers in the programme from all European countries."
According to Hamlin, EJI's decision to base it operations in Portugal was foolhardy. "It's like basing a US fractional programme in Mexico. For [northern European] customers there will always be a cultural barrier."
EJI and its predecessors also have to tackle the European taxation minefield, in which individual nations offer diverse rates of business taxation for aircraft. Hypothetically, a shareholder in Germany, for example, could write off 20% of the asset over five years, while a UK-based owner might be restricted to only 6%. With a block charter or leasing arrangement, most of the expenses can be written off against tax if the asset is used for business purposes.
Operators believe the obstacles to owning and operating business aircraft in Europe will be fully bridged only if, like in the USA, the Continent was to simplify and harmonise its legislative and tax codes.
Waiting game
The hurdles faced by traditional fractional ownership companies in Europe have been met with caution in the USA by the two remaining dominant fractional players, Raytheon Travel Air and Flight Options.
Both have signalled their commitment to Europe, but their programmes are unlikely to be extended to the Continent within the next two years. "We are assessing the market and will only start a programme when we feel there is enough demand for our products in Europe," says Bill Walish, Travel Air's vice-president for finance.
Air Harbour Technologies' Palin says Raytheon must enter the European market because it runs the risk of losing its corporate identity with its US owners. "It is important to the manufacturers to keep their customers flying in their brands."
Palin says Bombardier's drive to enter the European market was motivated by wanting to provide brand continuity to its US Flexjet customers as well as whole aircraft owners: "They did not want their Learjet or Challenger customers flying around in a Dassault Falcon [for fear they may switch products]."
Brand continuity
Independently owned Flight Options says it will make its move before its Fairchild Envoy 7s enter service in 2003. "The aircraft are an essential part of our global strategy," says Flight Options president Darnell Martens.
Both operators concede that any prospective programme is unlikely to offer traditional fractional ownership. "We are going to have to be creative," says Martens, "and to sidestep the prohibitive European regulations and legislation, we may end up with more than one way of offering a programme, and leasing and block charter make sense."
Meanwhile, EJI's determination to succeed in Europe is as strong as ever. The company remains upbeat about its future on the Continent and is committed to its Portuguese base despite the jibes of critics, whose comments Russell dismisses as sour grapes. He says: "Our fiercest opponents are those which have failed to make a success of fractional ownership. When NetJets was started in the USA, people said it would never work. Just look at it now."
Despite the slow start, investment in the European programme continues unabated. When Santulli unveiled NetJets Europe four years ago, he said: "We have come to Europe to stay for as long as it is necessary, and to do whatever it takes to make it successful." Russell believes the only obstacle in EJI's way "is the availability of [new generation] aircraft to satisfy the demand".
| THE COST OF FRACTIONAL OWNERSHIP | |||
| SUPPLIER | NetJets Europe | Flexjet Europe | Chauffair Share* |
| Aircraft | Hawker 800XP | Learjet 60 | Hawker 800 |
| Ownership/entitlement | 1/8 Share | 1/8 Share | 25h |
| Acquisition cost/deposit | $1,596,500 | $343,750 | N/A |
| Monthly management fee | $13,145 | $28,929 | N/A |
| Occupied flight hour | $2,435 | $2,387* | $5,285* |
| Annual entitlement | 90h | 100h | 25h* |
| Response time | 10h | 10h | 4h |
| *After an initial 3 month/10h trial period customers pre-purchase occupied flight hours in blocks of 25h costing £87,500 ($132,575). | |||
Source: Flight International