Kate Sarsfield/LONDON
According to Kevin Russell, senior vice-president of Executive Jet Aviation, "-fractional ownership has done more for business aviation than any other activity since the introduction of the business jet in 1963". One indisputable fact about fractional ownership is that its has revolutionised the business-aviation industry. Barely a week goes by without an announcement from a fractional- ownership operator or manufacturer declaring record-breaking orders.
Fractional ownership has evolved from a fledgling enterprise to become one of the major forces in aviation. Two recently published analyses into the business-aviation market support this view. In its Ten Year Business Plan, US-based Teal Group cites fractional ownership as one of the factors driving the slow, but steady, expansion of the world business-aircraft market, saying that it is "the most promising catalyst for business-aircraft market growth". Teal expects business ownership to expand by up to 30% over the next ten years.
In a separate report, New Jersey-based CIT Group says: "Fractional ownership is a bright spot that will account for much of the growth in an otherwise mature market."
THE PROGRAMMES
The first fractional-ownership programme was pioneered in 1986 by former mathematician Richard Santulli, who recognised that, although owning a business aircraft was beneficial to companies and individuals, the cost was often prohibitive. He had established Executive Jet Aviation (EJA) in 1984, and begun to acquire a fleet of four aeroplanes: from this basis the concept of Netjets was born.
"The reason we chose Netjets as a product name is because we envisioned that over time there would be a network of private business jets to blanket the world," says Russell, EJA's senior vice-president. In the past three years, the programme's success has been phenomenal. It now operates an expanding fleet of 104 aircraft, made up of 25 ageing Cessna Citation S/IIs, 24 new Raytheon Hawker 1000s, 39 Citation V Ultras, two Citation X and 14 Gulfstream IV-SPs. With a further 170 aircraft on firm order, Santulli has made deals in excess of $2.9 billion. "We will be buying new aircraft at a rate of 35 a year for the next five years," says Russell. In a record-breaking deal at the Paris air show in June, Santulli announced an order for 50 Citation Excels - the biggest single order in unit size for business aircraft in aviation history.
The company has an unprecedented 700 owners on its books. "Netjets has introduced more companies than ever before to the benefits of business aviation. More than 80% of our customers had never owned an aircraft before," says Russell. He claims that Netjets operates more than 700,000 flights a year, 95% of them in the USA and the remaining 5% in Europe.
Netjets has not only filled a profitable niche, but its acquisitions have inevitably boosted sales and inventories of business aircraft. Gary Hart, president of fellow fractional-ownership operator Raytheon Travel Air (RTA), says that around 15% of aircraft sold by Raytheon are for fractional-ownership programmes. The Netjets example has also inspired other fractional-ownership programmes, with manufacturers seizing the opportunity to increase their bottom line.
Bombardier and American Airlines fixed-base-operator subsidiary AMR Combs set up their own version of the fractional-ownership programme in May 1995 through their Business Jet Solution joint venture. Called Flexjet, it is arguably the second-largest fractional-ownership programme in the world, and operates a 40-strong fleet of Learjet 31As and 60s. Two Global Express business jets will be available after certification in 1998, followed a year later by the Learjet 45. "Flexjet fills a small niche, but we are growing rapidly," says Bill Koch, AMR's vice- president of marketing and development. The company claims to have around 150 owners, and Koch believes that fractional ownership has made a significant impact on the business-aviation community. "A successful programme has to have the ability to woo the concept buyer into the fold-this will make a big addition to your bottom line," adds Koch.
Raytheon began operating its version of fractional ownership in August. Backed by Raytheon Aircraft, the RTA programme is the first to offer shares in a twin-turboprop and will have an initial company-owned core fleet of nine aircraft, including Beech King Air B200s, Beechjet 400As and Raytheon Hawker 800SPs. "The scheme allows an owner to upgrade to a transcontinental Hawker or downgrade to a short-field King Air," says Hart.
As with the Flexjets programme, new models (here, the Premier I entry-level and Hawker Horizon mid-size jets which are still under development), are also expected to join the programme at some stage. Manufacturers are not alone in wanting a piece of the action, and smaller, yet no-less-significant, programmes have been established. Among them are two regional operations which will both use turboprop-powered aircraft - Alpha Flying of Norwood, Massachusetts, which has sold shares in two Pilatus PC-12s through its Plane Sense programme; and Atlanta, Georgia-based Hill Aircraft, which is expected to enter the market by the end of the year with Beech King Air B200s. Finally, TXI Aviation of Dallas, Texas, sells shares in a Dassault Falcon 10 and a Falcon 50 in its Jet Partners programme.
How it works
Although the various programmes have unique differences, the concept of shared ownership remains the same. Owners purchase an interest (usually a one-eighth or one-quarter share) in an aircraft, and pay a fixed monthly fee followed by an hourly fee for the time they use the aircraft. Ownership is usually set for five-year terms, after which time customers may sell back their shares in the aircraft to the issuer at a pre-determined price. Each share entitles the owner to an allocated number of flying hours. Under the Netjets programme, for example, a one-eighth share in a Citation X costs $1,950,000 the monthly fee is $12,500, and there is a $1,840 hourly charge. For that, the owner gets 100h of flying time for a year.
To buy a Citation X outright costs about $15 million, so the cost of the fractional option seems attractive, although Mike Rose, Flexjets marketing manager, says that the benefits of shared ownership are not just economic. "Users only have to pay for the time they are in the aircraft, and there are no hidden costs," he adds. An owner can demand an aircraft any time of the year. "We never close," says Netjets' Russell. "We guarantee full-time availability and will promise to deliver your aircraft to any decent-sized airport within 4-10h," he adds.
Piloting and maintenance are provided as part of the service, and all the programmes will allow the owner to trade up or trade down the aircraft fleet with fee adjustments. On the downside, sharers may not always get their same flightcrew or aircraft, and if their utilisation increases substantially, it may be more beneficial to run their own flight departments. "Fractional ownership isn't for everybody," adds Rose. "If you fly more than 400-500h a year, it makes economic sense to buy your own aircraft, and if you fly less than 100h it fractional ownership would be too costly."
Fractional ownership is luring new buyers into the market, something that years of traditional sales have failed to do. Up to 80% of buyers are referred to as "concept buyers" who have not owned business aircraft before. "A successful programme is having the ability to woo the concept buyer into the fold. This can be a big addition to your bottom line," says Rose. As many as one-quarter of the owners are seen as likely to increase their shares, and some will go on to purchase their own aircraft. According to Koch, the aim of the Flexjet programme is for sharers to become outright owners. "In less than two years we have already transferred quite a few," he says.
Fractional loyalty
This is not a familiar story within other programmes, however. Russell says that "very few people" have left Netjets to acquire aircraft, and Cessna claims that only around 1% of prospective customers are lost to fractional ownership.
Such is the success of fractional ownership in the USA that operators are attempting to emulate the concept elsewhere. Two fractional-ownership programmes exist in Europe, which is the second largest business-aviation market outside North America. The Netherlands-registered Corpavia Club was set up by business-aviation service provider, Jet Aviation in 1996. The company says: "Membership is similar to joining a golf club". Up to six members can buy part shares in a Beechjet 400A, and all the aircraft are registered privately. The club is trying to find a niche between customers who own their aircraft and those who use air taxis. The second programme, Netjets Europe, was established by EJA after five years of intensive study.
"What drove us to go to Europe was the demand that we had from individuals within the USA who needed to conduct and grow their business in Europe. What we found was a tremendous need for business aviation," says Russell. Netjets Europe began in June 1996 and now operates four Citation S/11s with partners Zimex Aviation of Switzerland and Air Luxor of Portugal, which is the operating base for the programme and from where the aircraft are registered. The company will take delivery of two more S/IIs in October, followed in November by delivery of its first of four Citation VIIs.
Fractional ownership has critics in Europe, and many believe that the concept cannot work on a continent riddled with legislation and different to North America, where there is a unique infrastructure and an intrinsic aviation culture which is not prevalent elsewhere.
Jamie Martin, co-owner and marketing director of UK corporate air charter broker Hunt and Palmer, believes that chartering is strong within Europe and is a more favourable form of business travel within the continent. "The European market is different to the US market. There may be one or two occasions, when for tax purposes or for other reasons, it is justifiable to have fractional ownership. However, I fail to see the advantage of it when you have so many advantages of using the flexibility of the charter market," he says. Martin claims that the executive charter market in Europe "-is essentially subsidised", saying that several operations belong to individuals or companies. "who only their aircraft for a number of hours a year. They then charter out the spare capacity on the open market at an agreed rate, and don't pass on the full costs of the aircraft. They only require a contribution to their costs to cover main elements of expenditure like maintenance and aircraft depreciation," he says. Martin believes that some people are drawn to fractional ownership for the status it provides. "There is some attraction in owning part of an executive jet just like there is some attraction in owning part of a race horse," he says.
European hurdles
Alan Marler, director of operations at UK charter broker Air London, owner of the ill-fated fractional-ownership programme Jet Network, believes that Europe is not ready for fractional ownership. "To operate fractional ownership successfully needs a minimum of four aircraft, and the skill is to minimise empty flying." Marler concedes that when Jet Network was established in 1995, there were too many hurdles involved. "We could always provide an aircraft cheaper through chartering," he says. Marler believes that the best time for fractional ownership will be "the turn of the century".
Hannes Ziegler, chief executive officer for Netjets Europe, admits that problems existed before the programme was established, but insists that any setbacks have now been dealt with. "It is simply a question of smart and professional researching," he says. Ziegler, who admits to investing a great deal of money in Netjets Europe, hired lawyers in every country in Europe to "-advise us on the laws and to examine the fiscal legislation". Daniel Lutolf, chief operating officer of Netjets Europe, claims that it took the company a considerable time to define the legal framework to enable it to handle fractional ownership in the same way as its parent company does. "Europe has many different countries with different legislations, and it has been imperative to find a structure that would permit us to have customers in the programme from all European countries," he says, adding that there are fundamental differences between operating in Europe and the USA. Customers do not get the same utilisation out of an aircraft in Europe. "In the USA they can fly 24h a day, whereas in Europe, we have a window between 6am and 11pm."
He also cites the difficulty of obtaining aircraft take-off and landing slots as a further obstacle. Lutolf and Ziegler are confident that the situation is improving. "Before the third-stage liberalisation act [which came in to force on 1 April] permitted full cabotage, we could only operate from one country to another, but not within the specific country," says Lutolf.
Ziegler is scathing of the critics of fractional ownership. "A year ago, they said it will never work in Europe. Now they see it is working, they say that it will never be quite as popular in Europe as it is in the USA - mark my words, fractional ownership is revolutionising the business-aviation industry in Europe," he says. Ziegler believes that programmes which failed did not have the support of a large organisation. "Fractional ownership is very cash intensive: you have to have the finance to buy the aircraft to start the programme - no-one will ever invest in paper aeroplanes."
Ziegler admits that, compared with the 5,000 airports available for business aviation in the USA, Europe is a long way behind. He is critical of regulations which allow priority over business flights. "We should allocate slots on a first-come, first-serve basis," he says. He feels that there is a need for a better relationship between the airline industry and the business-aviation industry in Europe. "The airlines must understand that business aviation is not a competitor, but is there to promote business and economies around the world."
Now that Netjets has opened up in Europe, other US programmes are beginning to evaluate the market. Bombardier/AMR Combs sees a European programme as being a natural progression for its Flexjet. "It is one of the hottest areas, so we are keeping our options open," says Mike Rose. The company operates charter services in Europe through a recently joint venture with Lufthansa Technik of Germany. Rose cites two obstacles to operating a fractional-ownership programme in Europe. Firstly, he believes that some journeys would be too short, which would pose problems for business travel. "It is costly to arrange a flight for a 30min trip, and compared with what you get paid, the return for your efforts is not as great."
Secondly, he believes that Europe has a good infrastructure for travel. "There is a good rail system and some of the best commercial air travel around," he says.
Growing membership
Whether Bombardier/AMR establishes a fractional-ownership programme in Europe, remains to be seen. What is clear, however, is that the concept in Europe, although in its infancy, is beginning to grow. Membership at the Corpavia Club is growing, and to meet demand the company has ordered two more Beech 400As, with options for a further ten. The success of Netjets Europe can be summed up by Ziegler. "Cross-feeding is working well-the response has been wonderful".
By year-end, the programme will have six aircraft. When Santulli launched Netjets in Europe in 1996, he said: "We have come to Europe to say for as long as it is necessary, and to do whatever it takes to make it successful."
EJA and Bombardier/AMR are casting their nets further afield. EJA is holding discussion with three Middle-Eastern partners and hopes to launch a scheme in South-East Asia by the end of the year. Both companies are also eyeing up Latin America and a prospective area for fractional ownership. According to Russell, "-the biggest hurdle to implementing a programme is the availability of aircraft".
Source: Flight International
