Don't read too much into Avolar's collapse when assessing prospects for fractional ownership programmes. UAL simply lacked commitment
The decision last week by United Airlines to pull the plug on its embryonic fractional ownership division Avolar has been taken by some to be an indicator of tough times ahead for the booming fractional sector. Not so. Avolar's demise is due more to a lack of business courage on the part of United parent UAL than a lack of demand from the market.
Rather than suggesting that a burgeoning business is set for a slowdown in the post-11 September climate, key indicators all point towards significant increases in demand for leading fractional programmes in the USA. If anything, the added safety that fractional ownership provides has become an additional selling point for the schemes, which were already proving their business worth before September's terrorist attacks.
Aviation Research Group/US, for example, which provides consultancy on the merits of business aircraft ownership, fractional ownership and chartering, has seen its business quadruple since last year. Many potential fractional users are merely waiting for a firm signal from Wall Street that the economic recovery is under way before committing to buying business aircraft shares.
Yet United blames market conditions for the fall of Avolar. This is disingenuous. After 11 September, UAL did not have the funds or the commitment to make its ambitious Avolar plans work. The investment needed and the time required to see a return in fractional ownership are not for the faint hearted.
The way to succeed in fractional ownership is to go large. The biggest operators in the sector are only just starting to achieve critical mass and move into profit. NetJets, by far the largest fractional programme, produced a small operating loss last year following a small operating profit in 2000. Bombardier's Flexjet, despite suffering low take-up in Europe, has also proved its business case ahead of expectations. Both operations are expected to record significant profits this year, as the programmes mature and break-even levels are reached. The merger of Flight Options with Raytheon Travel Air in January is designed to bring that scheme to the same position.
United climbed on board a bandwagon that was travelling faster and in a different direction to its airline operations. That the airline thought it should be making money out of a new form of aircraft operation is not surprising, but the scale of attack it planned on the market looked ambitious and needed real conviction.
To join the market late and build a fleet of comparable size in one-sixth of the time it took market leader NetJet would require complete dedication from board management - a dedication United's board lacked, understandably preoccupied with its struggling airline operations. United planned to trade on its reputation in a way that other major carriers had avoided.
United made a major mistake in trying to move in on the fractional market, believing its sheer size and brand recognition would marginalise operators who created the market. No other airline followed suit, although others have considered entering the market and some have dipped their toes in charter waters.
Delta Air Lines has adopted the sensible approach with its Delta AirElite charter management scheme, which offers the topmost stratum of the airline's huge customer base an alternative way to travel - in a way that negligibly impacts its core business but potentially generates huge returns for Delta.
Dassault and Gulfstream have both played down the significance of the loss of orders the fall of Avolar brings, not least since they recognise that the billion dollar orders were largely theoretical - fractionally owned aircraft need buyers before they are actually delivered.
Prudent manufacturers are careful how they factor fractional orders into their backlogs and production plans. In reality, only a handful of Avolar's aircraft had been committed to production from both manufacturers.
Airbus was even more cautious, negotiating a "joint ownership" marketing programme for its Airbus Corporate Jetliners in North America whereby Avolar would have acted as dealer and, in many cases, charter operator. The European manufacturer insisted on non-exclusivity and ring-fenced the operations to limit its exposure to risk. For Bombardier and Raytheon, which had signed even flimsier letters of intent with Avolar, production should not be affected.
Avolar's demise does not signal the start of bad times for fractionals. Rather, its collapse illustrates the behaviour of a large corporation jealous of a burgeoning market. Fractionals are set to boom, with or without Avolar.
Source: Flight International
