Wednesday, February 07, 2007

Growing pains for fractionals

A Business Week article, republished on the Business Travel section of the MSNBC website, suggests that fractional jet operators may be experiencing substantial 'growing pains' due to unforeseen costs arising out of rapid expansion.

Apparently the costs of acquiring and operating so many aircraft have resulted in driving expenses up so high that, despite brisk demand, "the companies operating these services, including NetJets, Bombardier Flexjet, and Flight Options, have collectively lost hundreds of millions of dollars in recent years." As a result, the 'frax' have had to resort to tactics such as discounting their rates in order to attract new customers, and offering their existing customers incentives to travel at off-peak times.

The article, titled "One jet, 16 owners, big problems," notes that the fractional jet business is a $6 billion industry, and that more than 5,000 individuals and businesses now own fractional interests in private jets, compared to 730 in 1997. So why can't they turn a profit?

Here's an excerpt from the article that explains some of the problems:
...For one thing, providing a ready, waiting jet for a multitude of customers--many jets are now sold in increments as small as 1/16th--is more complicated than it may appear. Experts estimate that more than 25% of an average plane's air time is spent flying empty to pick up the customer. And because many people travel at the same peak times--the day before major holidays, or Monday mornings--operators have too often been forced to turn to the costly charter market just to meet their contractual demands. NetJets Inc., for instance, estimates it spent $200 million chartering extra jets in 2005, though it says it cut its charter outlays to less than $100 million last year.

Analysts add that a good portion of the existing stock of business jets, such as the Hawker 1000 and Cessna Citation Ultra, were built for corporate users who flew them less than 300 hours a year, not for the roughly 1,100 hours that most fractional operators wring out of an average plane. The unfortunate result: chronic maintenance and excessive downtime. "A lot of these light business jets were not designed to be flown like a commercial airplane," says Mike Riegel, a former Flexjet executive who now advises fliers purchasing fractional stakes. And experts say that private jet operators, in their quest to gain market share, were way too aggressive with their own jet acquisitions, which in turn forced them to discount their rates to lure customers. "The fractional players have been just like the commercial airlines--they've been pricing just to fill seats," says Richard L. Aboulafia, vice-president at Teal Group Corp., an aerospace consulting firm based in Fairfax, Va.
Some of the frax are now looking to acquire more fuel-efficient aircraft in order to cut operating costs in the long run.

The article saves the best quote for last: "The best thing that could happen to this industry is consolidation--taking out a couple of the lesser players who just hold down prices," says David Strauss, an aerospace analyst with UBS.

That statement has such a familiar ring... Where have we heard that before? Are the frax just like the airlines after all?