"The thing that impresses me," Mateo said in the limo, "is how everyone is infected and genuinely enthusiastic about the company. I’m convinced they have a great company with a great leader, who has inspired them to do great things."

Mateo was speaking about NetJets, the fractional ownership provider, and Richard Santulli, the company’s chairman and CEO, who launched the brand in 1986. Mateo, who was considering the purchase of a fractional share, had spent the day flying in a Citation X and touring NetJets’ operations center in Columbus. He had considered alternatives, such as Marquis Jet Partners and Sentient, two companies that offer private aviation programs, but after his NetJets flight, tour, and meetings—and the steak-and-shellfish dinner in Smith & Wollensky’s private dining room—Mateo thought he had found his solution. "In my opinion, you have the only credible program," Mateo told Kevin Russell, NetJets executive vice president. "I’ve looked at your competitors. If you’re going to go fractional, you’re the only game in town."

However, Mateo did not make his final decision until a month after his visit. He double-checked the company’s contract, queried friends who were NetJets owners, and discussed his possibilities with Bill Quinn, president of Aviation Management Systems, the aviation consulting firm Mateo hired to assist him with his purchase. "He wouldn’t let go of the concept until he had wrung it out to the point where it wasn’t moist," Quinn says of his client. "It wasn’t even damp. It was dry."

Mateo’s self-admitted obsessive overanalysis was a result of a prior private flight experience that degenerated into one of the few financial miscalculations the otherwise successful start-up entrepreneur ever made. Mateo, who has launched, purchased, owned, and sold companies in diversified fields such as real estate and software, had previously purchased a fractional share that, by the end of its term, had depreciated precipitously. Fearing a similar scenario, Mateo resolved to pick through the financial scrum of fractional ownership with far greater caution and to enlist a professional to aid him during the process—a period that lasted nearly a year from the divestment of his previous share to the purchase of a new one. "I think it’s risky business without a consultant," Mateo now says. "It doesn’t matter what plane you buy. The amount of money you’d pay a guy like Bill is so infinitesimally small as a percentage of the first year’s ownership. He earned his fee—no doubt about it. And yet I was an experienced owner."

Few Options
Mateo’s business interests are checkered throughout the country, in Washington, D.C., Montana, California, and Hawaii. He is an automotive enthusiast who travels to rallies and often takes his family to his homes in Hawaii, Arizona, and Montana. Six years ago, to meet his personal and business travel requirements, Mateo purchased a one-sixteenth share in a seven person Beechjet 400A from Flight Options (then Raytheon TravelAir), one of the four major players in the fractional market. It was Mateo’s initial entry into fractional ownership. His inexperience would prove costly.

The current aircraft market is saturated with inventory, reducing resale value of used planes.

In 2002, his five-year contract was coming to a long-awaited conclusion. Upon completion, owners can renew their contracts or sell their shares back to their providers. Mateo decided to sell his share back to Flight Options, which countered with a significantly lower valuation, which he considered unacceptable. The current aircraft market is saturated with inventory, reducing resale value of used planes. In 2000, value was still high; an owner selling back to a provider could have conceivably received 85 percent of a share’s original value. Today, shareholders have seen returns as low as 55 percent, and Mateo’s valuation approached the latter figure. "The investment he made," Quinn says, "was a disaster. I’ve been dealing with dozens of Flight Options valuations. There is integrity and considerations that CitationShares, NetJets, and even Flexjet extend to owners. When it comes to Flight Options, they are so far off the chart."

According to Quinn, Flight Options uses a different valuation model than the other three providers when appraising about-to-expire shares. Flight Options buys back shares at the cheapest prices possible, often less than the real-market valuations of other providers and independent appraisers. "They use a buyer’s mentality as opposed to a valuation mentality, and that’s unfortunate because it hurts their program," Quinn says. For some time, Mateo negotiated with Flight Options to achieve a better valuation, but the two parties could not arrive at an agreeable resolution. Meanwhile, a former Flight Options executive, who was an acquaintance of Mateo and a friend of Quinn, urged the businessman to contact Aviation Management Systems to help him exit the program. Quinn presented two choices: His company could act as an appraiser to value Mateo’s share, or become his personal consultant and handle all negotiations on his behalf.

In September 2002, Aviation Management Systems took over Mateo’s exit strategy, winning a higher valuation for its client but one that still, in Quinn’s opinion, did not come close to the real value of the one-sixteenth share. Mateo was discouraged by the negotiations, but his travel requirements—his business takes him to small towns such as Hallettsville, Texas, and Bozeman, Mont.—could not be served by commercial flight. He decided to stay in private aviation, but was determined not to repeat his past mistakes.

Starting Over
If the 5,600 worldwide owners of fractional shares, Quinn estimates that 70 percent of owners are first-time buyers with little or no experience in private aviation. Many fail to establish their flight needs before the purchase, and rarely do any consider an exit strategy when shares expire. Mateo, who considered whole aircraft ownership and membership programs after selling his Flight Options share, did what Quinn recommends to all his clients: he performed a needs analysis to determine his common destinations, frequency of travel, average size of his traveling party, and his financial constraints.

Mateo knew he needed to fly between California and Hawaii three or four times a year, but his fluctuating business plans made it difficult for him to determine the exact number of annual flight hours. The easiest solution would have been to purchase an aircraft such as a Citation X or Excel outright, making the plane available for charter to offset his costs when he was not flying. Quinn conducted a benchmarking study to figure out fixed operating expenses (cost of ownership when the plane is not in use) and direct operating expenses (cost of ownership when the plane is flying). Quinn then divided the overall operating costs by the plane’s average speed to determine the aircraft’s cost per mile and its cost per seat mile.
 
However, Mateo did not want to spend the upfront capital required to make the purchase, eliminating the possibility of outright aircraft ownership. "His inclination was to reduce capital investiture, which pointed us back to fractional," Quinn says. "A lot of owners are sucked into buying planes because you’re able to shelter larger amounts of tax dollars in the plane. But that catches up to you, and he was sensitive to that based on experiences in the past."

Mateo’s other alternative would have been to join Marquis or Sentient. Marquis offers 25 annual flight hours aboard NetJets-operated planes to its members. Sentient features a fleet of charter planes from operators nationwide, and its clients draw upon a prepaid bank of flight hours when flying with the program. However, Mateo predicted that he would fly more than 25 hours annually, eliminating Marquis as an option. Also, Marquis’ cost per mile would be 5 percent to 10 percent greater than that of fractional and 15 percent to 20 percent more than that of whole aircraft ownership.

Mateo liked the flexibility of Sentient’s program—owners can exit the program whenever they want and are reimbursed any unused dollars in their account—but he had concerns that centered on not knowing beforehand which aircraft he would be flying. "It’s a little bit cheaper, but am I willing to risk an organization that doesn’t have the safety infrastructure?" he asked. "Am I willing to accept the fact that any one of these planes will show up? And I’m not quite sure, until 24 hours before it arrives, which plane I’m going to get and whether it will really meet my mission."

Mateo decided to go fractional. The question was which provider to choose.

Plane Comes First 
Many prospective fractional owners err at the start of the selection process. They compare different providers, cross-shopping between CitationShares, Flexjet, Flight Options, and NetJets. Quinn advises his clients against this approach; instead, they should start by cross-shopping aircraft. With Quinn’s guidance, Mateo decided that the range, luggage capacity, and speed of the Citation Excel would make the Cessna product his preferred plane. "The Excel product did the most for addressing his needs at the most reasonable cost and expense," Quinn said. "The price point considerations were acceptable to him."

Today, CitationShares and NetJets are the only fractional providers that fly the Excel. A one-sixteenth Excel share through CitationShares is cheaper, but Quinn pointed out that NetJets had more offerings if Mateo wanted to purchase additional hours or upgrade to a larger plane. The 1,829-mile range (carrying two passengers) of the Excel, which is the largest aircraft in the CitationShares fleet, prevents it from making a nonstop five-hour Los Angeles to Honolulu flight. If Mateo did not want to charter a plane for his flights to Hawaii, he could upgrade in the NetJets program to a Citation X, which could make the journey.

Mateo liked the Citation X, the fastest business jet on the market, but it was too much plane for his needs. "If I wasn’t going to be flying to Hawaii, the X was overkill," he explains. "Based on where I would fly the Excel domestically, it is just more than adequate, and the X is about 40 percent more, so it didn’t make any sense." The Excel would be Mateo’s plane, and NetJets would most likely be his provider—following the proper research.

 

Choosing the Provider
Mateo and Quinn focused on NetJets, the standard-bearer of fractional ownership. Not only did NetJets launch the industry, but today, according to Russell, the company claims a 70 percent market share. Money-losing operations in Europe have dampened recent performance, but NetJets is still attracting new clients and placing bulk orders for new planes, which is how the company makes a profit (manufacturers such as Cessna and Gulfstream give NetJets premium discounts on large orders).

Before committing to NetJets, Mateo’s most important objective was to identify the cost drivers involved in the purchase—expenses that could add significantly to the base price of the share. While the programs differ, there are several common factors built into a fractional provider’s contract that prospective owners must take into consideration:

• Takeoffs and landings. Most programs will deduct one-tenth of an hour for every takeoff and landing to cover fuel burn and aircraft wear and tear during taxi. For example, if a flight lasts five hours from takeoff to landing, providers will deduct 5.2 hours. So if you purchase a one-eighth share (100 annual flight hours), assuming all your flights take one hour, you will only have 80 hours of actual in-flight time on your airplane, losing 20 percent of your annual allocation.

Before committing to NetJets, Mateo’s most important objective was to identify the cost drivers involved in the purchase—expenses that could add significantly to the base price of the share.

• Short-legging. Flights of less than one hour will be rounded up. Again, assume you purchase a one-eighth share (100 hours) and take 100 flights a year. If half your flights take 0.7 hours (42 minutes), then you will lose 15 hours of your annual allocation because of short-legging. Even worse, assume you own a one-eighth share and fly exclusively between New York and Washington, which takes less than an hour. Taking penalties for short-legging and takeoff and landing into consideration, you will have only 65 hours of in-flight use. Clearly, fractional ownership is more efficient over longer journeys.

• Primary Service Area. The Primary Service Area (PSA) is the specified region in which owners can fly without imposed surcharges. For most programs, the PSA is the 48 contiguous states plus a boundary of several hundred miles. If you fly outside the boundaries of the PSA, you will incur additional surcharges. For example, assume you own a Challenger 604 share through Flexjet, and you fly from Washington to Nice, France. Flexjet will allow you a certain number of hours (usually three hours a day) if you keep the plane waiting in Nice, but those hours depend on total flight time. If total roundtrip time is 15 hours, you may keep the Challenger in Nice for five days before Flexjet begins to deduct hours from your annual allocation. If the aggregate number of total hours flown equals the provider’s minimum requirement (three hours a day in this example), no additional deductions are made.

• Congestion fees. There are surcharges for operating in certain congested airports.

• Leg restrictions. Some programs may impose surcharges if you make multiple stops in one day. Also, they may place time limits on each landing, and may assess fees or deduct hours if the limits are exceeded.

• Customs fees. Depending on the provider, a fee may be added to your monthly statement when you fly internationally and make a customs stop.

• Relief costs. If your primary flight crew exceeds its duty time, especially on international trips, the provider will send out a relief crew. For safety purposes, providers stipulate that crews can work only a certain number of hours in a particular time frame. You must pay the positioning costs to transport the relief crew to your location.

• Fuel escalators. Providers include an established average rate per gallon of fuel in your contract. While this is a set rate, usually adjusted annually, they will add a flexible surcharge per operating hour if the actual price of fuel rises by a specific increment.

Quinn made sure that Mateo recognized all the variables that could boost the price of the standard share cost. Mateo crunched the numbers, played through the scenarios, and concluded that NetJets had the offerings that made sense financially. But he still wanted to experience the company’s culture and view the operation up close for himself.

Touchdown in Columbus
In the past, they wouldn’t even talk to you about a demo flight," Mateo says. "Now they will do demo flights if you’re a serious purchaser and they believe you’re a serious prospect."

Mateo’s tour in July began in the 20,000-square-foot NetJets flight center, a newsroom-style open space devoid of cubicles. Dispatchers, schedulers, flight crew managers, and meteorologists work in the area, which contains television monitors, file cabinets crammed with information, and a screen that regularly flashes the company’s mission statement: To always be the worldwide leader in fractional aircraft ownership.

Glenn McConnell, director of NetJets’ flight school, led Mateo’s tour, introducing him to his personal six-member owner’s team who would always take his calls, faxes, or e-mails when he reserved a flight. He showed Mateo how the schedulers would determine which aircraft would be right for his mission, and how the 34 FAA-certified dispatchers would go over each flight plan, coordinating weather reports, security briefings, and crew availability. Mateo even asked one of the NetJets meteorologists, who sat at a desk with Meteorology Today and the Weather Forecasting Handbook at his disposal, what the weather was like in Kona: "Eighty-four degrees, with a northwest wind of eight knots," the meteorologist quickly responded after clicking on his screen.

NetJets justifies its industry-high rates with its unmatched emphasis on safety. Without prompting, its executives rattle off several of the company’s standards:

Pilots must have 2,500 flight hours before being hired. While commercial pilots undergo five to nine days of training a year, NetJets pilots must undergo 23 training days annually. There are 10 former Air Force One pilots on the NetJets team.

The company vets every airport and fixed-base operator before agreeing to use its services. Once a client wanted to fly into a Canadian airport that NetJets had never used. For an entire day, a NetJets crew toured the airport and tested the runway before approving it for use.

At 8:30 every morning, a meeting takes place in the flight center. During the meeting, dispatchers, schedulers, and executives study every flight from the previous day that did not arrive on schedule and determine the cause for the delay.

When a flight plan is filed, crew members receive general information on their pagers. Crew members respond via their pagers, and then receive the full flight plan details via phone or fax wherever they are, be it at home or in a hotel. This eliminates any paperwork or flight plans that might otherwise be viewed without authorization at a fixed-base operation by someone not involved with the flight.

After the tour, Mateo met with Russell, Vice President Michael Goode, and sev eral NetJets employees for further discussions and to view a demonstration of IntelliJet, the company’s proprietary software that manages all owner information. The program stores data such as owners’ preferred caterers, onboard restrictions (no Pepsi products aboard Warren Buffett’s flights), and choice of ground transportation. Over coffee and sandwiches, they discussed topics such as share depreciation (Russell estimated a 5 percent to 6 percent annual rate), competing programs (Mateo praised Sentient’s policy of refunding unused hours), and safety (Mateo lauded NetJets’ commitment while raising concerns about Sentient).

Upon conclusion of his visit and his return home, Mateo called Quinn and informed him of what he had seen. "He felt more comfortable with what he saw and knowing what he’d be getting," Quinn recalls. "He saw what planes would show up and saw the service and training. He was highly impressed with that component. And not that any other program is unsafe by any means. They each have their own benchmark for safety. But the benchmark is certainly NetJets, without question. They were the first player in the business. He saw that and felt comfortable with that."

"While they are the most expensive, it is clear to me that they are the best, and they have an amazing safety record," says Mateo. "That is the thing that is most important to me. If I’m going to fly privately, I don’t mind paying a few extra dollars and making sure that every flight is going to be a safe flight. Having seen what goes on behind the scenes, I know what’s going on. I feel comfortable with that."

The Final Approach
One last time, Mateo poured over the finances of NetJets’ offering, fusing the economics of the deal with what he had viewed during his tour and demonstration flight. He prepared to study every line of the contract, knowing he could negotiate certain points—a fact of which he was unaware when he purchased his Flight Options share.

While a traditional lawyer can help a client negotiate fractional ownership documents, Quinn says an aviation professional can better understand the flexibility of the contract. Also, providers regularly alter documents for clarity or risk-management purposes, which can muddy the language for prospective owners with no or little experience. Quinn recommends that an aviation-familiar lawyer perform the following:

• Define the language. A word that could be included in a contract is "substantially." For example, a contract could stipulate that a provider could substitute an aircraft for the owner’s plane that is "substantially" the same. This means if an owner’s light jet is not available, the provider could possibly deliver a turboprop as a substitute because it could be considered a "substantially" similar aircraft. Such vague language needs to be defined and tightened.

• Negotiate surcharges. If your travel requires a significant amount of short-legging or international flights, you will want to request that specified destinations be exempt from additional charges.

• Inquire about resale options. If you owned a Flexjet share, for example, you could insert a stipulation that guarantees 100 percent resale value of your share. You could state that if you decide to buy a whole aircraft from Bombardier, Flexjet’s parent company, you could sell back your fractional share at its full cost, ignoring depreciation. "You could say you want to own your own Lear 60 someday, but it might take you a couple of years to figure that out," Quinn explains. "They will do that. They’re in the fractional business, but they want to sell planes. If you tickle their fancy by saying you will buy a whole plane, they will bend over backwards for you."

During the peak of his decision- making process, Mateo would call Aviation Management Systems regularly, often flip-flopping from the declaration he had made previously. "Whenever he called, people would say, ‘What’s he doing now? What’s he doing today?’ It was fun," Quinn remembers.

In September, the calls stopped. Mateo had decided to purchase a NetJets share, but he wanted to negotiate the deal himself. Quinn was not surprised. He had gotten to know Mateo quite well by then and figured the businessman was doing what he knew best. "There’s no question," Quinn says, "that he likes the thrill of the deal."

Additional Information
Excel-lent Choice

Resources
NetJets, 877.356.5823, www.netjets.com;
Aviation Management Systems, 800.431.3362, www.amsconsultants.com