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| Aerial Combat |
Turbulent Times
Michelle Seaton
08/01/06
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For the past decade, growing numbers of affluent individuals and corporate
travelers have signed up with fractional ownership programs, which offer partial
stakes in top-of-the-line planes and the ability to fly on short
notice.
Though they remain quite popular, these fractional programs are not,
on the whole, profitable. In his 2005 letter to Berkshire Hathaway shareholders,
CEO Warren Buffett conceded that NetJets, which Berkshire Hathaway owns, remains
problematic. “I said last year that this business would earn money in 2005, and
I was dead wrong,” Buffett wrote. In that same letter, Buffett blamed various
issues for NetJets’ lagging performance, including the cost of its expansion
into Europe, a contentious four-year dispute with pilots that ended late last
year, and the fact that the other major players in fractional ownership are jet
manufacturers who can run their programs as loss-leaders.
Seldom cited,
however, are the problems the industry brought upon itself when it launched its
popular jet card programs, which allow travelers to purchase prepaid flight
hours on a company’s fleet of private aircraft.
| Jet card programs are tarnishing the fractional industry's reputation for service-and its profitability. |
These differ from fractional
programs, in which travelers actually buy an interest in a plane. Between 15 and
25 percent of most fractional shares remain unsold at any given time, so
companies offering fractional plans carve up these shares and sell the hours a
la carte through jet card programs in order to boost revenues.
In 2001 for
example, industry leader NetJets, which claims to have more customers than all
other fractional providers combined, formed an alliance with New York-based jet
card company Marquis Jet. Marquis Jet bought shares in NetJets’ popular
aircraft, carved them into 25-hour packages and sold them in $100,000
increments, far less than the price of NetJet’s minimum ownership stake—a 1/16th
share that costs $250,000.
The fractional companies owned by Bombardier,
Raytheon and Cessna followed suit, establishing their own jet card programs to
sell unused shares. The CitationShares Vector JetCard offers just 20 hours of
flight at less than $100,000, making it the lowest price point in the market for
access to a fractional fleet.
Fractional companies originally sold their
shares as a cost-efficient alternative to full ownership, explains Stephen
Maloney of Aviation Management Systems, a consulting firm in Portsmouth, N.H.
But they have, in some important ways, become victims of their success.
At
NetJets, for example, a 1/16th ownership share of a Hawker 400XP light jet
starts at $406,250. This assumes 50 hours of annual flight time. A Marquis Jet
Card in a small jet sells for $115,900 for 25 hours of annual flight time. So a
single Hawker 400 can, in theory, be carved up by Marquis Jet into 32 cards,
which can translate into 32 cardholders who may share travel patterns.
Furthermore, a cardholder who uses up the 25 hours before the calendar year
expires can simply buy another card. Marquis Jet Card holder Adam Bold, the
founder and CEO of the Mutual Fund Store, estimates that he was buying four or
five of these 25-hour cards per year before he began using more affordable
charter services for longer flights.
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