““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
What's Next for the Fractional Field?
Hindsight is 20/20—and in the fractional-share business, foresight may at best be about 20/1,000. In a market like today’s and with a rapidly evolving product like fractional, even the most seasoned insiders seem to lack a clear sense of what’s next.
Consider that only a couple of years ago, the field boasted six major airplane share providers, all of which seemed to be poised for expansion. Clearwater, Fla.-based Avantair, for example, reported that it was hiring an average of six pilots per month and, as CEO Steve Santo told our sister publication AIN in late 2011, “We’ve continued to grow and add airplanes.”
So much for that. Two years later, Avantair was out of the game, in the wake of an involuntary bankruptcy filing last summer. In early 2012, meanwhile, Cessna’s CitationAir stopped selling fractional shares and ceased renewals for existing ones. And last September, Bombardier sold its Flexjet operation to Directional Aviation Capital, which also owns Flight Options.
As the dust settles from all these changes, we’re left with just two major national players—Directional and Berkshire Hathaway’s NetJets—plus PlaneSense, which operates single-engine turboprops, primarily in the eastern U.S., and a variety of smaller operations. And now that Cessna and Bombardier have exited the field, no aircraft manufacturer is left owning a major airplane-share provider. (Sikorsky does still operate Associated Aircraft Group, which offers shares in helicopters.)
What now? Will the industry experience further shrinkage or consolidation? Will it stabilize or perhaps resume growing? As noted above, making predictions in this field can be particularly tough. Still, we convinced two experts to give it a shot.
New Jersey attorney Daniel Herr, who represents fractional shareowners, remains confident about the field’s future, though he says he expects only “modest” growth over the next few years. “Fractional owners value this premium product and appreciate that their costs are much lower than for whole ownership of an underutilized jet—even though the cost is much higher than charter,” he adds.
Herr says he tends to look at “company-specific stability rather than industry stability.” Flexjet and PlaneSense have long been stable and well run, he notes, “and NetJets has been stable since it embraced business discipline subsequent to the 2008 financial collapse. CitationAir was exiting the fractional world for years prior to the formal announcement. The Avantair blowup has been more spectacular, but I never considered Avantair a legitimate player in the industry.”
Maryland aviation attorney James Butler, who is CEO of Shaircraft Solutions, speaks similarly. “You have to look at it on a case-by-case basis,” he says. “NetJets certainly is here for the long haul. I don’t know what the capitalization is for Flight Options/Flexjet but I think Bombardier certainly believes, based on having done the deal, that that’s going to be a fractional company they can do business with for a long time. PlaneSense seems like they’ve got a nice niche—they seem to be fairly stable.”
As for Avantair’s collapse, Butler doesn’t think it will keep customers away from
fractional shares. “It’s certainly a cautionary tale,” he says, “but I don’t think people looking at NetJets, for example, would [worry] that they would end up in the same situation as Avantair. It’s just a totally different business, capitalization and financial commitment by [NetJets owner] Berkshire Hathaway.”
Will the remaining fractional companies expand or be joined by new ones? Herr has his doubts. “It requires a huge amount of capital to achieve the economies of scale necessary to grow a profitable fractional program,” he says. “Wheels Up [the flight club that Marquis Jet founder Kenny Dichter recently launched] is conceptually a replacement for Avantair [though it doesn’t sell aircraft shares], but I am not confident that it will succeed. At some point, the cost to crew, schedule and maintain backup lift dwarfs whatever cost savings there may appear to be by using a supposedly less-expensive aircraft. Further, there is unlikely to be a huge customer base that needs a King Air 350 rather than a PC-12 or Phenom 300.
“There is some market for an aircraft with a huge useful load able to achieve reasonable range but not enough demand to build a national company.” The more realistic option, Herr says, is for existing players to expand in the turboprop field.
Butler agrees that a major new entrant into the business seems unlikely. “Certainly smaller operators or regional programs will sprout up as they always have,” he says. “Anybody with three jets under management puts together a brochure and fancy name and, voilà, you have a program. I think we’ll continue to see that, but not a major new entrant into the business.”
Butler envisions some opportunity for expansion by the industry’s current players “if the economy grows and brings more people into
the demographic.” If that doesn’t happen, he says, the fractional business will likely remain “fairly steady.” However, he adds, “I think customers are going to be more enamored of leasing. I see leasing as being much more attractive over time than the asset-ownership model, both because it doesn’t take a large capital investment and because you’re willing to buy the risk of residual value up front and have more assurance as to what your end-of-the-day cost is going to be.”
Jeff Burger (email@example.com) is the editor of Business Jet Traveler.