The Fractional Market
By Matt Thurber - December 1, 2009
AMERICA’S ECONOMIC DOWNTURN has dealt a crippling blow to the fractional-share industry. Rapidly declining used-aircraft prices and fewer flying hours over the past year have forced fractional operators to defer aircraft deliveries, cut staff and explore new ways to keep flying. The situation has gotten so bad that some pundits are questioning whether the fractional-ownership business model is broken.
The rapid change in fortunes that has occurred among the fractional operators was dramatically brought to light when Berkshire Hathaway released second-quarter financial results for its NetJets subsidiary in August. Compared with the first six months of last year, NetJets revenues fell $550 million or 43 percent in the first half of 2009, reflecting an 81-percent drop in aircraft sales and a 22-percent decline in flight operations. Berkshire Hathaway has since stated that the fractional provider “owns more airplanes than is required for its present level of operations.” NetJets has announced staff reductions of 5 percent and implemented other cost-cutting moves.
So is the fractional business model in fact broken? It is, according to Michael Riegel, a former Bombardier executive who now runs AviationIQ, a consulting group for shareowners. “There are a lot of irate consumers monitoring what’s going on,” he said, noting that net sales of fractional shares have been declining steadily, went negative in 2008 and dropped quickly in 2009. “The decline has been going on for seven years,” said Riegel, who added that he believes the fractional industry’s problems go deeper than the fallout from the recession. “Can the business model be fixed?” he asked. “Yes, but changes are needed.”
The fractional industry could be compared with real estate timeshares, which suffered from a reputation for being bad investments long before the current recession started. While fractional shares of aircraft may be at risk of developing a similar reputation, the fact remains that many people still need to fly privately.
But at a time when costs arguably ought to be dropping, shareowners are facing a variety of price increases. The amount that they receive for their used shares when they exit programs is much lower than it used to be, due to rapidly dropping used-aircraft prices. Hourly fees are also rising. “A lot of owners are saying it’s become too expensive and they don’t want to keep doing this,” Riegel said. “The industry has dug itself into a hole.”
A main attraction of the fractional industry has always been that it offered lower barriers to entry for new business aviation users and an easy way to add lift for companies and owners that didn’t need another full airplane. Fractional providers delivered better service than many charter operators, but with fractional costs rising, many travelers are shifting to high-quality charter providers.
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