Can NetJets Europe defy the doubters?

Fractional aircraft ownership is a great American entrepreneurial idea that arguably hasn't traveled well. Fifteen years after its main proponent, NetJets, brought the concept to Europe, that company remains the only one to have achieved any lasting traction in the international markets that supposedly have a massive appetite for business aviation.

It took more than 10 years for NetJets Europe to record even a modest profit, which, to its credit, it maintained even in 2010–a veritable annus horribilis for the continent's business aviation industry. Nonetheless, the company has outlasted several challengers and now claims some 1,600 clients and a fleet of just over 150 aircraft.

The question today is whether NetJets–or anyone–can get the fractional seed to germinate in the key emerging markets farther east, which supposedly offer fertile ground for private aviation. The tenacity of NetJets in Europe gives some grounds for believing that the company might yet pull it off. Certainly its main backer, Warren Buffett, still appears to be a believer.

Faltering demand and tough competition from an increasingly vibrant executive charter sector have forced NetJets Europe to offer a more varied mix of fractional-share and block-charter card options. Demand for charter in Europe today is still significantly exceeded by the supply of aircraft available for hire. Charter clients have probably never had a better choice of aircraft and at extremely competitive rates, making it that much harder for NetJets to convince them to make a long-term commitment when it can seem so attractive to shop around.

On the fractional side of the equation, clients can now start out with a mere 1/32nd share in an aircraft for as little as $125,000, giving them 25 flight hours per year. On top of this, they pay management and flight costs that collectively run €4,000 to €10,000 (about $5,600 to $14,000) per occupied flight hour, depending on the aircraft type. Shares are priced in U.S. dollars, but ­operating costs, which are generally quite a bit higher in Europe than in the U.S., are billed in euros.

NetJets also now markets shares in preowned aircraft–quite a turnaround from the days when it made a great point about how it offered only the newest jets. This move is grounded in making a virtue of a necessity, with older aircraft harder to sell on the open market. Nonetheless, it provides clients with a more affordable entry point to the fractional world.

Light and midsized jets now typically remain in the fleet for eight years and the average age for these is nearly six years. Larger aircraft are being retained for 10 to 12 years. In both cases, NetJets says, it invests in refreshing cabin interiors. And new aircraft are on their way, including a batch of Embraer Phenom 300 lights jets, as well as Bombardier Global 5000s and 6000s.

With its charter card offerings, access to light jets such as the Hawker 400 and the Cessna Citation Bravo starts at €143,000 ($188,400) for 25 hours. For the burgeoning Russian market, NetJets Europe introduced a split card option through which customers can have 15 hours per year on a Dassault Falcon 2000 and 15 hours on a Hawker 800. Another new take on the concept was the 10-hour card that it launched for holders of the American Express Centurion card.

Winning business is one thing; retaining it can be quite another. European critics of NetJets–mainly the charter operators and brokers–claim to be adding many of its former fractional owners to their client lists. According to such critics, these customers are eager to escape from excessively restrictive contracts and dwindling aircraft asset values.

NetJets Europe won't reveal its client renewal rates, but sales director Emily Williams said that "we now have a dedicated team focused on retaining customers and we also have a dedicated commercial team to help customers look at the different options. Overall, we're fairly happy with our renewal rates."

One reason customers don't renew fractional shares–or don't buy them in the first place–is the fear that values will tumble. NetJets claims that until 2008 light jets were typically depreciating 5 to 7 percent annually, while larger aircraft were holding their values. But the company concedes that customers ending standard five-year contracts are now generally selling shares for 50 percent of their prior value.

"But you still have complete liquidity," Williams argued. "Even if worse comes to worst, you can sell your share and in 90 days get your money back." But, to be clear, the money the owner gets back in this scenario is the "fair market value" assessed at that time by NetJets and in current market conditions that certainly means taking a hit on the depleted asset value, with preowned-aircraft values still soft.

Customers now include first-class frequent flyers with German airline Lufthansa. NetJets Europe is once again providing lift for the carrier's Lufthansa Private Jets service through which clients can book flights as if they were scheduled services with regular tickets and billing.

NetJets has been proactive in taking innovative steps to ensure a smooth passage for its clients through some of Europe's worst aviation bottlenecks. In London, it controversially established a long-term lease to have preferential use of the Northolt Royal Air Force base, which had largely been a gateway for the exclusive use of Britain's Royal Family and senior politicians. On the French Riviera, it secured landing and takeoff slots at Nice-Cote d'Azur Airport to allow its passengers to beat the unseemly dash to the prime Mediterranean resorts. And in Germany, it got so impatient with delays at Frankfurt Airport that it simply bought the nearby Egelsbach Airport to keep it open as an option.

NetJets Europe has been tapping expansion of business aviation demand in Russia and its program also now extends into North Africa and Lebanon. Close by, it still has an interest in the Middle East franchise, which is based in Saudi Arabia and run through a joint venture with a local company called National Air Services, offering a fleet of Hawker 750s and 800XPs, Dassault Falcon 2000/2000EXs and Gulfstream G450s/GIV-SPs. Meanwhile, NetJets Europe itself–headquartered in London and with an operating base in Portugal–has a "ventures unit" looking into establishing a more permanent presence in Russia and India. Separately, the NetJets team in the U.S. is probing prospects for fractional ownership in China, almost certainly via a bridgehead in Hong Kong that could be established within 12 to 24 months.

NetJets Is a Transatlantic Bridge
One benefit of being a NetJets client is the ability to use its fleets on either side of the Atlantic through its interchangeability program. As with currency markets, an exchange rate applies. Costs in the U.S. fractional program are markedly less than those in its European cousin and so an occupied hour costs more–on a sliding scale–in a NetJets Europe jet than it does in a U.S. aircraft.

NetJets has adjusted to shifting levels of demand in Europe and the U.S. by temporarily transferring aircraft (usually American jets heading East) to the other continent to provide additional capacity. To avoid breaches of market access rules, the aircraft in question are temporarily transferred to the NetJets Europe aircraft operators certificate. This is legally significant because fractional ownership in Europe has to operate under full commercial air-transport rules, whereas in the U.S. it benefits from the special private aviation rules outlined in the Federal Aviation Administration's Part 91 Subpart K code.