In parallel with the general economy, the business aviation industry is beginning to see positive gains for the first time in two years. Yet the magnitude of the financial losses incurred since the crash of 2008 have caused many to question the long-term viability of the fractional jet ownership model.
Two specific events created this uncertainty. First, the business jet industry experienced an unprecedented volume of used aircraft inventory and the consequent collapse of residual values. Second, the single largest provider in the fractional jet ownership segment suddenly found itself in a rather extreme financial position, facing very public reports of its financial condition and the exit of the company's founder.
These developments, coupled with an increasingly negative public perception of private jet travel, created challenges for the business aviation industry, including the fractional ownership segment. Economic conditions and negative press forced companies, and individuals, to re-evaluate the best use of travel resources. For some, the immediate reaction was that any type of private jet service, including fractional jet ownership, was deemed excessive. Many of these fliers ultimately moved to non-ownership solutions-such as jet cards, retail charter and even commercial aviation-to satisfy their travel requirements while mitigating financial risk and public scrutiny.
The recession exposed the financial constraints of the fractional business model. Fractional jet service providers have the potential to earn profits through the sale of shares in a given aircraft and through the actual operation of the aircraft on behalf of the registered owners. But, unlike any other industry, providers face a level of extra risk, given that owners may elect to "put" their share back to the provider, with minimal notice. The provider is contractually obligated to repurchase the share under defined conditions. In a falling market, with close to zero resale velocity in the marketplace, this created an exceptionally difficult situation for fractional providers in 2009.
It has become critical for fractional providers to innovate or risk being left behind. Industry leaders have reacted by identifying ways to remain profitable, while also providing customers with new options to insulate them from further deterioration of aircraft values. Fractional companies have updated programs to allow customers to realize additional value by partnering with their providers to find more efficient travel conditions. Providers have also begun offering new financing options to free up working capital.
Companies that innovate are emerging from the recession as strong and resilient business partners. They are sharply focused on creating relevant, value-driven programs designed to retain customers and attract new entrants to the category.
The New Private Aviation Customer
Just as the fractional ownership industry is transforming, it is equally important to recognize that today's aviation customers have fundamentally changed. In today's environment, it is critical to be mindful of both the psychological and financial impact this recession has had on high-net-worth individuals. The value of their portfolios is still in recovery and they need to be assured they are making smart decisions.
When it comes to private jet travel, many of these clients are still finding that fractional jet ownership often turns out to be the most cost-effective solution.
Customers have begun to acknowledge that the scheduling freedom afforded by complete jet ownership comes with a hefty price. Many have determined that they can work with their fractional providers to make the operation more efficient, which is ultimately to their mutual benefit.
Among the new market innovations is a cost-saving program for owners making quick turnaround trips. Fractional owners are rewarded for the operating efficiencies providers gain when both legs of a round trip are booked in advance. Another program option lets fractional owners realize value from their unused hours by placing them in a pool for use by other fractional jet customers, providing a means by which they can adjust their commitment as needed over the course of their contract.
In general, these efforts are working and the industry recovery is under way. The UBS Business Jet Index is reporting a stable business jet market after two years of deterioration, and data released earlier this year by ARG/US indicates business aircraft flight activity has increased 8.5% from a year ago. Business jet inventory is beginning to move, and buyers are taking advantage of some of the best aircraft prices that have ever been available. There actually has never been a better time to buy a share in a business jet.
Questions still persist about the necessity of private jets, but studies indicate it remains an efficient travel mode. A recent study by NEXA Advisors found that companies who use business aviation clearly outperform those that do not. Among business aircraft users, more than 90% were deemed the most innovative and admired companies in the nation, and the strongest in terms of corporate governance and responsibility, according to the study. The report also noted that business aviation can accelerate strategic transactions.
Those who travel privately understand the enormous convenience and unparalleled productivity this direct form of transportation, can provide. With as little as six hours notice, travelers can be on their way to visit multiple locations in a single day. While in the air, business jets serve as boardrooms with wings. Plus, with access to more than ten times the number of airports served by commercial airlines (5,000 vs. 450), private jets efficiently deliver business people, or their family members, exactly where they need to be-faster and with the level of security and discretion that today's executives require. Private jets are essential business productivity tools, indispensable for company growth and expansion, and for managing the complexities associated with family wealth.
The Future Of Fractional Ownership
The bottom line is that fractional jet ownership remains as relevant as ever due to its inherent ability to provide added value on so many crucial levels. Owners purchase only the amount of aircraft needed, with each flight tailored specifically to their requirements and managed personally by their chosen provider. Fractional ownership enables owners to fly on a closed fleet, offering the highest control over aircraft maintenance and safety. One also has the option to utilize multiple aircraft at the same time, critical when moving large groups or sending out different teams to several locations in a single day. Ultimately, those who invest in fractional jet ownership desire a sense of control and flexibility that cannot be matched by non-ownership aviation solutions.
As compelling as fractional jet ownership remains, however, it may not satisfy everyone's needs. Those looking for optimal air travel solutions may find that the answer lies, not with a single, specific solution, but with a set of solutions working in harmony. Those with a consistent need for private jet travel may find they are best served by identifying a provider that offers access to the broadest range of potential solutions.
No one is willing to predict how long it will take for the fractional industry to return to levels achieved in 2007. Just as with traditional aircraft manufacturing and sales, the fractional jet ownership business is cyclical. This is poised to be a year of transition for many private aviation companies, one reflective of cautious optimism about the market's recovery and the continuing evolution of product offerings. Private jet travel and fractional jet ownership, in particular, continue to be outstanding productivity tools, and truly necessary for high-performing companies, institutions and individuals.
Fred Reid is president of Flexjet, a division of Bombardier, the world's largest business aviation manufacturer. Flexjet offers a variety of jet ownership and chartering options.