Description
If Marquis develops a winning business model, it's likely to draw competition in a fast-growing industry.
Given the jets' high carrying cost, it is perhaps surprising that so many companies opt to own planes outright. In the industry, the rule of thumb is that you have to fly 450 hours a year to justify the cost of a plane. Not every person or every company wants to fly that much. Nor do they want to take on the burden of chartering the plane when it's not in use in order to offset its cost. As such, executive jets were long confined to the very wealthy -- tobacco heiress Doris Duke used to jet-set around in her personal Boeing 737 -- and the very busiest companies.
All this changed in the mid-1980s, when Richard Santulli, a former math professor and Goldman Sachs leasing specialist, came up with the idea of fractional-jet ownership. Founded in 1986, Santulli's NetJets allowed companies and individuals to buy as little as a one-sixteenth share in a jet, which gives them the rights to up to 50 hours a year in the air. The cost of fractional ownership rises geometrically with the size of the share.
One satisfied NetJets customer is Warren Buffett. He and his family logged 850 hours on NetJet planes over a three-and-a-half year period in the mid-1990s. Convinced that the business was a good one, Buffett acquired the company through Berkshire Hathaway for $725 million in 1998. It proved a canny investment. NetJets' business has thrived in a business where most others have failed. "In the past seven years, 57 companies have set up fractional operations," boasts NetJets' Kevin Russell. "Of those, 51 have gone out of business."
Under the NetJets plan, a one-sixteenth share of a small Cessna Encore costs $487,000, plus a monthly fee of $6,350 and flying rate of $1,390 for each of the allotted 50 hours. Total cost: $145,700 a year, not including the purchase price, and assuming all 50 hours are used). At the other end of the spectrum, a one-sixteenth share of a Gulfstream V costs $2.6 million, plus $17,000 monthly and $3,000 hourly flying cost. Total annual cost: $354,000.
That may seem rich, but it's a lot less expensive than full ownership. And in some ways it's more convenient, since fractional owners can start using their jets immediately, avoiding the 12-to-40 months' delay that is typical for a popular new jet.
What's more, NetJets planes can be made available on four hours' notice; if one is not available, NetJets will charter one for you. Fractional owners can also use their time-sharing hours flying in two different aircraft over different routes at the same time. Under certain circumstances, they can even upgrade a specific flight to a larger plane for a slightly higher cost.
Indeed, NetJets' only serious competitors are the planemakers themselves, which are clearly looking to boost their jet sales. Bombardier's FlexJet unit and Raytheon's TravelAir both sell fractional time, but only on their own planes. And unlike NetJets, these planemakers' deals require buyers to sell back their shares after a set number of years, presumably with the hope that they will then buy shares in new planes.
Another serious challenger, UAL's Avolar, will launch its fractional-jet business in April. Some industry observers think the new venture reflects UAL's concern that the booming fractional business will ultimately steal United's most profitable passengers, the high-margin first-class business travelers, though Avolar's chief executive Stuart Oran insists otherwise. Whatever the case, several other commercial carriers, including AMR's American Airlines, are also said to be exploring the idea of getting into this game. Better to cannibalize your own business than to let someone else do it for you.
The biggest driver of new corporate-jet sales, it should be noted, has always been a strong economy. As a consequence, there has been no immediate surge in orders since September 11. Indeed, Bombardier says it expects to deliver about 370 planes this year, about the same as last year -- but 10% below the 410 aircraft the company had budgeted for.
And Cessna Chief Executive Gary Hay says his firm's production "is now running at levels last seen in 1996-7, about 60%-to-70% off last year's peak."
Adds an executive at another jet maker who asked that he not be identified: "It's a delicate business of balancing our production line schedules against what our order books are now and what we think they'll be in months ahead. We have to remember it's very difficult for a company to justify this kind of expense, especially if it's a new expense, when its bottom line is weakening."
The largest maker of executive jets is Quebec-based Bombardier, with about 24% of the expected market, in dollar terms, over the next 10 years, according to Forecast International, a Newtown, Connecticut-based publisher of market intelligence for the aerospace industry. Bombardier's aerospace division, which manufacturers the Learjet and Challenger lines, as well as commercial jets for regional airlines, produced revenues of $6.6 billion year ending January 31, 2001, or about 65% of the company's total. Aerospace delivered more than 90% of Bombardier's operating earnings.
"We are looking cautiously at next year," notes Peter Edwards, the firm's executive vice-president for aviation sales. "Yes, we have seen more interest since September 11, but we are not sure this will be enough to offset the weakening we were already seeing." The company's Toronto Stock Exchange-listed shares trade at around 13, down from a high of 25.70 in December.
The second-largest player, General Dynamics' Gulfstream Aerospace division, has about 23% of the projected 2001-2010 market. The aerospace unit delivered about 30% of the company's revenues and 44% of its operating earnings in 2000. General Dynamics shares, which are flat on the year at around 77, have been supported largely by the company's defense business.
France's Dassault, maker of the Falcon series of executive jets as well as the Mirage fighter, is forecast to win about 18% of the market over the next decade. Commercial aerospace delivered revenues of 2.4 billion euros in 2000, 71% of the company's total.
"We have enough orders to fill production to the end of 2002," notes John Rosanvallon, president of Dassault Falcon Jet. "But we have to be concerned. The driving parameter of our business is the economy." The shares, which trade in Paris, recently fetched 320 euros, close to the year's high.
Textron's Cessna division is the largest business-jet maker, in terms of units produced, with a forecast 28% of the market through 2010. But since Cessna focuses on the low end of the private aircraft business, it is only expected to capture 14% of the new orders, in dollar terms.
Last year, Textron's aerospace division delivered 34% of the firm's revenues and roughly 32% of operating profits. Cessna's Hay remains optimistic. "We are in a strong position because hot models introduced over the past few years have given us a strong order book. We are seeing more calls post-September, and my first impression is that we are closing more deals and closing them faster. Still, even with this upturn, we are still headed lower overall." Textron trades at about 39, down from around 60 in June.
The smallest of the major small-jet manufacturers, Raytheon, is also the most troubled. The defense contractor's aviation division, which makes Beech and Hawker jets, has been plagued by new product delays, cost overruns and management turmoil. And jet sales stand to be hurt in the future as demand falls off for its very profitable but aging models. Hawker and Beech delivered 18% of Raytheon's revenues last year, and Jim Schuster, the recently-named chief executive of the division, says, "I guess we will see that dip a bit." Raytheon shares, which trade 30, are basically flat on the year.
While the short-term outlook for executive-jet makers can hardly be described as upbeat, better times do lie ahead. Private jets will only become more and more mainstream, given the combination of lower-cost fractional ownership and an increased willingness of companies to spend more on the convenience, security and safety. Nor, perhaps, is it any coincidence that, according to Andersen Consulting, the earnings growth for companies in the Standard & Poor's 500 that own planes is greater than that of those that do not. So while the growth in executive jets may be stalled, when the economy returns to cruising altitude, private jet makers will likely be cleared for takeoff.
Products & Services
private jet cards,
short-term leases,
private jet aircraft,
fractional jet,
aviation
Forward
Print
Find Employees
Find Competitors
464 online sources
