Business Jets Flying High
Reuters Finance News
Jan 12 7:20am ET
By Kathy Fieweger
CHICAGO (Reuters) - It may be the ultimate luxury. Call up with a few hours notice. Drive to a nearby airport 10 minutes before takeoff. Avoid all lines. Hop on board your well-appointed personal jet and fly off.
Whether the agenda is the midday meeting across the country or dropping in for an Aspen ski vacation, owning your own business jet, or at least part of one, is de rigueur.
The market? Corporate executives, celebrities, professional athletes and wealthy individuals afraid of flying on commercial airlines or just fed up with hassles and outrageous fares.
Interest in business jets has risen dramatically since the Sept. 11 attacks in New York and Washington. Business jet operators and manufacturers are betting an expanding range of customers are ready for this form of travel, weak economy or not.
The business jet market more than tripled in value between 1995 and 2000, according to Richard Aboulafia, analyst at aviation consulting firm Teal Group, and is now much larger than the combat aircraft industry. He predicts that, over the next 10 years, nearly 7,000 business jets will be produced worth $95 billion in 2001 dollars.
Strong corporate profits in the late 1990s drew companies to business jets as they sought travel efficiencies. Since Sept. 11, security and convenience became added considerations.
"Prior to last September, a good many of these same individuals would have hesitated to rely on private aircraft, reasoning that a larger plane must be safer," said the Robb Report, a magazine devoted to "the luxury lifestyle." The publisher recently put out a 152-page issue dedicated to private air travel. The tag line: safer, faster, smarter.
NAME YOUR PRICE
The growing sector is divided into three segments: charter, fractional shares and outright ownership of a plane.
There are many brands of small jets from a handful of manufacturers, each hoping for a piece of the expanding pie. The names include Cessna by Textron , Falcon by Dassault Aviation , Gulfstream by General Dynamics , Learjet and Challenger by Bombardier , Beechjet and Hawker by Raytheon . At the very upper range are Boeing Business Jet and the ACJ from Airbus, majority owned by European aerospace company EADS
The fractional market is currently the hottest segment, growing at 45 percent a year. It was pioneered in 1986 by Executive Jet when it created the NetJets fractional unit.
Warren Buffet's Berkshire Hathaway Inc. , a company that has made fortunes for its shareholders by buying up other firms, bought Executive Jet in 1998, and others are seeking a way to hop on board.
Starting at about $150,000, a card entitling you to 25 hours worth of rides may be bought from an outfit called Marquis Jet Partners. The New York-based firm is carving up and reselling NetJets shares for a young, wealthy client base not ready to buy a whole share.
Despite the rising interest, Alan Clingman, chief executive of Marquis, cautioned that only NetJets makes money in the fractional arena. He expects to sell 1,000 travel cards a year.
"We believe that our market, which is half the number of hours (of a traditional share), is a potential 500,000 people," Clingman said. "It's enormous."
SOME CONSOLIDATION
Late in December, Raytheon's Travel Air announced plans to form a joint venture with privately held Flight Options Inc. of Cleveland to offer fractional shares.
Aboulafia said the partnership shows the intense pressure on all segments of the industry to achieve critical mass.
"They need to join forces to improve service and negotiate better terms from manufacturers and other suppliers," he said.
In addition to Flight Options and NetJets, players in the fractional share market also include Bombardier's FlexJets, Cessna CitationShares and, more recently, UAL Corp.'s Avolar, a sister company to No. 2 U.S. carrier United Airlines.
Stuart Oran, Avolar's president and chief executive, told Reuters he sees revenues of more than $400 million for his company in 2002 and more than $1 billion annually at the end of five years. Oran said there are only 3,000 fractional share owners right now, but a potential 300,000 industrywide.
"From our perspective, the market is huge today," Oran said. "We have no doubt that demand is many times in excess of what's been purchased to date. Demand will continue to outstrip supply. In reality, very few people know about this business."
For its part, Avolar intends to sell shares in 250 planes over the next five years. So far, 306 jets from four different manufacturers are on order.
NOT EXACTLY CHEAP
Avolar's prices begin at $434,700 per 1/16th share, entitling the buyer to 50 hours of flight time. That does not include the monthly management fees or actual costs of flying like fuel and maintenance. Prices for a bigger Gulfstream V are much more -- $2.8 million for a share and hourly fees from $5,000 to $6,000.
Despite the daunting cost of entry for travelers, the number of business jets in service continues to rise.
Boeing Business Jets, for example, expected orders for six airplanes per year at a base, unoutfitted cost of about $35 million each. Instead, more than 80 of their ultra high-end planes, derived from the 737 series, were ordered.
So how do you decide if the price is right? According to Executive Jet's NetJets fractional share unit, owning a share of a plane is most cost effective for those needing 50 to 400 hours of flying time per year.
Below 50 hours, charter is recommended. Buying a whole plane makes sense for more than 400 hours a year.
Open wallet. Get ready for takeoff. |
