It’s pretty obvious that if you are flying privately, business is fluid and the economy seems to be making its next leg up. So why did Avantair go bankrupt? Why is CitationAir winding down operations? Why did Flight Options buy Flexjet?
The real problem is not the economy. It’s the business model. Over 25 years ago Richard Santulli created Netjets and the fractional jet business model. Based on each owner owning a quarter share (hence the ‘QS’ you see on each Netjet tail number) he used an algorithm to predict how many aircraft would be needed to service each owner with a guaranteed call out time. Keep in mind this is a business though and it was designed to make money.
The original way to make money in the fractional jet business was to place large orders with the manufacturer, get a wholesale deal and then resell the shares at retail. The cost of managing the aircraft was supposed to be a breakeven business.
Then two things happened.
First was the nationwide expansion of the programs, especially growth in the Midwest and Texas. Customers started flying from seldom serviced areas and the operators would have to spend 3 hours repositioning for a 45 minute flight from Oklahoma City to Plano. These flights became money losers, but had to be done because the customer was under contract for a non-ferry cost guaranteed rate.
The second thing was the enormous growth in the availability of pre-owned shares. What Netjets did originally was to trade in their old aircraft to manufacturers as part of the deal to buy new aircraft. Once the recession hit in 2008, they had to cancel all orders and then remarket the pre-owned shares as owners were getting rid of them. The pace of puts far outpaced sales and if it wasn’t for Berkshire Hathaway, Netjets may have gone out of business. CitationAir and Flexjet were owned by their respective manufacturers, Cessna and Bombardier who shouldered their problems. Flight Options got spun off and sold back to its founder, Ken Ricci for a song.
So now the manufacturers have admitted two things: 1) the fractional business model doesn’t work and 2) Netjets is our biggest customer, so let them figure out the business.
My prediction is that Flight Options will soon own CitationAir and when that happens, there will just be two companies to hash out the busted business model. As a consumer, you will have 3 choices: buy from Netjets, buy from Flight Options or charter outright.
The advice I offer is to do a combination of both. Use charter on longer trips and for the trips where charter prices are no more effective or there is zero room for error, use a guaranteed provider. Let Flight Options or Netjets suffer the miscalculation of their operating costs for that one way trip from Oklahoma City to Plano and save yourself some money.
Article by: Dave Richter