The Plane Truth
January 21 2010 by Michael Gelfand
In the court of public opinion, the slightest whiff of irresponsible corporate spending always sets off intense scrutiny. So when some prominent CEOs chose to fly in corporate jets rather than drive to Washington, D.C., from Detroit for last year’s TARP escapades, the media vilified them for their seemingly insensitive use of an extravagant luxury. Somehow their use of an ordinary business service got blown out of proportion into the eight miles high equivalent of a diamond-studded shower curtain frivolously purchased on a corporate expense account.
Business aviation or travel by company-owned or leased aircraft remains one of the least understood tools in corporate America’s arsenal, but it would be much better if this particular corporate secret got out. Business aviation is actually an affordable and highly efficient solution for companies that use it responsibly, helping executives maximize productivity for themselves and their teams. And today’s bargain basement pricing affords them that operational advantage with more bang for the buck than ever before.
“Business aviation is not a perk, it’s an enabler of productivity,” explains Michael Riegel, president of Aviation IQ, a business aviation consulting firm based in Lake Tahoe, Nevada. “There’s often a lot of pressure from shareholders to reduce business aviation travel, but companies need to push back harder against that notion.
In fact, shareholders should demand that their company’s executives use it it’s a business requirement, and there’s no reasonable alternative.”
With virtually no privacy on a commercial flight, inconvenient travel times, and long delays passing through security, at boarding gates, on tarmacs and during transfers, it’s a wonder that C-suite executives actually choose not to afford business aviation. Those who opt to travel in business jets enjoy expedited security checks, virtually no waiting and the freedom to use their computers and phones on the ground and in the air in short, the ability to minimize their travel time and to make effective use of every possible minute. And they’re less likely to arrive at their destinations exhausted from having spent an entire day getting there.
“Business aviation, when used appropriately, is a vital tool and clearly contributes to a business’ success,” asserts Bob Knebel, vice president of sales for Flexjet. NEXA Advisors’ recent study for the National Business Aviation Association (NBAA), Business Aviation An Enterprise Value Perspective, backs up the assertion. According to the study, S&P 500 companies that used business aviation outperformed nonusers between 2003 and 2007 across a number of key financial metrics, including average annual revenue growth on a market cap-weighted basis, average earnings growth, EBIT, EBITDA and market capitalization, among many others.
Smaller firms, too, benefit from business jet use, notes Knebel. “Many companies can’t remain competitive or manage without it because business isn’t limited to the concentration of 500 cities that commercial aviation serves,” he says. “Business is everywhere, and we serve all of it by flying to and from the 5,000 airports that commercial providers don’t serve. Business leaders simply can’t get their jobs done without it.”
Let’s Make a Deal
The business aviation industry, like the economy it mirrors, is currently experiencing one of the most difficult down cycles in its entire history which means it’s a great time to explore the entire spectrum of business travel solutions, from full and fractional ownership to jet card programs or chartered services. According to the NBAA, the current inventory of used airplanes available for sale has reached an all time high while prices for those planes have declined by as much as 40 percent. At the same time, general business aviation flight activity over the last 12 months has dropped nearly 18.5 percent compared with the previous 12months (according to a recent study by the Aviation Research Group/U.S.), stirring up a perfect storm for the business aviation market.
“Many of our competitors have been forced to significantly downsize both in fleet and employees,” says Steve Santo, founder and CEO of Avantair. “It’s very difficult to operate multiple aircraft flying multiple missions efficiently. We’ve seen this in the [commercial] airlines where industry giants like Delta and United Airlines have suffered while the airlines focusing on one aircraft such as Southwest and Jet Blue have thrived. Private travel programs will need to evaluate their strengths and weaknesses while streamlining their operation in order to survive. I believe we will see fewer providers with more focused solutions in the future.”
The market is already so competitive that the spread between the cost of fractional ownership (where you purchase or lease a share for a minimum amount of time on a plane) and charter service (where you buy one-way time on a plane a la carte) has narrowed to 10–15 percent, reports Riegel. “Fractional ownership traditionally has a much higher cost basis because of the newness of available planes and the higher pay afforded more experienced flight crews,” he says. “The pricing has come down close to chartered services, and you can even ask a fractional provider for a walk away lease—something you couldn’t do two years ago.”
Currently, businesses can cut a deal for short, medium or long-term leases, with three-year buy-back guarantees and “incredible flexibility,” adds Riegel. The bottom line? If your current service is up for renewal or you’re considering business aviation service for the first time, there’s never been a better time to shop the market.
“Prospective customers are doing their homework and looking at not only cost, but efficiency and rethinking what type of aircraft they are using for different missions,” says Santo. “They want to ensure they are receiving the best value with a provider that is focused on their specific needs.”
“It’s safe to say that every consumer of business aviation, irrespective of the solution they’re currently in, is asking themselves, ‘Is there a smarter way now?’” says Flexjet’s Knebel, who encourages business leaders to make deliberate evaluations of the services available. “They should be wondering, ‘Would a different solution or different set of products serve me more cost effectively?’”
Preparing for Take off
The rub is knowing which business aviation solution best suits your specific needs. “You need to know what destination(s) you will travel to, how many passengers will be traveling, how often will you travel and how long will you stay away,” says Riegel. “Of equal importance is knowing your budget, how you will expense it and whether it’s a short or long term solution.”
For instance, if you need to travel from New York to St. Charles or Moline or Chattanooga, it’s tough to get to any of them in one day via commercial airlines, says Knebel. “A charter solution may be more cost effective than other solutions, as long as it’s available. But if the other 75 percent of your trips are to other difficult-to-reach places and you tend to stay there for two to four days at a time, a jet card or fractional program might be more cost effective,” he says. “The solution must fit the need.”
Once you’ve decided which type of service you need, you can drill down to the companies that provide those services, and choose from the various plane types. “Then you need to start asking the more difficult questions about financials and liabilities to minimize your risk and exposure,” says Riegel, who cautions that buyers need to consider the fine print when contracting for aviation shares. “Start by asking each provider where the hidden costs are, and how they can guarantee that you won’t exceed [your expected costs].”
Careful negotiation is critical, particularly in the fractional marketplace, where deals are “very nuanced and mismatches can be costly,” he adds. For example, all providers increase hourly fees as aircraft get older often hiding those increases among obscure footnotes which means used aircraft shares can look attractive at first glance, but actually be more costly than shares in a brand new or younger aircraft.
Despite this caveat emptor marketplace, businesses that shop carefully can reap the rewards of finding good value. “You can spend a lot of money and waste it but the right deal can be worth many hundreds of thousands of dollars,” says Riegel. And that’s not counting any additional productivity and comfort gained.