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Sour Outlook for Netjets (and all Fracs)

Old 12-10-2009, 08:31 AM
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Default Sour Outlook for Netjets (and all Fracs)

I came across this article in Business Traveler magazine. The quotes are from Michael Riegel, a former Bombardier executive who now runs AviationIQ, a consulting group for shareowners. I have cut and paste portions of the article below - he has a pretty harsh assessment of Netjets (and the Fracs in general). Not sure about his figures and predictions, but the impact on pilots could be very negative. Again, not sure if he really has the inside scoop or not. You can read the article by clicking this link:

The Fractional Market: Business Jet Traveler Online

Any thoughts? Here are some of his quotes from the article:


In the case of NetJets, some of its problems can be linked to the fact that it “has tried to be all things to all people,” Riegel said. The company’s Marquis jet card program and the need to buy charter to fulfill fractional flight requests layered in additional costs, he noted, “and it’s not surprising they dived into the red. The only way to dig out is to try to make money by selling shares.” But for many fractional providers, share sales are virtually nonexistent.

Although NetJets’ Marquis jet card sales offset some of the shareowner departures, “card activity creates as many problems as it solves,” Riegel said. In the fractional industry, he explained, there is an average of nine to 10 owners per airplane, and each of those owners places demand on each airplane. Marquis jet card buyers, however, average about 20 per airplane. “The more card business you do, the more people can demand the airplane,” he said.

NetJets’ losses for the first six months of this year translate into nearly $700,000 per airplane. “Those are terrifying numbers,” Riegel said. “Almost anything they do [to fix the problem] is going to take years.”

There remains a need for the fractional concept, but major providers have to revise their business models. NetJets has too many airplanes to serve its customers and, in Riegel’s view, should cut its fleet to around 170 airplanes versus the 500 it has now.

NetJets is allowing some owners to idle their shares by stopping flying, letting them keep the shares without paying the monthly management fee. Riegel said he expects these aircraft–which he estimates number approximately 160–to sit idle for a few months before NetJets asks the owners to resume paying management fees or sell their shares. “Many will pull the plug,” he said of owners who have held their shares in the hope that used aircraft prices would recover. “[That would] worsen the problem for the fractionals.”
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Old 12-10-2009, 12:23 PM
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The article talks about "Netjets' Marquis Card" program. The card program is not owned by Netjets. Marquis Jet is a completely separate company. They buy shares at Netjets just like other fractional owners and then their own customers (card holders) fly in Netjets aircraft.
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Old 12-10-2009, 12:33 PM
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Originally Posted by Bill Lumberg View Post
Any thoughts?
Yes. I think the fact that the quote came from

Originally Posted by Bill Lumberg View Post
...a former Bombardier executive
Who:

Originally Posted by Bill Lumberg View Post
...now runs ...a consulting group
Pretty much says enough.

Let's see. An (former) executive for a competitor who is demonstrating his lack of knowledge about the competition, by relating information that he has no access to. Anyone with a real clue knows that the first paragraph alone has more holes than a screen door.

Furthermore, the entire aviation industry is going to take years to recover. It doesn't take a rocket consultant to figure that out.
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Old 12-10-2009, 12:43 PM
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Originally Posted by NJA Capt View Post
Yes. I think the fact that the quote came from



Who:



Pretty much says enough.

Let's see. An (former) executive for a competitor who is demonstrating his lack of knowledge about the competition, by relating information that he has no access to. Anyone with a real clue knows that the first paragraph alone has more holes than a screen door.

Furthermore, the entire aviation industry is going to take years to recover. It doesn't take a rocket consultant to figure that out.
I don't completely disagree with you. Sounds like he is guessing - but that is a big decrease in aircraft. He's talking about a fleet roughly 1/3 the size of present day Netjets. You could say this consultant probably has a better picture of user/owner demand than Netjets and other fractionals because he works with owners and potential owners every day. I am sure his business will be hurt too with fewer customers going forward.

Netjets ordered hundreds of aircraft based on projections of demand that were clearly not realistic (probably given discount pricing for volume orders). They hired hundreds of pilots based on those aircraft orders. And then the bubble burst. It will be interesting to see what the new CEO does to match supply with demand - I hope that doesn't translate into the "expected" pilot job losses. Let's hope he doesn't talk to this consultant. I do hope that the slow economic recovery leads to fewer job losses and some new demand but you never know...
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Old 12-10-2009, 01:11 PM
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Originally Posted by Bill Lumberg View Post
Sounds like he is guessing - but that is a big decrease in aircraft. He's talking about a fleet roughly 1/3 the size of present day NetJets.
NetJets has too many airplanes to serve its customers
Nothing new here, that came out in official press releases.

" ...in Riegel’s view, should cut its fleet to around 170 airplanes versus the 500 it has now. "

For a person with Bombardier ties, I'm sure he wishes NetJets ruduced to 170 aircraft.

The NetJets® operating companies have a fleet of 856 aircraft, which is larger in size than the world’s second largest airline.http://netjets.com/Learn_More/pdfs/N...Fast_Facts.pdf

Yes, NetJets/US has around 500 a/c.

People have been saying the "frax model is broken" for 23 years. Two stock market crashes and 9/11 had little effect. It took something as major as large scale banking failures to put a dent in NetJets. I'd say the model (ours) is pretty sound. In need of tweaking, maybe, but broken, no.
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Old 12-10-2009, 01:36 PM
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most people did not believe in the fractinal business model before the recession, so I expect the " aviation experts" to come out in force, tons of people eager to say "I told you so"....expect to see more articles like this one

I'm worried, but who isn't?.... I'm also confident on the frac business model. Just turned 35, If my health holds up, I plan on retiring from Netjets.

Last edited by UCLAbruins; 12-11-2009 at 04:20 AM.
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Old 12-10-2009, 11:09 PM
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Default 2006 Report from KPMG

Lookup the pdf report from KPMG written back in 2006 titled:
"Fractional Aircraft Ownership Programs:

A Deeper Look into Why Operators Aren’t Profitable—Yet"

Here is the link: http://www.aia-aerospace.org/assets/...alaviation.pdf

The executive summary makes an important point...

"Executive Summary
From only a handful of jets in 1990, the fractional aircraft industry has grown to more than1,000 aircraft and more than 8,000 owners in the United States, Europe, and the Middle East. Revenue among the four largest operators now exceeds an estimated $4.0 billion annually, and yet despite its popularity, the industry has been consistently unprofitable—even the largest and most developed operators reported losses of more than $80 million in 2005. While market demand for fractional aviation services is strong and the ownership base will continue to grow, how long can these businesses endure without profits? "


Later in the report they talk in particular about "level of critical capacity"...


"But eventually the operator will run out of aircraft, and because core fleet cannot be rapidly increased, the internal capacity becomes a hard ceiling over the short term. Demand beyond this point, which we’ll call the
“level of critical capacity” require nearly all additional trips to be flown by outside charter. As demand increases past the level of critical capacity the impact of the higher expenses associated with charter eventually reaches the breakeven point and losses mount rapidly."
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Old 12-11-2009, 05:15 AM
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Perhaps the industry will go back to mom & pop air-taxi operations. One mom & pop operator had a Lear 25 and his base was wherever he landed last.

If the frac owners start complaining I'm sure we will see congressional hearings on the matter.
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Old 12-11-2009, 06:21 AM
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Default Hmmmmmm

"But eventually the operator will run out of aircraft, and because core fleet cannot be rapidly increased, the internal capacity becomes a hard ceiling over the short term. Demand beyond this point, which we’ll call the
“level of critical capacity” require nearly all additional trips to be flown by outside charter. As demand increases past the level of critical capacity the impact of the higher expenses associated with charter eventually reaches the breakeven point and losses mount rapidly."




I don't think Netjets or any other fractional is having that problem right now. That article was written in a very different economy back when frac growth was way over forecasted.
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Old 12-15-2009, 08:43 AM
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From private jet maker Hawker Beechcraft's most recent Financial Update:


[Hawker Beechcraft] announced that it has received cancellation notices from NetJets, Inc. for a significant number of aircraft previously contracted to be delivered over several years beginning in 2011. The impact of the cancellations will be to reduce the Company’s current backlog by approximately $2.6 billion. HBAC has previously disclosed that NetJets, while a considerable source of backlog, was not expected to provide the Company any substantial revenue during 2009 or 2010 and has historically not represented more than 10 percent of the Company’s annual revenue. The cancellations represent approximately 90 percent of the Company’s previously contracted backlog with NetJets. After removing the cancelled NetJets orders from backlog and considering the anticipated sales and order activity for the fourth quarter, backlog is expected to be approximately $3.5 billion at December 31, 2009. The Company continues to expect depressed demand in the near term.
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