Future of the Fracs: Discuss

[Dooker]

Dear Flightinfo.commers,

Is it just me, or does anyone else get the sense that the fractional industry as we knew it might be a thing of the past?

Granted, this is still an awfully young industry, but I find myself wondering if its growth--and, perhaps, its mere presence--might not have been brought about by a very specific set of conditions which might not reemerge anytime soon.

The abundance of cheap money with which to finance shares. The explosion in the stock market and the giddy sense that it would just keep going and going. The rise of the financial services sector and the uber rich. Tax breaks which made fractional ownership financially sensible (so long as the jets had decent residual value at the back end).

Now, it seems we've entered a period of serious readjustment and reassesment. Share sales have dried up and charter is quickly becoming our lifeblood. But do you need as many airframes and pilots to run a charter operation as you do if you operate on a strictly fractional model?

Something tells me you don't. Which brings me to my next question, or point, or whatever: is there still too much capacity in this industry? As we've all seen with the airlines, overcapacity is bad news, because it forces operators to slit each other's throats. Now that the airlines finally seem to have a handle on their capacity issues, thanks to various mergers and realignments, they're back in the driver's seat when it comes to setting price, and most analysts predict a sunny new era of profitability.

So I guess my follow-on question is this: if this industry is going to survive, in what form will we find it ten years from now?

Respectfully yours,

Dooker, Esq.

 

[ProFracPilot]

So I guess my follow-on question is this: if this industry is going to survive, in what form will we find it ten years from now?

I don't think anyone's crystal ball can see 10 years out, especially when you consider that the fractional industry is barely 10 years old.

Markets are still very uncertain, which will continue to inhibit organic growth in the fractional model for the foreseeable future. What I do think will happen sooner than later is industry consolidation. Just like with the legacy 121 carriers, there are certain efficiency gains and economies of scale that can be realized by combining operations. And I believe we'll start seeing mergers and/or acquisitions starting as soon as this year.

That's my .02, but it's not worth that.

Happy New Year!

pfp

 

[gutshotdraw]

Huge article in the December issue of AIN. Sokol declined to comment for the piece....

Some say po-tay-to, some say po-tah-to.

 

[tdwnds1]

The straight fractional model is based on the purchase of new aircraft and guarantees of resale value at the end of the contract. With the current state of the market and the HUGE glut of used airplanes, that model is under considerable reevaluation.

The companies that survive will be the ones that are best at adapting to the new realities of the market and chaning or adopting a new business model. Certainly some sort of consolidation is in my opinion invetiable.

 

[ArtVandalay]

Dooker is this what you're looking for?? I see nothing but a positive future for this industry myself. Yes, there could be some M&A activity right now, its probably needed but, the future looks good in my opinion.

http://www.bombardier.com/files/en/supporting_docs/BBA_2010_Market_Forecast.pdf

 

[clydefastly]

I think that with the recent cutbacks in flying that most of our pax have made, Fractional is the new "F" word for now. I think most of the flying in the immediate future will be just what the pax need (charter) and not having the full availability that a fractional model offers. This allows these pax to shop around the different companies and only pay for what they use. As the belt tightens, people are willing to suffer through the hassle of trying the unknown and a nice shiny new fractional airplane doesn't have the same value it did two or three years ago. I think this is just a transitional phase, and (not trying to get political here) what happens in the govt.(taxes) in the next couple of years will spell the future of the fractional model.

Just my 2 cents.

 

[ExJmbDrv]

Consolidation would only help the industry, but is not likely due to CEO ego issues.

The real money savings here is in the size. Here are my thoughts:

If you want to go from Dallas to NY and stay one night then return, you can charter or use a 25 hour card from Netjets, CitationAir, etc. (assuming you don't want to own and get a big depreciation writeoff). If you are truly staying one night, the charter vs fractional model is close to even as far as cost. The charter crew will stay the night and fly you home - probably the same with the fractional depending on the season.

If you want to go to from Texas to NY and stay a week, or go from Fredericksburg, TX to Burlington, VT; the fractional will usually win the pricing war.
1. The charter will reposition from the TX to NY trip because the cost of lodging the crew and the plane as well as the lost utilization of the plane will make it cost effective to do so - even if the charter operator picks up a trip on the back end to deposition, they will still bill the customer for most of the cost anyway.
2. The fractional, if it is large enough, should have airplanes positioned close enough that the deposition leg is not necessary. They also have enough clout that the FBOs will give them a discount on the fuel/ramp/hangar that most charter operators just can't get. These are two durable competitive advantages that Netjets has. They always seem to have a crew hanging at every FBO in the country - and a 15 minute position leg is cheaper than a TX to NY deposition leg.

There are even companies out there now that will analyze your trip for you and tell you which is less expensive - charter or fractional card.

I'm sure the industry will change. The same trends that hit the airlines will hit the fractionals. American Airlines said it was better than Southwest because it was offered a differentiated product and customers would pay more for it. The customer wanted inexpensive transportation. Netjets says it is better than Flexjet because it offers a differentiated product and... I think the customer wants inexpensive on demand transportation. The race to the lowest price has already begun and will continue.

I hate to say it but pay has probably peaked in real terms. It will go down a little via pay freezes, loss of benefits, or some other concession; but then will just barely keep up with inflation.

 

[jonjuan]

Consolidation would only help the industry, but is not likely due to CEO ego issues.

The real money savings here is in the size. Here are my thoughts:

If you want to go from Dallas to NY and stay one night then return, you can charter or use a 25 hour card from Netjets, CitationAir, etc. (assuming you don't want to own and get a big depreciation writeoff). If you are truly staying one night, the charter vs fractional model is close to even as far as cost. The charter crew will stay the night and fly you home - probably the same with the fractional depending on the season.

If you want to go to from Texas to NY and stay a week, or go from Fredericksburg, TX to Burlington, VT; the fractional will usually win the pricing war.
1. The charter will reposition from the TX to NY trip because the cost of lodging the crew and the plane as well as the lost utilization of the plane will make it cost effective to do so - even if the charter operator picks up a trip on the back end to deposition, they will still bill the customer for most of the cost anyway.
2. The fractional, if it is large enough, should have airplanes positioned close enough that the deposition leg is not necessary. They also have enough clout that the FBOs will give them a discount on the fuel/ramp/hangar that most charter operators just can't get. These are two durable competitive advantages that Netjets has. They always seem to have a crew hanging at every FBO in the country - and a 15 minute position leg is cheaper than a TX to NY deposition leg.

There are even companies out there now that will analyze your trip for you and tell you which is less expensive - charter or fractional card.

I'm sure the industry will change. The same trends that hit the airlines will hit the fractionals. American Airlines said it was better than Southwest because it was offered a differentiated product and customers would pay more for it. The customer wanted inexpensive transportation. Netjets says it is better than Flexjet because it offers a differentiated product and... I think the customer wants inexpensive on demand transportation. The race to the lowest price has already begun and will continue.

I hate to say it but pay has probably peaked in real terms. It will go down a little via pay freezes, loss of benefits, or some other concession; but then will just barely keep up with inflation.

That's a nice little analysis and all, however, most frax owners/card buyers pay (still do) a good premium over traditional charter due to aircraft/crew standardization, insurance levels, standardization of service, etc. Most don't go to "priceline for rich people." If they did, they wouldn't be in business very long. Agree with the rest of your post, BTW in that commoditization has begun. Frax levels have peaked, but the levels will remain fairly steady to slowly declining, imo.

 

[CA1900]

That's a nice little analysis and all, however, most frax owners/card buyers pay (still do) a good premium over traditional charter due to aircraft/crew standardization, insurance levels, standardization of service, etc.

Don't forget the relative safety of the fractionals versus the charter market, too. I've had owners tell me in no uncertain terms that they're with us for that reason. (On a recent flight while were were deicing, I overheard the owner say to his wife, "Wow, I'm surprised they're being so cautious; it's only a little bit of frost on the wing." That's the whole point; we don't cut corners like the charter that crashed in Montrose a few years back.)

 

[jonjuan]

Don't forget the relative safety of the fractionals versus the charter market, too. I've had owners tell me in no uncertain terms that they're with us for that reason. (On a recent flight while were were deicing, I overheard the owner say to his wife, "Wow, I'm surprised they're being so cautious; it's only a little bit of frost on the wing." That's the whole point; we don't cut corners like the charter that crashed in Montrose a few years back.)

Agreed-Actually I implied that. It's probably the biggest differentiator-the levels of safety, cutting/not cutting corners in frax versus general charter. Now there are many safe charter companies out there, however, as a whole they dont have the resources or financial backing to manage entire safety departments. The "safety department" at a charter is often a pilots part time desk job.