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Airlines' Private Problem
Full fare and premium traffic has not returned to the levels achieved by US airlines in the late 1990s.
By Aaron Karp
Air Transport World, September 2008, p.64
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AIRLINE INDUSTRY, PARTICULARLY in the deregulated US market, is defined
by fierce competition among carriers. Airline executives plotting strategy
must be fully aware of competitors' latest fares, route choices and service
offerings in order best to determine the direction their own carrier should
take. But a serious competitor has emerged in recent years that may be
far more difficult to counter than a rival airline: Business aviation.
While there are no definitive numbers proving that premium passengers
are shifting from airlines to business jets, trends in both sectors point
to that conclusion. No longer merely the province of the wealthiest corporate
titans who can afford to spend millions of dollars to purchase a posh
private jet, traveling aboard business aircraft now is available to a
wider range of passengers. Fractional ownership, typified by organizations
like NetJets, and operators that contract out business jets for individual
trips have changed the high-end air transportation equation.
More
people are flying private than ever before," says Todd Rome, president
and co-founder of Blue Star Jets, a brokerage company that charters aircraft
for individual trips, offering customers "any jet, any time, any
place." He tells ATW that Blue Star Jets is growing 25%-30% per year
and is on pace to generate $1 billion in annual revenue within five years.
"When availability tightens up in commercial aviation, private aviation
booms," he says, pointing to significant airline capacity cuts planned
for the remainder of this year and 2009.
Stanford
Transportation Group, a San Francisco-based aviation consultancy, recently
completed an extensive study that found that the number of US airline
passengers paying full fares or higher has dropped significantly throughout
this decade while business aviation has gone through "a steady expansion"
over the same period. "I don't think anybody has any data that say,
'This passenger stopped flying business class on airlines and now flies
on business jets'. . .But if you track the growth of business aviation
and look at the number of full-fare airline trips based on [US Dept. of
Transportation] data, [it leads to the conclusion that] business aviation
is growing to the point where it's getting to be a significant share of
premium air travel," STG MD Gerald Bernstein tells this magazine.
He explains that full-fare or higher airline trips in the US dropped from
79 million annually in 2000 to 42 million in 2007, with a further falloff
expected this year. Meanwhile, business aviation trips have grown from
10.7 million annually in 1998 to 17.3 million last year. "There are
approximately 17 million one-way trips taken annually on business jets
and turboprops," he says. "In 2007, the number of trips using
these aircraft was 41% the number of trips made by premium airline passengers.
This is clearly a vastly different competitive landscape than existed
even eight years ago when business aviation travel accounted for only
16% the number of premium airline trips."
Honeywell Aerospace stated in the 2007 edition of its well-respected annual
"Business Aviation Outlook" that "business aviation is
still in the midst of a strong up cycle." It forecast the delivery
of 14,000 new business aircraft valued at $233 billion through 2017. Global
deliveries of business aircraft topped 1,000 in 2007, the highest total
ever and up more than 16% from 861 in 2006. Deliveries in 2008 are expected
to exceed 1,300. "Industry growth has moved into unparalleled territory,"
Honeywell Aerospace President-Business & General Aviation Rob Wilson
says.
Premium Alternative
What does this mean for airlines? While reluctant to talk publicly about
the shift of premium passengers to business aviation, an industry source
concedes that it is a "reality we're dealing with . . . A lot of
the more expensive revenue has gone out of the airline industry, revenue
that had helped subsidize the rest of the airplane."
Taking business class passengers away from airlines is not the result
of a concerted plan by business aviation but rather the fruit of circumstances,
International Business Aviation Council Liaison-ICAO Peter Ingleton tells
ATW. He explains that reduced, less reliable airline service combined
with airport security hassles on the one hand and new, less expensive
models for traveling by private jet on the other hand make business aviation
an attractive alternative for premium air passengers.
"We don't consider ourselves engaged in a competition with airlines,"
he insists. "The quest is not so much to compete with airlines but
to increase productivity for corporations. Business aviation, for all
intents and purposes, exists to operate efficient point-to-point service."
Business jet operators generally avoid congested airports such as New
York JFK and London Heathrow, he says, which appeals to executives looking
to avoid harried crowds and long security lines. "The name of the
game is to get a management team on the ground as fast as possible at
the closest possible airport that isn't congested."
Rome
claims that Blue Star can "get a jet to you inside four hours notice
anywhere in the world . . . You can book us for one trip or 1,000 trips.
And we can provide everything." That means pilots and a flight attendant
for each flight but also, if requested, "catering, helicopters to
and from the jets, [onboard] yoga instructors and nanny services,"
he says.
The jets Blue Star uses are privately owned but the proprietors are looking
to make money with the aircraft when they don't need to use them. "The
corporation has already paid for the plane, it's sitting idle and they
want hours on the plane," Rome explains. All of the aircraft are
audited and have to meet "high standards," he says. The company
keeps a vast database of available aircraft and contracts them out when
customers request a trip or trips.
"The growth of models [for operating business jets] pushes the cost
down for the user," Bernstein says. "As the airlines drop routes
and increase fares, they're raising the floor for [private] charters.
For a party of three or four or more, with some of these [walk-up business
class fares] you're going to be better off chartering."
'Same Factory' Indeed, while chartering business jets is not inexpensive
(Blue Star Jets charges $6,000 per hr. for larger jets that can carry
10-16 passengers and $2,300 per hr. for smaller models carrying 3-4 passengers),
Bernstein says that on a "dollars-per-mile basis," the costs
can be relatively even. For example, he says, if a company realizes on
short notice that it needs a number of executives to travel to a given
destination, contracting one business jet may be no more expensive than
buying multiple full-fare business class tickets. And the business jet
allows the executives to avoid the hassles associated with major airports.
For similar reasons, a company with executives that need to travel long
distances regularly may determine that buying a private aircraft or investing
in fractional ownership ultimately makes more sense than continually buying
airline tickets. For airlines, this poses a serious dilemma.
Historically, particularly in the US, carriers have "produced leisure
and business service in the same factory," Michael Levine, a former
executive with several airlines who is considered a principal architect
of US deregulation, said during a recent appearance at an International
Aviation Club luncheon in Washington. In the face of soaring operating
costs and increased competition from business aviation, does that model
still make sense? "We've been combining [different classes of passengers]
on the same airplane," said Levine, now a distinguished research
scholar and lecturer at New York University School of Law. "Do we
need more specialized [products] for business passengers?"
"In effect, airlines have a fare problem," Bernstein says. "The
number of passengers that pay for a full coach fare or higher, where airlines
have traditionally made the bulk of their money, has been cut in half
" in the US since 2000. Now more than 90% of passengers on an average
US airline flight are of the "bare-bones" variety that buy tickets
well in advance to fly economy, he explains. "It's tough for most
of the carriers to make a decent profit with over 90% of passengers flying
on discount fares . . . I don't know how you can offer both of these services
[business and economy] within the same business any longer. Airlines do
have to try to find some premium competitive product" to counter
the rise in business aviation.
Lufthansa, which has a reputation for being ahead of the curve, launched
Lufthansa Private Jet in 2006 in cooperation with NetJets Europe, enabling
LH customers to contract a corporate jet through a single phone call to
LH for travel between more than 1,000 airports onward within Europe and
the CIS (ATW, May 2008, p. 40). LH subsidiary Swiss International Air
Lines in July announced the acquisition of Servair Private Charter, which
it said will operate as a wholly owned, Zurich-based subsidiary called
Swiss Private Aviation and "should establish the Swiss Group in the
business aviation sector and provide a platform for operating the Lufthansa
Private Jet fleet." SPA will concentrate on offering aircraft management
services to private clients and companies and operating charters. From
spring 2009, the LH Private Jet fleet will be operated under SPA's AOC.
United Airlines, of course, scrapped its proposed Avolar private jet venture
during the post-9/11 downturn. The idea was opposed strongly by UA's unionized
pilots.
ATC Fees
US carriers, struggling to avoid major losses as fuel costs soar, are
hardly in a position to launch private jet services now. But led by the
Air Transport Assn., the industry has renewed its ago old push in Congress
to force private aviation to pay a higher share of ATC costs. The debate
is currently in an extended holding pattern, with FAA reauthorization
legislation not likely to be considered seriously or passed until the
next US president takes office in 2009.
ATA maintains that commercial airlines drive 66% of US ATC costs but provide
90% of system funding. It argues that the business aviation sector is
underpaying by $700-$800 million annually based on the cost of providing
ATC to corporate aircraft. It also believes that the proliferation of
business jets is adding to system congestion; even if corporate aircraft
are not necessarily using the same airports, they use the same airspace
in crowded markets when flying to secondary airports, ATA says.
Earlier this year, Senate Aviation Subcommittee Chairman Jay Rockefeller
(D-W.Va.) and Finance Committee Chairman Max Baucus (D-Mont.) thought
they had reached a compromise on funding FAA operations by agreeing to
a plan to raise jet fuel taxes on noncommercial aviation from 21.9 cents
to 36 cents per gal., a way to force business aviation to pay more without
directly charging it higher user fees. But an attempt to consider the
plan on the Senate floor quickly fizzled as senators began bickering over
amendments and rules of debate and effectively tabled FAA reauthorization
for the remainder of 2008. ATA says it will be "coming back to this
debate [next year] and believes firmly that business aviation shouldn't
be able to receive a subsidy from commercial passengers and air cargo
shippers."
Business aviation, not long ago a small niche air travel sector, clearly
has become a thorn in airlines' sides. "Business aviation looks like
it's becoming pretty competitive," Bernstein says. "Business
aviation use has certainly grown. It's growing while [premium-fare airline
trips] are shrinking. While there's no absolute proof of a shift, we can
certainly observe that these two trends are going on together."
But, Levine pointed out, business jets also operate on petroleum-based
fuel. "If airline convenience deteriorates further and fares keep
rising, what you may see is simply less flying altogether," he said.
"The notion that somehow [the business aviation] sector is immune
to [high fuel costs] strikes me as bizarre.
Blue
Star Jets
885 Second Ave
New York
212.446.9037
www.BlueStarJets.com
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