Latest Fractional Sales/Inventory Trends = Stalled

Fri, 10/15/2010 - 18:42

According to a J.P. Morgan Aerospace and Defense Business Jet Monthly newsletter (October 8, 2010), the business jet market is facing a fragile recovery. It will take a long time for OEMs to rebuild backlogs to former levels. Most demand for business jets comes from the corporate market and tracks the rise and fall of corporate profits. What concerns us, specifically, is the narrower fractional segment.

The fractional aviation industry remains troubled.  J.P. Morgan notes that fractional providers are buying neither new nor used aircraft. Right now, used aircraft inventories are at peak levels and used aircraft prices are at 1997 levels. On a rolling three-month basis, fractional share sales are down 48.3% yoy. (This number is inflated somewhat by sales to former Marquis customers who are switching to NetJets.) In summary, whatever net new fractional shares occur are absorbing existing excess fleet capacity. The total fractional fleet (of which NetJets represents about 50%) is down 8% from its peak in January 2009 (= 81 aircraft).

Three years into the financial crisis, stalled purchases of new aircraft mean that the fractional fleet is aging. Fractional customers do not like to fly on older aircraft. Either meaningful growth must resume, or eventually fractional companies will be forced to buy new aircraft anyway, which will dump more used aircraft on the market, putting further pressure on resale prices.

J.P. Morgan's conclusion: "it will likely take an improved macro outlook to generate demand among potential buyers of the large number of inexpensive used jets currently available." However, J.P. Morgan's current forecast is for only a "modest increase" of new jet deliveries in 2011 following a full-year decline of 14% in 2010; its analysts' confidence in this forecasts = "visibility is limited." Eventually this logjam must break, one way or another.

 

 

 

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Fri, 10/29/2010 - 14:31 — D3

Stalled Fractional Sales

I am new to this blog, so forgive me if I am restating the obvious. While the economy has damaged all aspects of private/business aviation and it appears that Sokol has ridden rough shod over the NetJets employees, it is clear that the factional business model has also been seriously undermined by the major shift to the jet card product. Why would anyone take the risk on the asset when they can have the same product (effectively) by just purchasing a jet card? Yes, the per hour cost is higher for the jetcard, but go ask how much that fractional buyer paid per hour when you factor in the decrease in value of their share. Sokol's biggest mistake may turn out to be ignorance of, or response to, this issue. Failure to adapt (highly difficult for the largest entrenched provider) will ultimately cause the company to collapse. Irrespective of whether they invented the product of not.

Tue, 10/26/2010 - 09:34 — Anonymous

Alice; To your point about

Alice;

To your point about the fractional business and aging airplanes, the UBS report showed after a fair calculation that NetJets has over 230 share equivalents worth of airplanes unsold. The report also indicated the average age of the NetJets fleet is now 6.3 years old. Worse, it seems nothing can slow this aging trend very much for years to come, including the recent order for Embraer light jets which are not to be delivered until "sometime" in 2013. UBS further reported that certain key NetJets airplane types are considerably older than the average, such aws the Gulfstream, Citation 10's, and Citation Excels.

Due to the significant increase in the costs of operating older airplanes, it seems likely that any current NetJets customer is facing an unpleasant prospect of much higher costs upon renewal of their current operating agreement. Similarly, any new prospect considering purchasing from NetJets will also face a considerable and ever growing charge for the NetJets service when all costs are totaled.

Considering these factors, it's not surprising the number of customer owned airplanes continues to tumble at NetJets while the number of owners per airplane appears to be rising. Perhaps the most critical metrics in determining the long term health of the business along with true customer satisfaction are the number and directionality of customer owned airplanes. Additionally, which type of customer owned airplanes and the number of owners per airplane demanding service from the operating system are also critical metrics.

For the most part, the pertinent information to this important topic is available within the public domain, yet a clear and concise reporting of these facts by the NetJets leadership remains unenthusiastic at best.

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