Multiple choices
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Posted Date: 01/12/2007
Issue: Executive & VIP Aviation International December 2007
Publication: Executive & VIP Aviation International
The sale of Flight Options, says Raytheon Chairman and Chief Executive Officer, William H Swanson, will focus Raytheon’s attention on core business, leading technologies and mission support to his company’s global customers. Announcing strong results for Raytheon’s third quarter and a new $2 billion share repurchase plan, he also made clear that Flight Options’ future is now in HIG Capital’s hands. At the time of the announcement, Michael Scheeringa, Chief Executive Officer of Flight Options, said: “HIG demonstrates a commitment to growth and excellence that mirrors Flight Options’ own values and approach. As part of this combined growth strategy, we are also pleased to note that Flight Options is in final negotiations with Embraer on a long-term aircraft supply agreement that will continue to modernise our fleet.”
Flight Options’ business
So what is this business that Raytheon has agreed to sell and where is it headed? With Michael Scheeringa, Chief Executive Officer, at the helm, Flight Options’ business strategy has undergone considerable overhaul in recent years. The company operates a modern fleet – aged around six years – of more than 140 aircraft which comprises the Hawker 400XP, Hawker 850XP/900XP, Cessna Citation X and Embraer Legacy 600. Given that the Hawker, manufactured by Flight Options’ former sister company, is a dominant feature of the fleet, what are the repercussions of Raytheon’s corporate rationalisation programme on Flight Options’ future fleet selection criteria? “History has more to do with our fleet mix today than the former ownership of Raytheon Aircraft by the Raytheon Company,” explains Scheeringa. “We are the world’s largest operator of the Beechjet 400 and the Hawker 400XP and we’re the world’s second largest operator of the 800 series; but Raytheon never dictated that we bought aircraft from Raytheon Aircraft Company.” By way of illustration he explains that Flight Options’ large cabin aircraft of choice for the last three years has been the Embraer Legacy 600 and, in the super mid-size category, Flight Options buys and sells Citation Xs. “Even when Raytheon Aircraft was launching the Hawker 4000, we had already made a decision that, in that cabin class, for speed we would offer the Citation X and for luxury we would provide the Embraer Legacy 600,” he ventures.
Scheeringa describes the 400XP as the “work horse of the industry”. He goes on: “It is a fast airplane, it is relatively easy to maintain for a general aviation aircraft, and we put a lot of hours on these airplanes. Reliability is very important.” But the advent of new generation aircraft with better fuel performance, reliability and maintainability has caused Flight Options to look again at what the market has to offer. “We’ve transformed the business over the last three years. We used to have 12 different types of airplanes and now we are down to four. The average age of our fleet has gone from just under 10 years of age to just under six,” comments Scheeringa. “We got rid of anything where we did not have economies of scale or the airplanes tended to not be reliable.” The plan, now, is to grow the fleet. To that end, negotiations are underway for new orders of Embraer aircraft to be delivered over the course of a decade.
Products and services
Flight Options has revamped its standard products to meet the needs of its clients. For instance, Flight Options' fractional programme allows owners to fly 80-120% of their contracted hours each year. On a five-year contract, that means people with contracts for 50 hours/year (250 total, over the life of the contract), can fly as little as 200 hours in that five years, and as much as 300 hours, without any penalty, paying only for what they actually fly.
Additionally, Flight Options no longer deducts the standard 2/10 of an hour taxi time from
contracted flight hours. This means that an owner, who before would have used up some number of contracted flight hours on taxi time, now spends all of his contracted hours in flight. Fractional First also pioneered a transparent, pass-through fuel-pricing formula that makes fuel charges much more easily understood. Owners also pay less per hour for longer missions. Flight Options has also pioneered changes to its membership programme with JetPASS Ultimate Travel. Whereas most jet cards lock you into a certain number of hours on a certain type of aircraft, Flight Options’ programme is designed as a debit system that gives you access to its entire fleet.
Sheeringa comments: “At the moment, we have focused on standardisation, not only in terms of the fleet but across all of our contracts as well. The business, in our view, has become somewhat complex; not only on the fleet side but also on the contracts side.” He says it is just not realistic to schedule unique contracts on the back end of the business. Flight Options offers four key services: fractional shares, leasing programmes, Jetcards and aircraft management. To what extent do these services rely on a pooled fleet or does Flight Options draw lines between different fleets for different purposes? “We do separate the fleet from an acquisitions standpoint, but from a scheduling standpoint the aircraft are intermixed. If on a specific date demand exceeds our internal fleet capability, we charter aircraft for additional lift. In that case, the charter aircraft is likely to be biased toward the Jetcard holder and not the fractional,” he answers.
For a company that has recently rationalised its fleet and standardised its contracts, there seems to be an awful lot of diversity in its products and services. “In 2005 we did about $1 million worth of research on people flying privately. We found that, over all, the ‘for hire’ market in North America has been growing at twice GDP on a 10 year or 20 year basis. This also happens to be the wealth growth rate in the US,” he explains. At the same time, the fractional market was growing at less that twice GDP for the third consecutive year while the card market was relatively new and starting to take off and the industry was seeing continued growth in the charter business as well. “What Flight Options decided to do in 2005 was to grow the business in every aspect of ‘for hire’ travel in which it did not already participate,” comments Scheeringa. “We moved from a single priced single product company – that is, fractional – to adding JetPASS, aircraft management and then Flight Options Charter, where we will charter aircraft that we are already operating or we will broker charter flights.”
Flight Options has discovered that around 40% of fractional owners have needs beyond those satisfied by their fractional share that are met through the procurement of other aviation services. It has also found that the same number of people leave fractional programmes to buy whole aircraft as those who leave whole aircraft to buy fractional shares. There is also clear evidence that those people that do not want to make an acquisition commitment, charter aircraft. When they seek consistency and a higher level of safety they move from charter to Jetcard. They may move from a Jetcard to a fractional share because it is a better value proposition.
In fact Scheeringa is hopeful there may even be a fifth or a sixth product that has not yet been introduced to the market. “We want the most efficient and effective business model so that if the market rotates to a new direction, we are the most able to respond,” he adds.But Scheeringa is realistic, and his airline background causes him to add caution to his tone. “Every business has economic cycles and general aviation is no different. There are so many emerging markets that there is opportunity for growth.” For Flight Options, growth will be in its new owners’ hands. This is a private equity firm with plenty of experience of the foibles of the aviation industry that has made clear its intent to partner in on the next phase of Sheeringa’s plans.
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