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Do business aviation operators have to get more old fashioned to survive?

Richard Koe The economics of operating business jets in the current economic environment make commercial airline business models looks pretty by comparison. Business Aviation case studies show that private jet operators looking to make money through charter need a dedicated fleet of at least 10 aircraft to break even. Even with a mixed case of charter and managed aircraft, fleets of less than 5 aircraft do not seem to provide the economies of scale to sustain a profitable business. Such indicators are bad news for the European bizav industry, given there are a scarcely credible 1100 operators with an AOC managing a fleet of only 4000 business aviation aircraft. Aside a handful of operators with more than 20 or 30 aircraft, most operators are managing fleets of just 2 or 3 aircraft. If the ‘standard’ economics apply, this would mean that a good number of European business jet operators are underwater. Yet the roster of operators and the size of the fleet continued to expand in 2012, even whilst activity fell. In fact in December 2012 business aviation departures were at their lowest levels since 2005. Movements were 7% down on December 2011, but given the fleet increased over 12 months, that equates to some 20% fall in average per aircraft activity. This of course further undermines the case for running a charter operation. So, why aren’t we seeing widespread bankruptcies, or at least a bunch of cheap M&A activity? In fact there have been a few collapses. That includes Ocean Sky, which not so long ago managed to get product placing in a Bond film (there’s hubris for you). There was a big acquisition too, with the IPO-fuelled Hangar 8 buying up more aircraft from the venerable Jet Club. But overall, given what should be a parlous financial situation, there’s not much tumult amongst the operators. The reason for this relative calm may be that we are mistakenly expecting the industry to respond as rational economic actors would in other more open, mature service sectors. Creaking business models should collapse, and a fitter next generation should swiftly consolidate the market. That doesn’t happen in business aviation, where most operators are beholden not to profit margins and shareholders, but aircraft owners who don’t want to sell their aircraft or the business around it. Operators benefiting from such owners don’t need to sweat the fleet with charter. At a certain point, and below a certain price, their owners don’t need the business. Operators who have invested in their own fleet and are dependent on charter can only look on with envy – or of course, they can refocus their own business on managing the aircraft of wealthy individuals, rather than slogging it out in the charter market and paying all the operational costs. This repositioning seems to be the key to survival right now. Operators whose business models were aggressively charter-oriented a year or two ago are quietly pivoting their attention back to aircraft management. The income potential might be substantially less, and indeed the excitement of controlling and building a real air taxi service might be lost. But the risks are far lower; the operating costs and much of the overhead can simply be passed back to the owner. This apparent flexibility in business model may not be good news for the industry as a whole. It could equip many of its operators to survive the recession when in fact the market should benefit from some ‘creative destruction’. It may take the industry backwards, towards a concierge-service for the very rich, rather than develop its more hopeful path towards a genuine transportation alternative to the creaking commercial aviation networks. Being old fashioned could be a smart short term tactic, but not a great strategy for the industry.

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