NetJets TA fails miserably

[njwingman]

Herb valued employees satisfaction with job as to their role in the process but it would be a bit simplific to say one started there. As to the 75% comment, Netjets competition is only part other fractionals. They also compete with every charter company and every corporate flight operation. It is a very complex model that needs constant tweaking. I always thought the problem was going to be the 5 year new equipment stategy as with their intial success, they would be pumping quite a few high time used aircraft into the market. If that in turn depressed the used market, their original estimates of residual value would not work and the customer would be upset.

This has happened to a small extent already with some customers upset that the residual has not held up. On the service side, they have made some strong committments to the customer. To meet that service level means some extrodinary costs to provide the promised service. No matter how the TA comes out, the likelyhood is a higher cost to Netjets and one they will try and pass along to a customer base somewhat stressed by the cost per hour they end up paying. That may not be a big deal to Tiger Woods but some of the smaller companies that they are trying to get on board, it will be.

Publishers --

I would agree about the used aircraft and residual values. I don’t know if you are aware, but NJA does offer ownership in their "used" aircraft at advertised rates approximately 15% below the new aircraft ownership numbers. So it seems they are in the used aircraft market through NetJet Sales, Inc. in order to keep those residual values up. And the Marquis program is probably helping them keep those used aircraft utilized until they are marketed. As you say, they are constantly tweaking. The problem is they are creating a vicious circle for themselves as they run the hours up on the owners’ aircraft utilizing it for Marquis business, hurting the residual value for when a particular owner’s contract is up for renewal. Don’t know how that is going to be tweaked. Especially when business is growing, not stagnant or shrinking.

You seem like a man who knows the numbers. Putting aside the purchase and sale of the aircraft itself, and relying only on the hard income of monthly management fees and occupied flight hour fees, and using the hypothetical number of $208 million annual income in a particular fleet of NetJets aircraft, what would you project your pilot costs to be in order to operate that fleet? Just curious to have your opinion.

 

[Publishers]

/it would be really hard for me to come up with a number that had any significance. First of all, it is common knowledge that they need the purchase and sale to even be in the business. Therefore to throw them out would be equally misleading.

The problem here is that one needs to come up with an occupied hour crew cost. In a typical corporate operation, there are very few unoccupied hours relative to the total operation. Therefore when Joe customer is looking at Netjets or one of the other options, he is going to figure out what it cost him to do his own versus Netjets fees. What we would have to do is take all that dead head flying around positioning and add the crew costs from that to the hourly cost for occupied trips. In short, both crew costs over the occupied hours.

Forever ago if my memory serves me, we had a crew cost component of about 26% of the total hourly operating. That included salaries, benefits, per diem, etc. We had little or no unoccupied flight hours so every hour was charged, either to parent or a charter customer. That was also relative to our aircraft expense and utilization where 1/3 was fuel, 1/3 maintenance and depreciation, and the balance G&A and profit.

All of this is complex and symbiotic stuff so it is not cut and dried. My Challenger friend has roughly $150,000 in crew cost per year salaries and benefits. He flies about 438 hours for a crew cost in the $330 per operated hour for an aircraft that goes for $3500 per hour.

 

[G100driver]

PER CREW or per crew member?

 

[Publishers]

The $150k is for the crew and benefits. $80k and $45k plus benefits.

 

[njwingman]

/it would be really hard for me to come up with a number that had any significance. First of all, it is common knowledge that they need the purchase and sale to even be in the business. Therefore to throw them out would be equally misleading.

A. Okay, I'll throw it in. No problem here with figuring in every piece of the pie.

The problem here is that one needs to come up with an occupied hour crew cost. In a typical corporate operation, there are very few unoccupied hours relative to the total operation. Therefore when Joe customer is looking at Netjets or one of the other options, he is going to figure out what it cost him to do his own versus Netjets fees. What we would have to do is take all that dead head flying around positioning and add the crew costs from that to the hourly cost for occupied trips. In short, both crew costs over the occupied hours.

A. That's the way I look at the numbers also. More efficient in revenue hours, more money for the business.

Forever ago if my memory serves me, we had a crew cost component of about 26% of the total hourly operating. That included salaries, benefits, per diem, etc. We had little or no unoccupied flight hours so every hour was charged, either to parent or a charter customer. That was also relative to our aircraft expense and utilization where 1/3 was fuel, 1/3 maintenance and depreciation, and the balance G&A and profit.

A. We agree on this figure. In the mid- to late 90s in a past life we were figuring 30%. So I guess you would agree that 15-16% is low.

All of this is complex and symbiotic stuff so it is not cut and dried. My Challenger friend has roughly $150,000 in crew cost per year salaries and benefits. He flies about 438 hours for a crew cost in the $330 per operated hour for an aircraft that goes for $3500 per hour.

A. Nice guy, I'm sure I must know him.

You and I basically agree on the numbers and the way they work. Just comes down to whether you're pitching or catching. Can't we all just get along?

Regards ....

 

[Publishers]

Well in the real time example, you have a 10% figure relative to the hourly ops cost.

In my history from above, fuel costs were a relatively low number when combined with the maintenance capabilities we had you, your 2/3 's were low and the pilot cost high.

Today, fuel costs are up and a larger portion, insurance costs are a more significant %, maintenance depending on age of aircraft and type can be very costly, and the pilot costs less as a percentage due to the other factors. That is why the percentage game is not very effective in doing analysis all the time that is really comparative.

Now take the Challenger crew above. For the owner, they only fly 300 hours per year. The balance is charter. In terms of dollars, the owner is paying out the same money with or without charter. The question is whether the costs are spread over the 300 or the 438. Over the 438, his crew costs have dropped, plus, he is generating revenue on the aircraft - a double win.

It is this kind of calculation that people look at to determine what it would cost them versus going with Netjets. You can get whatever you want to get but in the real world, this challenger flies when the boss wants to go, where he wants to go, and there is no overtime, no fixed days off, no staff to do Jepps, no much of any work scope.

To try and translate this typical flight operation into a union organized public company is difficult at best. You want airline type benefits along with corporate type pay, and really are a charter company. I think your work rules more than the money are going to be detrimental to the future model.

 

[Starman]

The $150k is for the crew and benefits. $80k and $45k plus benefits.

I'm hoping that's per pilot.

 

[njwingman]

So, I guess in summary, Publishers, you are saying that the numbers you and I both know so well don't necessarily fit in the fractional house of cards. I agree.

You are saying the fractional business doesn't mirror airlines well, and it doesn't mirror the charter business well. I agree.

So, here we are, you on the sidelines watching and perhaps somewhat threatened by it if I've got the picture right; me in the midst of it all with a couple thousand other guys betting our futures on it, blazing the trail for the future. The Lewises and Clarks of the skies.

Maybe when it all shakes out, we both will know whether or not this business concept was genius or fatally flawed. We just made our bets on opposite sides of the table. Either way, it will be exciting. And hey, I can always go back to corporate/charter, huh?

Regards --

 

[Publishers]

They work as long as you can make it up somewhere else in the program. If sales of fractions slowed appreciably, your dead.

 

[njwingman]

If sales of fractions slowed appreciably, your dead.

And that, Publishers, is the truest thing either one of us has said in this exchange of ideas. Enjoyed it --thanks.