Business jets fly high in the GCC

With your own jet, you are free to fly when you want, where you want, without delays or connection hassles.

Flying by private jet, in recent years, has become the preferred means of long-distance travel for government leaders and corporate chiefs. And while the United States remains the world leader in corporate jet sales, the Middle East has become a clear growth area for the sector.

In the region, the competition among the leading manufacturers is increasingly intense - which is hardly surprising, considering that a single sale means millions in profits.

However, the industry is facing a crisis of confidence in a time of global belt-tightening: hard questions are now being asked about the necessity of private jet travel, and the impact of this enormous expense on a company's bottom line.

A new study, "Flights of Fancy," written by David Yermack, New York University professor of business, argues that corporate jet use represents the "most costly and fastest growing fringe benefit" enjoyed by corporate CEOs.
"The central result of this study," writes Yermack, "is that CEOs' personal use of company aircraft is associated with severe and significant underperformance of their employer's stock."

The key word, of course, is "personal": few question the competitive advantage of having a company CEO travel by private jet for a business meeting; hopping on a Gulfstream for a family vacation is an altogether different story.

Yermack's study found a "dramatic, almost shocking" link between a company's stock price and the use of its shareholder-owned aircraft. It's too soon to say if this study will have any impact at Fortune 500 companies, but it has certainly caused a great deal of worry at leading manufacturers like Boeing, Bombardier and Dassault Falcon Jet.

Nevertheless, executive jets are still regarded as a strategic business tool for major corporations and investors - worldwide and, increasingly, in the Middle East. With a variety of ownership options available, they are also within reach of a larger proportion of the elite.

In terms of the biggest jet markets in the Middle East region, Saudi Arabia is likely to remain the largest by far, says Jean Rosanvallon, CEO of Dassault Falcon Jet, based in the United States. The Egyptian market is now the second largest, he says, having grown substantially over the last 10 years.

The nature of jet ownership has changed dramatically in recent years. Besides total ownership, customers can opt for charter hire, or buy into fractional ownership programs. This scheme gives the access and time advantages of owning a jet at a fraction of the cost. Owners can choose from a wide variety of aircraft, and they do not have to worry about day-to-day management and maintenance issues.

The fractional ownership concept was introduced to the market by NetJets in 1986. The company has more customers than all other fractional ownership programs combined. Fifty percent of NetJet's customers are private companies, 30 percent public companies and 20 percent private individuals.

All told, this year NetJets will fly over 250,000 flights to more than 140 countries.
Fractional ownership makes economic sense for people with jet requirements of between 50 and 400 hours per year, says a NetJets spokesman. In the United States, a 1/16th ownership interest entitles 50 occupied hours per year, and a 1/8th interest is equivalent to 100 occupied hours per year.

Recently, a new concept has appeared in the fractional market, Jet Card. This is a pre-paid credit card for time on a corporate jet. NetJets offers time on its fleet in 25-hour increments through the Marquis Jet Card. A single-year, 25-hour prepaid lease starts at $109,900 for the Citation V Ultra aircraft, and is $339,900 for the large-cabin Gulfstream V.

Chartering is another option in executive jet travel. Independent charter broker International Air Charter projects 40 percent growth in air charter business in 2004. The company provides a variety of aircraft, from helicopters and executive jets to large commercial airliners, from its fleet database of over 45,000 aircraft. The company has a regional office in Dubai.

Hugh Courtenay, chief executive of International Air Charter, says drivers of growth in the air charter business include the presence of multinational corporations and a vibrant economy, which generate heightened demand for corporate charter flights. Another key driver is a change in perceptions about chartered air travel.

"Charters are no longer viewed as a luxurious indulgence of the privileged," says Courtenay. "It is a very safe and practical way to travel, especially to multiple or remote destinations."

Buying a private jet is far removed from commercial aircraft purchasing. The sale can effectively happen in one day, with the buyer viewing a completed aircraft at a regional air show or one based or transiting in the local area. According to Lee Monson, president of Boeing Business Jets (BBJ), "We can often make a BBJ deal quickly and face to face with the principal." Commercial buying, by comparison, requires fleet-wide decisions.

Monson outlines the stages in the delivery process: the BBJ is considered delivered when the "green" airplane is turned over to a customer, payment is made and title changes hands, he says. Either the customer's crew or a Boeing crew then flies the airplane to DeCrane Aircraft Systems Integration Group in Georgetown, Delaware, for installation of the auxiliary fuel tanks.

The next stage is for the airplane to go to an interior completion center. The customer chooses the interior configuration, which will usually be fabricated and installed in 9-12 months.
If opting for total ownership, buyers need to take into consideration operating costs. As an example, Monson outlines the costs in general terms for the BBJ.

The direct hourly operating costs (fuel, maintenance, navigation and landing fees) are approximately $2,000 per hour. In addition the annual fixed costs (including crew, hangar and insurance) are approximately $650,000 per year.

In assessing market prospects for the region, Rosanvallon draws a parallel between the Middle East and US markets. "For many years, the Fortune 500 companies represented 90 percent of our business. Today, they account for roughly 50 percent. Medium-sized concerns and even successful family businesses have become much more important for us," he says.

Falcon's business has ebbed and flowed in the Middle East, with the 1970s and 1980s successful decades, but the 1990s less so. Rosanvallon says he now sees a lot happening, both in major markets like Saudi Arabia, but also in smaller states like Oman. Falcon is focused on high-end aircraft costing $20-40 million.

Noting strong competition from Gulfstream and Bombardier, Rosanvallon says the company aims to markedly increase its market share over the coming decade.

The global peak for jets was around 800 per year, but that dropped to 450-500 jets per year in 2002 with the downturn in the economy. The Middle East market has been a small one, Rosanvallon says, representing around five percent of the total market demand.

Brazilian aircraft manufacturer Embraer is also keenly interested in the Middle East region, and is locally represented by Swift Aviation. For the corporate market, Embraer offers the Legacy, which is available in two versions: Executive and Corporate Shuttle. The company has two aircraft flying in Saudi Arabia and one in Kuwait.

"We are now looking for other opportunities, given that the market is accepting our products," says Luiz Fuchs, Embraer's senior vice president for Europe, the Middle East and Africa. He adds that Embraer is establishing a maintenance support center in the region.

Singling out prospective new customers is a challenge for the jet manufacturers. "We identify prospective clients through our relationship with the charter companies and the fractional ownership people," says Rosanvallon.

Consequently, client loyalty is a critically important for success in the jet business. "We have a lot of customers who have been with Falcon since the beginning," says Rosanvallon. In a typical year the company sells a little over 50 percent of its airplanes to current Falcon owners. First-time buyers account for only 10-15 percent of sales.

The potential pool of buyers will grow with the region's economies. Robert Greenhill, president and chief operating officer of Canadian aerospace firm Bombardier, which offers among other aircraft the Learjet and Challenger families, says regional integration is important for jet prospects.

"At the moment it is a series of very small markets, but if they are efficiently integrated a significant market could be created," he says. "Collectively, this region has an economy of over half a trillion dollars. Given the fact that there is a political vision to integrate these economies and to open them up, I would say that there are some very healthy opportunities for regional aviation in the area."

Greenhill adds that, post-9/11, airlines learned a major lesson of the need to increase the number of small, high-frequency regional jets. "The near complete absence of modern regional jets in the Middle East means that there is a huge latent, or undeveloped, market here, both for turboprops and jets," he says. "This is one of the major trends we expect here over the next 5-10 years."

Thinking local. Travel within the region can contribute to jet demand. "Looking at the trends, I would predict that, in terms of aviation, the region is going to become networked at the local level," says Greenhill. "Right now people tend to fly in and out of the region from a specific location, but do not fly within the region."

Greenhill adds that a major breakthrough is expected within the next five years. "As the region becomes more of an integrated area in terms of both economics and the transport of people, growth in regional aviation here will be massive," he says, adding that if economic integration and structural reform does not take place, the number of jet sales will remain modest.

Jet manufacturers do not have to accept the market in its current state. "In terms of this region, we are faced with a fascinating problem: What kind of role can we play with the private and public sectors here to actually accelerate the development of the regional aviation network?" asks Greenhill.

"We are no longer just selling the product; we are also helping to build businesses at a microeconomic level. I expect five years from now that we'll be doing even more of that kind of step-out thinking than we are today."