Corporate Planes: Perks or Necessities?

SEPTEMBER 23, 2001

The Transatlantic Star, a 70-seat Airbus jet, is a conspicuous symbol of the 1998 merger that formed DaimlerChrysler, shuttling managers twice a week between the company's offices near here and Stuttgart, Germany.

If there was any complaining about the expense of the plane and its pampered passengers, however, it is not heard now. The Star, which DaimlerChrysler parks at an airport in this suburb northwest of Detroit, has vindicated itself as a valuable corporate tool.

The hijackings by suicide terrorists on Sept. 11 paralyzed much of the commercial airline industry. But they also injected a huge dose of adrenaline into the already energized world of business aviation -- the fleets of private jets that corporate executives have been using increasingly in recent years. In the aftermath of the attacks, many corporations are expected to rely even more heavily on private planes -- through leases, purchases and fractional ownership deals that work like vacation time shares.

"The issue of a heightened sense of security and safety certainly makes this mode of transportation more attractive to many people," said Jim Holcombe, senior vice president for marketing at the Gulfstream Corporation, a leading manufacturer of corporate jets that is based in Savannah, Ga.

William Curtis, chief executive of CurtCo Robb Media of Acton, Mass., publisher of The Robb Report, a monthly magazine about luxury products and services, said, "Companies are going to decide this is the time to have a jet."

More than 9,317 companies already own at least one jet, a 40 percent increase in the last 10 years, said the National Business Aviation Association, a trade group based in Washington. The number of planes used for business aviation has increased by two-thirds in that period, to 14,079. Until Sept. 11 companies most often cited convenience as a reason for buying jets. "It's become a necessary business tool to be able to do business in a fast-paced economy," Mr. Holcombe said.

Commercial air travel certainly costs less -- and may soon be even cheaper as airlines, desperate for customers, slash fares. But Mr. Holcombe and other representatives of private jet travel contend that price should not be a consideration. With a private jet, Mr. Holcombe said, "you can go when you want to go, and leave when you want to leave."

DaimlerChrysler's three planes -- it has two Gulfstream V jets in addition to the Airbus -- sit in a hangar 15 minutes from its operations in Auburn Hills, Mich. It takes 45 minutes to drive to Detroit Metropolitan Airport, the area's main airport.

Corporate jets are often regarded as perks of top executives, but 86 percent of the users are senior and middle managers, the business aviation association said. These jets can save many wasted hours that managers spend in airports, waiting for delayed flights, because the jets also are convenient places for meetings and allow officials to focus on work, said Jack Olcott, the association's president. "A business airplane is an office that moves," he said.

Moreover, it is an office that provides a level of passenger security that commercial airlines may not be able to match. "It is one of the safest forms of travel in the world," Mr. Olcott said. "You know who your pilot is, what's on board the aircraft, who's on board the aircraft." Often, security and customs officials at airports know pilots and passengers of private jets by name, because the same people fly so often.

That does not mean corporate jets are exempt from government scrutiny. Like commercial jets, private planes were grounded for two days after the terrorist attacks at the World Trade Center and the Pentagon. As of last week, a ban on private planes within 25 miles of the capital remained in force. If anything, security officials are taking extra precautions with executive jets.

Last week, passengers on DaimlerChrysler's Airbus jet waited two and a half hours in Stuttgart as police and border guards searched their plane, accompanied by bomb-sniffing dogs. Each piece of hand baggage was searched, said Michael Aberlich, a company spokesman. He said it was the first time he could recall such tight security at the company's private terminal.

For companies that do not want to buy planes outright, an increasingly popular option is fractional ownership of jet aircraft. The plans are somewhat like vacation time shares. They offer companies a share of a plane and provide pilots and crews.

The idea was conceived in 1986 by Executive Jet Inc., based in Woodbridge, N.J., and owned by Warren Buffett, the multibillionaire chief executive of Berkshire Hathaway. The concept was slow to catch on; only three customers signed up initially. But the robust economy of the mid-1990's, coupled with a boom in travel, led to a vast expansion. In 2000, there were 3,694 fractional owners of business aircraft, according to the business aircraft association.

Executive Jet's fractional-ownership clients range from celebrities like Tiger Woods to businesses like General Electric, Seagram, Texaco and Dow Chemical.

Some companies that would like to have their own jets are resorting to fractional ownership because of the long wait to buy planes. Someone placing an order today for a Gulfstream V, which costs $42.5 million, might wait 12 to 15 months for delivery, Mr. Holcombe said. Even before Sept. 11, he said, Gulfstream had seen a surge in interest from people and companies for jets.

Bombardier, the aircraft maker based in Montreal, has a three- to three-and-a-half-year waiting list for its new flagship plane, the $42 million Global Express, which can fly 14 hours nonstop, said Leo Knappen, a company spokesman.

In contrast, a fractional-ownership contract can be completed in days or weeks, depending on how many hours a company needs each year, and the planes it wants.

The least expensive contract at Executive Jet, which offers 12 types of planes, starts at $375,000 a year. That buys one-sixteenth of a Citation V, which seats eight people, and 50 hours of actual flying time, not the time spent waiting on the ground before or after the flight. Fifty hours would be the equivalent of 25 round trips for eight people between Boston and Washington. Besides that expense, companies pay a monthly management fee of $5,000, which covers insurance, the cost of pilot training and flight crews' salaries. Then there is a $1,325-an-hour occupation fee for using the plane, which, at 50 hours a year, comes out to just over $66,000 a year. The total annual cost for such a contract would be about $500,000.

Despite the price, Executive Jet has been signing up six to eight new customers a month and plans to expand its fleet of jets to about 1,000 by 2005, from 380 now, said Kevin Mitchell, senior vice president for marketing. Most customers sign up for 100 to 200 hours a year, drawing from a roster of 1,800 pilots that includes 10 past crewmen on Air Force One.

Others are competing for the same business, including FlexJet, a six-year-old company started by Bombardier, which has a fleet of 100 planes that will soon include the Global Express; and Raytheon, which has a fleet of about 100 aircraft. Despite a financial crisis caused in part by the downing of two of its jets in the terrorist hijackings, the UAL Corporation, parent of United Airlines, is adhering to plans, announced in June, to enter business aviation in 2002, with a subsidiary called United BizJet Holdings.

United BizJet will take delivery of the first of 200 planes next April, said Steven R. Fushelberger, its vice president for marketing. Some industry analysts are concerned that United BizJet will take away business from United Airlines, particularly in first and business class, areas where airlines still make money. "What I would want to hear from them is that they are going to treat the passenger who pays $5,000 differently than the person who pays $500," said Mr. Curtis, the Robb Report publisher.

Others say the trend toward business aviation will subside as stricter security precautions at airports become routine and as passengers regain confidence in commercial airlines. Incentives like extra frequent-flier miles and airport club membership deals are likely to be offered to affluent travelers. "The airlines will try to keep these people," said Raymond Neidl, aviation analyst at the ABN Amro investment bank.

But, given the growth in business aviation, Mr. Fushelberger said, there are opportunities for his company, and others, to attract newcomers. "A lot of the low-hanging fruit has been picked, but look at the entrepreneurs, look at the executives and look at the travel they do," he said.

Source: New York Times