Expert Commentary

Risk Mitigation—How Corporate Aviation Can Work

It is not often that we write about clients, but in the case of Worldwide Jet, the inner workings of this company were too good not to share. This is a charter company that makes money. It may be one of the few that does it with its own equipment.


Corporate Aviation
June 2007

On the surface, this seems absurd, but anyone who knows corporate aviation, the charter business, etc., will agree that pretty much "no one" makes money. If they do, it is only via management of "someone else's aircraft" that they get paid healthy caretaking fees for.

Even the mighty NetJets (a firm we shower with marketing kudos) eked out a modest gain after years of losses, massive investment by Berkshire Hathaway, and aggressive mark ups on everything from the aircraft share sale to the hamburgers. It took 20 years and hundreds of millions in investment to get there.

On the other side of the Universe, you have companies like Worldwide Jet, who, on their own, have defined what risk management means for the corporate aviation industry.

By definition, risk management is "the process of analyzing exposure to risk and determining how to best handle such exposure." Worldwide Jet, while a small and perhaps even unknown firm (in the context of a company like NetJets) excels on every point.

Analyzing Exposure

To the corporate aviation company, this means the almighty revenue and the operations required to generate that revenue. Certificated as Part 135 air carriers and insured accordingly, the bar is already set pretty high on the safety of operations to prevent the underwriter from paying out any claims in the first place. This is a fact that makes corporate and turbine Part 135 operations very safe when compared with other modes of transport.

But what about the money? Perhaps the strangest factor to manage in an industry that exists at the whim of wealthy people is the revenue, and how to get it. The patrons who support this industry are brave enough to pour millions into assets that effectively do the same thing a $199 ticket on Southwest will do for you.

You are in the business of providing rental for many thousands of dollars per hour to individuals that can select from thousands of available aircraft that are all vying for the same business. From an income perspective, this is a risk mitigation nightmare, since the only revenue you can ever really count on is that last trip you just completed.

How To Best Handle Such Exposure

Enter Worldwide Jet, Cliff Russell, and Ray Vanasse, and the evolution of what a charter management company must be in order to survive the world of fractional ownership, jet card madness, and many other less than optimal hair-brained aviation schemes that are here today and gone tomorrow. Worldwide Jet operates a mixed fleet—part of the fleet is owned by the operator (the company), while the remainder is owned by clients who pay Worldwide Jet to manage their aircraft. The reason why a company would choose to own aircraft (instead of manage them, which is much more intelligent from a risk management perspective) is that this company actually makes money with an airplane that they own and control via an operating lease. The problem is, they never know how many they need, since forecasting demand is a difficult science and also nonexistent in today's air charter industry.

What makes this story compelling is that it allows the management side of this company to under-promise and over-deliver in terms of the revenue hours that the aircraft will fly. For example, we know that the core fleet (the owned fleet) peters out at 60 to 70 hours per month. If demand spills over into the managed fleet consistently for 3, 5, or 10 years at 50 hours per month on managed aircraft, Worldwide Jet makes a point of telling management prospects that they can bank on 30 hours of revenue per month, provided the owners are clear on not causing conflicts with trips that get booked on their aircraft. (One of the biggest challenges of the charter management industry is the "type-A owner/CEO" who wants the aircraft to earn its keep, yet always be available for personal trips.)

When the consistent 60 to 70 hour months arrive on the aircraft that is managed, the result is happy clients, since their private jet use is now approaching "cheap," or in some extreme cases "free," on an after-tax basis. When charter demand drops off, and times are lean for the management company, Worldwide Jet (WWJ) honors its original promise to its owners and their primary aircraft continue to perform like champs in terms of their own financials.

Once you under-promise and over-deliver on the scenario you engaged your customer with, you can offer more services. And WWJ did just that. With a new maintenance facility in Millville, New Jersey, WWJ now operates and maintains its own fleet of owned and managed aircraft. Control, savings, and added value for the company and its management customers is a natural step for those looking to minimize their exposure to circumstances they cannot control.

Summary

Today, with the increased transparency driven by online forums, user groups, and savvy owners, the opportunity to charge a lot of basic management while doing comparatively little in the way of asset marketing for charter is diminishing. As used heavy jet aircraft values fall, and owners seek to continue to leverage their investments, the role of charter revenue is higher than it has been historically. To get an accurate sense of where we are in the historical continuum, see Richard Aboulafia's "guns to caviar" ratio and you can see that corporate aviation is booming.

Good times also mean rapid evolution of the species, which yields more players, more competition, and more options for the owners. In an industry that is effectively "net zero" in terms of financial gain (since the Wright Brothers), intelligent risk mitigation must form the fabric of any organization that operates aircraft.

Worldwide Jet may not be Herb Kelleher's prototype of what air taxi should be, but this company's business model is one that actually works, puts food on the table for its owners and offers a glimpse into how air charter may not only subsidize aircraft ownership, but drive costs down for all concerned parties through increased utilization.


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