NetJets – Pioneer in Private Business Travel
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NetJets, an aircraft charter business owned by Berkshire Hathaway, has historically been and today remains a pioneer in the private business jet travel sector. NetJets represents an effective example of a company aligning its business and operating models.
Who is NetJets?
Founded in 1964 and headquartered in Columbus, Ohio, NetJets provides fractional aircraft ownership of private business jets. Owners can purchase merely a share (as small as 1/16) of an aircraft, as opposed to the entire jet. Additionally, through its Marquis Jet subsidiary, NetJets provides business jet leasing via its 25-hour leasing jet card program. The company’s fleet of over 650 business jets (the largest in the world) flies to 2,200 airports spanning 170 countries. The company’s core customers are corporations and high net worth individuals.
Business Model
NetJets provides much more than just transportation services. The company offers a unique travel experience, characterized by convenience, safety and the highest level of customer service. The company actively manages its fleet for safety and quality. Planning personnel are actively managing jet location and availability. Jet owners can request a flight with only a few hours’ notice. The NetJets team handles scheduling and planning, as well as on-demand catering and other hospitality services. In terms of safety, NetJets ensures its fleet is the highest quality in the industry. And the company’s starting pilots average over 7,500 of flight experience and log the highest number of training hours in the industry. The NetJets team is also trained to provide emergency treatment, as needed. Fractional jet owners trust the entire NetJets team to ensure they, along with their families, friends and business partners, travel safely, comfortably, reliably, on time, and stress-free.
Operating Model
NetJets manages a fleet of 650 business jets (see below examples). The jets are either owned by fractional jet owners or, with respect to the aircraft used for its Marquis Jet aircraft leasing business, by NetJets. The company regularly purchases or sells aircraft based on forecasted demand. Collectively, NetJets operates over 300,000 flights annually.
To become a new customers, one must (1) purchase a fractional interest in a jet, (2) pay a monthly management fee (covers insurance, pilot compensation, fleet maintenance costs, etc.), and (2) pay an occupied hourly fee while using the aircraft (covers direct expenses such as food, fuel, etc.). Owners have access to anywhere from 50 – 400 hours of flight time per year. Owners can request a flight as close as four hours to departure time. Owners are guaranteed availability of a jet – i.e., if their owned aircraft is unavailable, NetJets will charter another aircraft of equal or greater size/value.
For customers seeking convenient and reliable air travel but not looking to purchase ownership in an aircraft, NetJets offers the Marquis Jet leasing card (see below). Cardholders have access to 25 hours of flight time per year. Similar to the fractional ownership program, cardholders are guaranteed a plane of equal or greater size/value to the extent their designated aircraft is unavailable.
The Company’s cost bar primarily consists of (1) pilot training and compensation, (2) sales staff and business development, (3) flight planning and logistics staff, and (4) aircraft maintenance. The company also regularly purchase new jets to replace aging aircraft to ensure it has the most up-to-date fleet in the industry. The company places the highest emphasis on customer service and satisfaction. As such, the company typically is more expensive than competitors.
The primary business risk is the fact that private business travel is a highly discretionary purchase. A small percentage of the broader population has the means to travel privately. As such, demand for the company’s services depend on net worth, discretionary income, and healthy equity and real estate markets.
Alignment of Business & Operating Model
NetJets is very effective at aligning its business and operating models. The company’s goal is to provide a quality, safe, convenient and reliable travel experience for its customers. The company benefits from being financially backed by Berkshire Hathaway, as the company is well-capitalized and has the financial and operational resources to efficiently allocate capital, labor and equipment to execute its strategy. The company has the largest, newest and highest quality fleet in the industry. NetJet’s unmatched fleet drives demand in the private jet community and provides the company with an advantage over its competitors. Furthermore, the company allocates substantial resources to ensuring passengers have the utmost flexibility in their flight locations and the fastest route to their destination. For travelers who value their time, NetJets provides the best alternative to outright owning and managing your own jet. Lastly, the company invests a great deal of time and capital in its work force. The company’s pilots and flight planning staff are the best in the industry. The pilots are the most highly trained and the ancillary service providers take the burden of traveling off of the customer. Together, the company’s employees contribute to the high quality and unique experience of NetJets and drive the brand equity that attracts and retains customers. Collectively, these competitive advantages create barriers for new entrants seeking to enter NetJet’s line of business.
Sources:
http://www.hoovers.com/company-information/cs/company-profile.Netjets_Inc.73b1797dd75cf47f.html
https://www.youtube.com/watch?v=cPAzRQJIkcQ
http://www.slideshare.net/bayrak_can/netjets-overview-presentation
Fantastic business that I would not mind experiencing at some point in my life. I think that this is a really hard business to get right given the logistical nightmares, capital to buy planes, training of staff, etc. and, from what I read, these guys are best-in-class.
In your opinion, if Net Jets could wave a magic wand and grow only one part of their business as fast as they want, would it be the fractional ownership or leasing part? I haven’t done much homework and don’t know the answer, but I would imagine that the fractional ownership part of the company is a bigger part of the business when the economy is doing well, but the leasing part of the business is what sustains the company during a downturn.
I think the jet card model is going to gain share over the fractional jet model, regardless of the state of the economy. Ownership of jets is becoming less and less “sexy,” as the appeal of owning a jet (“this is my jet, I can use it when I want”) has decreased given the number of new options in private jet travel. The jet card provides flexibility. You can fly 50 hours a year or you can fly 0 hours per year, and the costs are completely variable. Over time, jet travelers will trend toward this model to capture this flexibility. The major players such as NetJets will succeed by continually investing (they are backed by Berkshire) in their fleet to ensure they meet this demand.
Echo Scott – really interesting model. I wouldn’t previously have guessed the market was that huge for something between first class travel and outright plane ownership but it seems to be! I guess first class travel is relatively poor value for money in terms of the customer experience vs. private jet travel and outright ownership has huge inefficiency in terms of the low utilisation of the aircraft.
Agreed. First-class commercial travel pales in comparison to private jet travel in terms of convenience, reliability, comfort, and service. The concept of fractional jet ownership, which closed the gap between first-class travel and private ownership, has actually been around for decades, long before NetJets. However, the issue of jet availability always was a deterrence on the reliability front (several owners needing jet at the same time was a key challenge). NetJets addressed this challenge by building out a fleet of nearly 700 jets, providing its owners assurance that either their jet, or comparable jet owned by other owners or NetJets itself, would be available at few hours’ notice, creating the utmost reliable travel experience.
I think this is a very interesting business model, however, I wonder how easily it can compete with emerging point-to-point private flight providers like Beacon Airlines or SurfAir. The concept of these airlines is to provide high quality and high frequency air travel in between busy destinations (e.g. Boston-New York) and offer a $1,750 entry level subscription price per month that enables the user to make unlimited flights per month with 2 reservations at a time. When compared to the entry level of NetJets, it is likely to be significantly cheaper and easier to trial as NetJets sells or leases the aircraft, charges a monthly fee for maintenance, plus an hourly fee for sundries. The value proposition seems to be similar and the risk significantly lower for the consumer.
Thanks for the comment. I agree these regional competitors are great for individuals that have a limited set of destinations. For the consumer, they are, without a doubt, cheaper than both NetJets and Marquis Jet. However, I think they both cater to different consumer groups. Beacon and SurfAir cater more to customers that would normally purchase a first class plane ticket, and that frequently fly to only a handful of destinations. NetJets and MarquisJet cater more to ultra high network individuals and corporations who spend a considerable amount of their weeks traveling. The price sensitivity of the latter consumer group is must lower, as they care more about the fleet quality, availability of jets, and overall number of destinations.