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Fri 2 Oct 2009 04:00 AM

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Where are all the high-fliers?

VistaJet boss Thomas Flohr believes that the downturn has lined the clouds his planes navigate with silver. Is he right?

Where are all the high-fliers?
VistaJet CEO Thomas Flohr is eyeing innovative business models to finance his firm’s fleet expansion.
Where are all the high-fliers?
Where are all the high-fliers?
Where are all the high-fliers?
VistaJet registered its first quarterly loss in Q1 this year, but has since returned to profitability.

VistaJet boss Thomas Flohr believes that the economic downturn has lined the clouds his planes navigate with silver. Is he right?

When speaking about private jet customers, there is a certain way of referring to people worth a couple of hundred million dollars. It seems they need to sound like a community that is somehow privileged and unfortunate at the same time.

At an average net worth of $200m, these people are not quite among the ultra-rich who own their very own private jets, for example Tiger Woods, Larry Ellison, Mohammed Al Fayed and several dozen Middle Eastern princes.

The $200m brigade is certainly rich, but they are also almost certainly poorer than they were a year ago. Privileged, but also unfortunate.

These people will travel first class when it is convenient, but also need flexibility and sometimes privacy for their travel. They also want a consistent level of quality whether they are flying long haul on business or short haul for a skiing trip.

They are the target market for VistaJet, a relative newcomer to the private aviation business, but one that intends to reel in the market’s largest player, NetJets, with what it claims to be a combination of better prices and a better all-round service.

When Thomas Flohr, the founder, 100 percent owner, and chief executive of VistaJets, refers to his $200m customers, there is an almost imperceptible dip of the chin, and a breezy wave of an open-palmed hand. These are not just customers to Flohr, they are friends and colleagues, the types of people he meets on his 42 metre luxury yacht in Monaco every day of the hot summer.

He is not in the business of listing his celebrity customers, but Formula 1 world champion Lewis Hamilton and his Pussycat Doll pop star girlfriend Nicole Scherzinger are known to be regulars.

Even race car drivers are not quite in Flohr’s wealth league. The 47-year-old owned three planes of his own, paid for by his successful IT financing company, before stumbling onto the idea of building a business around his passion for private aviation.

It wasn’t just a passion for private jets, it was also a frustration at the failures of operators in the sector that drew Flohr into the private aviation sector. He chartered out his own planes when he did not need them for his own use, and also chartered planes from other owners for flights at other times.

But as a customer of other operators, and an owner of his own small private fleet, he realised that private air travel was not always as luxurious or professional as he would have liked.

Planes weren’t available. They weren’t in the right place at the right time. Some were brand new, others were older, and showed it. Some were cramped, some were luxurious. There was never the consistency that he had come to expect from other parts of his life: Four Seasons or Mandarin Oriental hotels, for example, which deliver identical levels of quality wherever they are found in the world, and irrespective of the kind of room or suite you select.

“That concept does not exist in private aviation,” suggests Flohr.

The VistaJet solution is to sell programmes that give customers a number of hours flight time per year in whichever aircraft is most suitable to their needs.

The company’s fleet is designed to offer programme holders flexibility to match the needs of a particular trip to the correct aircraft for the job. Two people hopping from Dubai to Bahrain for lunch need the smallest Learjet in the fleet, a Doha football team travelling for an away match in Riyadh can fit into a Challenger, while a large family from Jeddah heading for a holiday in Geneva might use the Bombardier Global Express.

No matter which plane is used, it will have the same luxurious look and feel both outside and throughout the cabin.

Used aircraft prices in freefall

The price of used aircraft has been on a rollercoaster over the past 15 years. To an extent, the market is driven by the wealth of its target market, so you see an almost perfect correlation between the performance of major stock markets and the price of planes.

But the calculation is a little more complicated than that. It is not possible for the largest manufacturers to instantly expand and contract production as demand rises and falls.

The fit out of a medium sized cabin, alone, can take up to a year, and that comes after the plane itself is built.

The Aircraft Bluebook has charted the price of used aircraft for decades, and provides valuable historical data on the market.

A study of the price of a wide range of aircraft, from helicopters, to small propeller aircraft and mid-size jets — would reveal that prices have typically risen slowly over long periods during the past 15 years, but have sharply dropped during the downturn — around the time of the dot com crash, and nosedived during the current crisis.

Mid-size jets have fared even worse than the overall market, with used aircraft prices for planes such as the Hawker 800, Cessna Citation, Lear 31 and Gulfstream G-IV, built in 1994, dropping from a price of around $7m at the end of 2008, to under $4.5m today.

There is evidence that the worst might be over for owners of aircraft looking to sell or at least improve the value of their aircraft on their balance sheets. The most recent three months have seen a levelling off in the fall of prices, particularly at the mid- to upper end of the market.

Analysts are expecting 2010 to be a big year for used planes, as demand increases, and manufacturers are unable to ramp up production to satisfy it.

VistaJet is a relatively new, but fast-growing player in a market dominated by NetJets. The company intends to expand its fleet from 25 planes to 50 or more, and is looking at innovative business models to finance the expansion in an era where banks are enormously reluctant to fund the acquisition of aircraft.

One plan is to offer equity to strategic investors, thereby adding planes to the global fleet while also increasing traction in important parts of the world.

The Middle East region is top of Flohr’s list, and he is already in discussions with potential investors who have expressed their interest in the VistaJet brand.

“What we have in the Middle East is approaches from VistaJet customers who have said: ‘we like your product, but you do not have access to the local market in the way that we do. I can bring you 20 customers, each buying 100 hours, and we can build a business,’” explains Flohr.

The ensuing discussions have seen business models like franchising and joint ventures dismissed in favour of an investment into the main VistaJet company in return for minority stake of the core equity.

“I don’t believe in joint ventures,” Flohr explains. “There are a number of problems with the JV structure, for example the JV might own three planes that operate in the Middle East, but private aviation is a global business, so it makes more sense for the entire European fleet to be available to Middle East customers, and the Middle East fleet to be available in Europe and the rest of the world.”

The global fleet needs to be centrally controlled, or it cannot be utilised at peak efficiency. “We can’t find ourselves in a situation where we are arguing with a partner over whose planes are flying where, who charges for what, what flights are demo flights or press trip flights, who pays for what? I just don’t want to go there,” says Flohr. “I have said very clearly to potential partners, if you want to come in, you have to come in at the top of the company. And you know what? They are saying, ‘even better.’”

Flohr will not be drawn on who he is speaking to in the Middle East, and when deals might be concluded. But he intends to exhibit at the Dubai Airshow in mid-November, and hopes to have something to announce by then.

As a privately owned business, Flohr says he does not need to set himself artificial deadlines to lock down deals with investors, but it is clear VistaJet has not been immune to the global economic meltdown, and its effect on luxury travel.

Revenues are up by 23 percent since January, but Flohr concedes that he was hoping for closer to 40 percent growth, and that, “in a crisis like this, only a portion of your top line growth is going to fall through to your bottom line”.

The company registered its first quarterly loss in Q1 this year, but has since returned to profitability, he says. The 12 months from summer of 2008 to 2009 were not only tough in terms of customer spending, the value of private planes also plummeted. Used aircraft often rise in value over time because demand can often run ahead of manufacturers’ ability to supply planes in time, but 2008-09 saw a brutal plunge of around one-third as multinationals with their own fleets dumped planes as a way to raise cash and reduce costs.

Cast your mind back to when the trip taken by executives of General Motors and Ford to Washington DC to ask for a government bailout last year was made on corporate private jets. The flood of outrage that followed has made corporate private air travel a good deal less appetising.

Flohr hopes that the market is beginning to find a floor for used aircraft, and that his fleet should start appreciating in value through 2010. That matters more for VistaJet than its competitors, because it pledges not to fly planes that are more than three years old, the age at which the manufacturer’s warranty from Bombardier expires.

The value of VistaJet’s fleet isn’t the only tough thing to predict next year. Flohr also has an eye on the oil price, and its effect on the price of aviation fuel. At $70 per barrel, he says he is comfortable, but, “the pain kicks in anywhere above $100 per barrel.”

The company hopes to hedge against rising oil prices by investing in futures if the price dips to around $60 per barrel. Flohr also believes that building a considerable business in Saudi Arabia and other Gulf countries creates some sort of automatic hedge. “If the oil price rises, my potential customers get more wealthy,” he suggests. “But the ideal scenario is a lot of wealthy people and an oil price of $40.”

There is no doubt that the private aviation industry has been battered by the perfect economic storm over the past 18 months. Wealth has evaporated from high net worth individuals; companies are reigning in excessive spending on corporate travel; the oil price is high; aircraft asset values have crashed; manufacturers have slashed production; and conspicuous consumption has become unfashionable.

Through it all, you don’t find Thomas Flohr panicking. He believes that the current crisis has created an opportunity for VistaJet, and he intends to stick to his brand values and business plan of delivering a consistently stylish, convenient and comfortable flight for every customer.

VistaJet fleet specs

Bombardier LearJets:(40XR, 60XR, 85)

Capacity:Crew: 2-3 / Passengers: 7-9 Maximum range:2,850-5,556 km Speed:861-871 km/h

Bombardier Challengers: (605, 850)

Capacity:Crew: 3 / Passengers: 10-14 Maximum range:4,784-6,878 km Speed:850-870 km/h

Bombardier Global Express XRSCapacity:Crew: 3 / Passengers: 14 Maximum range:10,093-11,390 km Speed:950 km/h

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