petesciulli.competesciulli.com/wp-content/uploads/...Model-and-Cas… · Web viewIn August 2009, Richard Santulli, CEO of NetJets, stepped down from his post at the company. Santulli,

A Case Study

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Table of contents

NetJets Case Study

Executive Summary

Industry Overview

NetJets Story


Executive Summary

In August 2009, Richard Santulli, CEO of NetJets, stepped down from his post at the company. Santulli, the pioneer of the fractional jet ownership business model, had revolutionized the air charter industry in the last two decades. Unfortunately, the success did not carry on. It is remarkable how abruptly things turned sour, with NetJets posting a $711 million loss in 2009.1 Santulli’s replacement, David Sokol, has quite the task to try to revive this suffering behemoth. The fractional ownership model involved selling a fraction of new aircraft to a client in return for a designated number of flight hours. NetJets would handle all the maintenance and management of the aircraft for a minimal fee. This was a big paradigm shift because at the time the industry was mostly comprised of air charter services (air taxi) that owned the aircraft and typically charged high hourly fees or, to a much lesser extent, full aircraft owners who footed extensively high initial purchase costs.

Fractional aircraft ownership affords its customer base with the convenience and flexibility of private air service without the more significant costs associated with sole ownership of an aircraft. Additionally, fractional ownership allows customers to avoid typical travel inconveniences such as flight delays, crowded or filled flights, and inconvenient flight schedules. Also add in the fact that commercial air travel is increasingly subject to threats and security-related inconveniences, specifically following events such as 9/11. For businesses large and small, sports teams, government agencies and high net worth individuals, fractional ownership offers a balance between convenience and cost.

A fractional aircraft company assembles a fleet of planes with each of these planes available for a certain number of revenue generating flight hours per year. Those hours are then divided into partial ownership shares and these partial ownership shares are sold to individuals and businesses. Fractional customers typically purchase one-sixteenth or one-eighth shares in an aircraft; although in some cases the purchases are one-quarter shares or more. The purchase of a one-eighth share means that the owner will pay approximately one-eighth of the aircraft retail price initially and receive one-eighth of the total number hours of flying time per year for the life of the contract (typically five years). Jets in the NetJet fleet typically fly 400 hours per year.

NetJets is a private jet service company based out of Columbus Ohio. It was the first company to offer fractional jet ownership to clients in 1986. Some competitors of NetJets include: FlexJet, CitationShares, PlaneSense, Avantair, Flight Options, and Sikorsky Shares. Availability of a jet is guaranteed by NetJets with only four hours notice, or they will provide a replacement jet. This revolutionary business model was so successful it attracted the attention of Warren Buffet in 1995. Buffet’s Berkshire Hathaway acquired the company in 1998 and financed it into an industry mammoth. 1 Buffet, Warren. Letter to Berkshire Hathaway Shareholders, 2009. http://www.berkshirehathaway.com/letters/2009ltr.pdf , p. 12, accessed March 6, 2010. www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

However, as of late, the fractional jet ownership company has seen better days. The company relies heavily on corporate clients who are struck with financial woes and must cut back. Due to the recession and cutbacks, NetJets has endured massive losses. CEO Richard Santulli, pioneer of the fractional ownership model, stepped down and Buffet appointed a new CEO, David Sokol. Can this once successful company be rescued from the brink?

Industry Overview

The Air Charter industry includes over 2,000 companies, including the three leaders Bombardier Flexjet, Global Aviation Holdings, and NetJets. Sixty percent of the revenue is generated from just 50 of these 2,000 companies. The air charter industry is the on-demand, nonscheduled transportation of passengers and cargo. In general, charter flight is more flexible, extensive, and efficient than traditional commercial air travel. Air charter planes have access to over 4,000 general aviation airports, while scheduled commercial aircraft are restricted to the 500 US commercial airports.2

The Fractional Aircraft ownership industry can be seen to be a variant of the overall Air Charter business segment. Around 20 percent of industry revenue comes from buying fractional ownership of a jet.3 The Fractional Aircraft sub-segment would have a client base that overall has a higher earned income as compared to the overall Air Charter industry customer base. This higher earned income level is necessary to account for the high price tag associated with owning a fractional share of a high-end aircraft. An example of the costs is presented below:

Fractional ownership doesn’t come cheaply, even though it’s far less expensive than buying a plane. Just a one-sixteenth interest in, say, a Citation Ultra costs only $80,000 but about $200,000 for a turboprop KingAir, according to consultant Bailey & Partners. If it’s a used seven-passenger BeechJet, expect to lay out approximately $275,000.

A typical jet transaction, involving a one-eighth interest over a five-year period, can cost roughly $3 million. That breaks down to about $1.3 million for the main payment, plus management fees of $12,500 per month and usage fees of about $1,750 per hour.

During the early years of the NetJets inception, industry growth was practically unbounded and led to a rapidly increasing revenue stream. The positive revenue growth in the Fractional Aircraft industry quickly attracted several formidable competitors. Among the leading competitors was Bombardier’s Flexjet.

1. Bombardier Flexjet

Bombardier Flexjet was established in 1995 as a joint venture with American Airlines. The Flexjet division (known as Flexjet), like NetJets, offers fractional jet ownership services. However, one of the differences is through its Flexjet 25

2 First Research. Industry Profile: Air Charter Services Quarterly Report, 3/1/2010 3 Ibid. www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

program, customers can also buy flight time in 25-hour blocks. Flexjet's fleet of around 100 aircraft includes Learjet and Challenger business jets manufactured by the company's parent, Montreal-based Bombardier. Bombardier is a supplier of NetJets.

2. Flight Options

Flight Options provides fractional jet ownership services, in which customers share ownership and are guaranteed access to a particular type of aircraft operated by the company. Its fleet of about 110 aircraft includes Beechjet, Hawker, Cessna Citation, and Embraer Legacy jets. Its primary service area spans the continental US and locations within 200 miles of its borders. Besides fractional ownership, Flight Options offers aircraft leasing and management and a membership program, JetPASS, that gives customers access to various aircraft. Investment firms Directional Capital and Resilience Capital own a majority stake in Flight Options.

3. Jet Aviation Management

Jet Aviation provides chartered passenger transportation with a fleet of more than 200 owned and managed aircraft worldwide, including jets of various sizes, turboprops, and helicopters. It also provides aircraft management services, fixed-base operations (FBO) and private aircraft handling, and aircraft maintenance and completion (interior fitting-out) services. Jet Aviation operates from facilities in the Americas, Asia, Europe, and the Middle East. Founded in 1967, the company was acquired by defense contractor General Dynamics for $2.18 billion in late 2008.

However, demand for this sub-industry is greatly driven by corporate profits and, to a lesser degree, the needs of the US military. Therefore, NetJets specifically, and the entire sub-industry in general, has experienced a significantly shrinking revenue stream and declining profit margins—in 2009, NetJets experienced a loss of approximately $500M.

To combat the realization of a depressed market, NetJets and the other market players have begun to rationalize their overall business operations by selling off excess inventory and canceling future plane orders. Whether NetJets and the other competitors have done enough to stave off further revenue and profit decline, remains to be seen.

NetJets StoryIn August 2009, Richard Santulli, CEO of NetJets, stepped down from his post. Santulli, pioneer of the fractional jet ownership business model, had revolutionized the air charter industry in the last two decades. Remarkable how abruptly things turned sour, with NetJets posting a $711


million loss in 2009.4 Santulli’s replacement, David Sokol has quite the task to try to revive this suffering behemoth. What follows is an overview of the history of NetJets, creation and maturation of the fractional jet ownership program, and the current situation NetJets is facing.

The Early Years

The company initially known as Executive Jet Aviation (EJA), now NetJets Inc., was originally founded in 1964 by Brigadier General O.F. “Dick” Lassiter. The company’s primary mission during these early years was to offer both private business jet charter and aircraft management services. Before the close of the 1970s, EJA had grown to a company of considerable size—“with approximately 250 contract flying customers…routinely flew throughout the US, parts of Canada, the Caribbean, Central and parts of South America, logging more than three million miles a year.”5 Private air charter was becoming increasingly popular and many companies entered the market. Because of this, EJA was positioned to capture only a modest portion of this market share.

Richard Santuilli, a brilliant mathematician and former Goldman Sachs senior executive, purchased EJA in 1984. According to Business Week, the military mindset of EJA had produced extensive records of EJA's every trip, a mother-load of data for Santulli to mine.6 He would use this valuable data to develop operations processes and streamline efficiency. Furthermore he already had a framework in mind based on the timeshare principle used in vacation resorts. In 1986 he introduced to market the fractional aircraft ownership program. At the time of the introduction, EJA had eight Cessna Citation II aircraft.

Fractional Ownership Introduction

The fractional ownership model involved selling a fraction of new aircraft to a client in return for a designated number of flight hours. EJA would handle all the maintenance and management of the aircraft for a minimal fee. This was a big paradigm shift because at the time the industry was mostly comprised of air charter services (air taxi) that owned the aircraft and typically charged high hourly fees or, to a much lesser extent, full aircraft owners who footed extensively high initial purchase costs.

When Santulli submitted his fractional ownership program to the Federal Aviation Agency (FAA), EJA was given a Federal Aviation Regulation (FAR) designation of Part 91. The FAR number is determined based on the aircraft corporation’s activities and determines how they are regulated, in ways such as taxation, depreciation schedules, certifications, pilot training, flight

4 Buffet, Warren. Letter to Berkshire Hathaway Shareholders, 2009. http://www.berkshirehathaway.com/letters/2009ltr.pdf , p. 12, accessed March 6, 2010. 5 Freeze, Di. http://www.airportjournals.com/Display.cfm?varID=0801007, accessed March 21, 2010. 6 Bianco, Anthony. What’s Better Than A Private Jet? A Semiprivate Jet, BusinessWeek, 07/21/97, Issue 3536, p52-56. This article profiles Richard Santulli as a pioneer and brilliant manager of EJA. Interestingly it also mentions the 1997 entry of new competitor Raytheon, one of EJA’s aircraft suppliers. The article quotes Santulli’s opinion of the new competitor: "It confirms the validity of our product." www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

crew limitations, foreign travel fees, runway length and airport restrictions.7 The charter companies, including EJA, had always operated under Federal Aviation Regulation (FAR) Part 135. Typically Part 135 places more restrictions on charter operators than Part 91 (See Exhibit 1). Part 135 companies are considered commercial operations, while Part 92 companies are considered to be non-commercial. With the new fractional ownership program, assets would belong to clients, freeing up liability of the asset from the operating company yet providing them power of attorney over the aircraft. Exhibit 1. FAR Part 135 versus Part 91

FAR Part 135 FAR Part 91Federal Excise Tax (FET) 7.5% tax on all amounts paid for

air transportation7.5% tax can be avoided in some operating structures (under these instances usually just a fuel tax is paid)

Depreciation Schedule 7 year 5 year

Time and Expense of Certification

Obtaining an operating certificate takes approximately 6 months to 1 year and costs approximately 15-20 times the hourly operating costs of the aircraft

No operating certificate required

Runway Length Requirements

Aircraft must be capable of landing within 80% of the runway length (affects access to as many as 2,400 smaller airports

Runway length determined by aircraft requirements

Available Airports An aircraft may not even begin an approach to an airport that has no weather reporting facility unless the alternate airport has approved weather reporting

An aircraft may begin an instrument approach to airports where there is no weather reporting and the pilots determine when they approach the airport whether they can land safely

Pilots and Crew Crew members cannot serve as pilots until significant records and information is disclosed to the FAA, potentially creating significant delays (especially with new hirings). Limitations are placed on the number of hours a pilot or other crew member may work, complicating flight schedules among other activities

Crew regulations far less stringent

The FAR 91 designation of fractional ownership created uproar throughout the air charter industry. Air charter companies believed they would be ruined because of these lax regulations. They complained heavily to the FAA, arguing that their Part 135 operations would not stand a chance. Furthermore, private jet manufacturers were also unhappy with the fractional ownership model. Manufacturers believed they would be selling fewer planes if more clients were sharing

7 Federal Aviation Agency Website, http://www.faa.gov/regulations_policies/faa_regulations/, accessed March 21, 2010. www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

them (although the contrary occurred, they sold many more planes). The fractional ownership model faced heavy criticism; however it would survive and thrive.

Fractional Ownership Takes Off

EJA offered its customers one-sixteenth ownership of an aircraft, typically costing $500,000 plus hourly usage, monthly management fees, and pilot fees.8 Customers get the convenience of a private jet, but at the price of a commercial airline ticket. When direct and indirect costs were factored in—hotel, meals, travel time, expenses— the cost of first-class commercial travel was significantly higher compared to EJA. Based on a theoretical trip from Newark to Austin, the real cost of the commercial trip was $19,400, compared with $10,100 in a fractional private jet.9 Furthermore, whereas 70 percent of commercial flights went to only thirty airports across the United States, EJA offered access to more than 5,500 airports across the country, in convenient locations near business centers. Therefore it is not surprising to see how popular this ownership model became, exploding in such a short amount of time (See Exhibit 2). By 2002, over 5000 shares had been sold, with the number growing drastically each year.

Exhibit 2: Growth of Fractional Jet Ownership 1986-2002.10

Corporations and wealthy individuals normally buy private jets to dramatically reduce total travel time, to lessen the hassle of congested airports, to allow for point-to-point travel, and to gain the benefit of being more productive and energized upon arrival. It is a more efficient way to get around since the plane fits around the customer’s schedule and provides a resourceful and comfortable means of travel. However, it comes at a hefty price. The purchase price of a typical 8 First Research. Industry Profile: Air Charter Services Quarterly Report, 3/1/2010 9 Balmer, J. The New Jet Set, Barron's 11/19/2001.10 Source: National Business Aviation Association (NBAA) Business Aviation Factbook 2003 (p.25).www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

private jet ranges from $5-40 million, not to mention the additional storage, maintenance, fuel, pilot, and crew costs. With EJA, a customer would be at ease without these hassles and extra fees. Furthermore, the availability of the EJA fleet is incomparable. An EJA jet is always available to clients with only four hours' notice, or the company would charter another jet. This pivotal guarantee was delivered using the FlightOps software which:

“Handles all aspects of fractional fleet management: reservations, scheduling, dispatch, aircraft maintenance, and crew requirements. It also keeps track of the FAA regulatory requirements for crew duty…ScheduleMiser creates an optimal schedule for a fleet of aircraft and a set of owner demands (missions) by minimizing costs while meeting FAA regulations and FMC business rules for feasibility.”11

This software allowed EJA to organize their operations efficiently enough to offer this four hour guarantee, which was unprecedented. The software would eventually be adopted by competitors, forcing EJA to continue expanding its fleet size as its major differentiator.

EJA’s growth was explosive: In 1997, it accounted for 31% of all corporate jets ordered in the world.12 Warren Buffet took notice of this company in 1995, quickly signing up for a one-quarter share of a Hawker 1000 Jet, 200 hour annual flight hours. In 1998, for the tidy sum of $725 million, Buffet acquired the company for his Berkshire Hathaway conglomerate, keeping Santulli in charge.13 In Buffet’s own words:

“EJA, which is by far the largest operator in its industry, has more than 1,000 customers and 163 aircraft (including 23 “core” aircraft that are owned or leased by EJA itself, so that it can make sure that service is first-class even during the times when demand is heaviest). Safety, of course, is the paramount issue in any flight operation, and Rich [Santulli]’s pilots— now numbering about 650 — receive extensive training at least twice a year from FlightSafety International, another Berkshire subsidiary and the world leader in pilot training.”14

The Buffet acquisition allowed Santulli to finance a major blitzkrieg on the European market by expanding in the international market. Throughout the late 1990’s the fractional ownership model expanded like wildfire to many international regions like Europe and the Middle East, with the exception of Canada.

Just four years later, following considerable growth in both customer base and the number of managed aircraft, Executive Jet Aviation officially became NetJets. NetJets’ fractional 11 Chris Martin, David Jones, Pinar Keskinocak. Optimizing On-Demand Aircraft Schedules for Fractional Aircraft Operators, Interfaces, Vol. 33, No. 5 (Sep. - Oct., 2003), pp. 22.12 Buffet, Warren. Letter to Berkshire Hathaway Shareholders, 1998.http://www.berkshirehathaway.com/letters/1998ltr.pdf , accessed March 6, 2010.13 Olcott, Jack. Business Aviation and the Buffet Factor, NBAA Digest, August 1998 p2. This is an interesting article detailing the Buffet acquisition at the time of purchase. 14 Buffet, Warren. Letter to Berkshire Hathaway Shareholders, 1998, http://www.berkshirehathaway.com/letters/1998ltr.pdf , p6, accessed March 6, 2010.www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

customers were 50% public companies, 25% private companies, and 25% private individuals and included Aetna, Dow Chemical, General Electric, Gillette,Prudential Insurance, Annika Sorenstam, Andre Agassi, Pete Sampras and Tiger Woods.15 With such a high clientele base, NetJets maintained a high level of service and safety standards which led to word of mouth advertising. Over 70% of NetJets new business was from previous clients or previous clients’ friends and family.16

NetJets stood as the market leader in the offering of fractional ownership of private jets—owning in excess of 60% of the total market by 2005. “In less than 20 years[in 2005] NetJets has grown larger than many airlines, with more than five hundred aircraft, operating more than two hundred fifty thousand flights to more than one hundred forty countries.”17 This unprecedented growth would continue until 2007, with jet sales peaking and decline on the horizon.

Things Fall Apart

Growth had continued at an alarming rate and fractional ownership was doing very well. However, in 2007 a peak in jet sales was observed in the market (See Exhibit 3). Although 2008 posted strong deliverable units, it did not sustain the rate of market growth seen in 2004-2007. Interestingly, NetJets increased its fleet from 2007 to 2008, a year where the entire fractional market had declined. Exhibit 3: New Jet Deliveries (units) for Fractional Jet Companies18

In 2008, during the economic recession, NetJets suffered horribly which brought to light the many ailments of the company. Debt had risen from $102 million in 1998 (at the time of the Berskshire Acquisiton) to $1.9 billion in 2008.19 NetJets was forced to cancel many orders for 2009. Making matters worse, Richard Santulli, the champion and creator of the fractional 15 NetJets Fast Facts 2006, http://www.netjets.com/News%20and%20info/pdfs/NetJets%20Fast%20Facts%2004-06.pdf, accessed March 20, 2010. 16 Ibid. 17 Kim, W. Chan and Rene, Mauborgne. Redefine Your Market Boundaries, Harvard Business School Press, 2005. 18 Roland Vincent and Associates. Business Aviation Outlook Fractional Ownership and Jet Cards, 34th Annual FAA Aviation Forecast Conference, Washington, D.C., March 31 – April 1, 2009.19 Buffet, Warren. Letter to Berkshire Hathaway Shareholders, 2009, http://www.berkshirehathaway.com/letters/2009ltr.pdf , p11, accessed March 6, 2010.www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

ownership program, submitted his resignation to Warren Buffet in August 2008. “It’s clear that I failed you in letting NetJets descend into this condition,” said Mr. Buffet to his shareholders while announcing the $711 million loss for NetJets in 2009. However, Mr. Buffet also announced the installment of Santulli’s successor, David Sokol. Although Mr. Sokol has big shoes to fill, as the creator MidAmerican Energy a Berkshire owned company, he may have what it takes. MidAmerican Energy went from having revenues of $109 million in 2000 to $1.7 billion in 2008.20

20 Patterson, Scott. The Next Oracle of Omaha: Mr. Sokol?, Wall Street Journal, http://online.wsj.com/article/SB10001424052748703940704575089731590431108.html, accessed March 3, 2010. www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

Strategy and Business Model


Table of contents

NetJets Strategy and Business Model

COAR Map

Five Forces

Future and Recommendations


Analysis-Business Model and Strategy

COAR MAP:

Industry Segment

Fractional Jet Ownership, segment of Air Charter Industry

Biz. Logic Installed Base-Customers are purchasing a 5 year fractional ownership of an aircraft and must pay additional hourly usage and monthly management fees.

Competitive Objectives

Product Leadership- There are many substitutes including commercial air travel, air charter services, and wholly owned aircrafts. NetJets needed to differentiate its product offering from basing air charter services to fractional ownership. Fractional ownership has the best of both worlds; the flexibility and luxury of a private jet at a fraction of the cost. NetJets can differentiate from competition in following ways21:Most Aircraft types: NetJets has about 15 different aircraft types ranging from 6 to 18 passenger capacity. Customers can choose any type of jet as per their travel requirement.Global Operations: NetJets has presence in US, Europe and Middle East. This gives customers flexibility to choose any type of jet in any one of the countries the service being offered.Strong Financials - NetJets is fully owned subsidiary of Warren Buffet’s Berkshire Hathaway company. It is financially very strong company.Most Experience – NetJets is a pioneer of fractional jet ownership business model and they are the most experienced company in this industry segment.Customer/Stakeholder Intimacy-Customers in this market segment expect world class customer service. NetJets provides each customer with a unique support number and they have assigned a team of customer relationship staff to assist the customer.

Customer Wealthy Individuals, large corporations, sports teams, the US military, and government agencies

Outcomes Safety – Safety is the most important thing for the customers in this segment.Flexibility – Customers require the flexibility to travel at any time with a short notice. They avoid commercial air travel because they

21 Marketing information is taken from NetJets website http://www.netjets.com/NetJets_Differences/NetJets_Differences.asp , accessed on April 5th, 2010www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

have to abide by the airline schedule and not by their convenience. It is important that the customer should be provided with an aircraft to meet their travel requirement at a short notice.Travel Experience - Customers want their travel time to be as low as possible and they would like to reach their final destination as quickly as possible. They expect point to point service, no hassle of changing planes, to various destinations. A C-Level executive’s time is considered too valuable. Complete travel operations, from customer point to final destination, should be most efficient and also aircraft service should be most reliable with respect to on time and no cancellations or change of schedule.World Class Customer Service – Customers expect world class service, and they expect the onboard service to be customizable to meet their specific demands.

Core Obj. Safety – Set Safety standards above the Industry.Flexibility – Keep the aircraft available at four hour notice.Travel Time – Access to most airports, Hassle-free travel.World Class Customer Service – Customizable service.Low Positioning Cost - In order to maximize profits, NetJets need to have high operational efficiency, which means they need to minimize the aircraft positioning cost and also any variable costs. Positioning cost is the cost incurred to bring the available aircraft from any location to the customer’s departure location.

Activities Safety Standards Above Industry22 – Low MEL, Pilot Training, Always working AircraftPublic perception about air travel safety using charter services is that it is less safe compared to air travel using commercial airlines. NetJets needed to set the safety standards for their aircrafts above the industry standard. They need to keep the Minimum Equipment List (MEL) as low as possible. FAA regulations set the upper limit for MEL to be 15. NetJets set stringent flight maintenance standards above and beyond FAA regulations to ensure there are always working aircraft for the customers to reach their destinations safely. NetJets has mandatory pilot training programs in place to keep the pilots up to date with technology and any other information.

Aircraft Available at 4 Hours Notice23 – Large number of aircraft. Keep the jets always in working conditionNetJets needed to operate the aircraft most efficiently, reliably, safely and provide the aircraft to service the customer at a 4 hour notice. NetJets has the largest aircraft fleet in the charter service

22 NetJets Case, p 9.23 NetJets Case, p 3.www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

industry24. Over 800 aircraft combined with NetJets exacting safety standards and lower MEL, made possible for NetJets to provide the aircraft to customers at shorter notice.

Access to Most Airports25 – In order to cut the travel time, NetJets needed to have access to most of the airports using point to point air service. Also, having access to smaller airports, NetJets is able to avoid most congested airports, which reduces travel time tremendously compare to commercial air travel time. Charter air services have access to over 4,000 airports compare to Commercial airlines have access to only 500 airports26.

Hassle-free Travel27 – By knowing each airport security clearance requirements, a crew can guide the customer through proper security channels to provide the customer the best possible solution for clearing airport security. By choosing smaller airports, NetJets can reduce the security clearance time there and therefore provide a better customer experience.

Customizable Service – Provide services to individual customer needs and not general services which cover all customers. NetJets needed to provide world class customer service to keep the customers happy. NetJets provides a unique support number for each customer, and they assign a team of customer service staff to take care of complete travel requirements for the customer. Customers expect to have their favorite foods, magazines and any other entertainment on board the aircraft during flights.

Positioning Cost – NetJets should keep aircraft in the same geographic region where the majority of customers reside. This will help them reduce the positioning cost and “empty leg” time, where planes return to starting points without anyone on board. Also, if they can anticipate the customer demand and have systems to use this information in flight assignment, that would greatly reduce the positioning cost.

Resources Safety – Professionally managed maintenance facilities and pilot training facilities. Well defined operating procedures are a requirement as well.

24 NetJets website, http://www.netjets.com/NetJets_Differences/Worlds_Largest_Fleet.asp, accessed on April 5 th, 201025 NetJets Case, p 4. 26 Industry Profile, Air Charter Services By First Research, SIC 4522, NAICS 481227 NetJets Case, p 8.www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

Aircraft available at a 4 hour notice – Large number of aircraft, standard aircraft maintenance policies and procedures, Advanced systems to manage the flights and crew schedules.

Access to Most Airports – Permits to most airports, Information about every airport and security requirements.

Customizable Service – System to maintain extended customer profiles and preferences, trained customer service staff, and relationships with premium food suppliers.

Positioning cost – Advanced systems to incorporate several business rules to optimize the flight and crew schedules.


Critical Forces

1964-1985Air Charter Roots

1986-1990sFractional Ownership White Space

1990s-2008Fractional Ownership Maturing

2009-Crisis Management

Buyer Power

Medium Low High High

Supplier Power

Low Low Low/Medium Low

Rivalry Medium to High Low High HighThreat Of Entry

Medium Low (white space)

High Low

Entry Barriers

Medium High Medium Medium

Substitutes Many Many Many ManySize Medium White Space Large Large

(declining)Growth Medium Large Low Low

1964-1985 Air Charter RootsDuring this period, EJA was one of many Air Charter companies. Rivalry was increasing at a large rate (Medium to High). EJA had no differentiating factor that created demand for their services. Their fleet was small, with eight Cessna Citation Aircraft by 1984.28 Even if they could get higher demand, there was no guarantee that they could deliver with such a small number of planes. EJA was bound by limited capabilities and by high rivalry.

1986-1990’s Fractional Ownership White SpaceRichard Santulli brilliantly changed the game. By expanding his market boundaries through re-defining the customer and the customer’s needs (Blue Ocean Strategy29), he was able to create an uncontested market space. Fractional ownership made private jet ownership much more accessible to those who were wealthy, but not wealthy enough to own an entire aircraft. He made fractional ownership more convenient (plane is ready in 4 hours notice) and much cheaper in the long run than Air Charter (fluctuating costs based on the specific trip).30 He also had the major advantage of fewer regulations with FAR Part 91, allowing operations to run much smoother and expand the airport offerings. With FAR Part 91, he was clearly able to differentiate EJA from the Air Charter competition.31

28 NetJets Case, p 8. 29 Kim, W. Chan and Rene, Mauborgne. Redefine Your Market Boundaries, Harvard Business School Press, 2005. Blue Ocean Strategy is based on this idea of expanding the boundaries that inhibit a company’s growth. Most companies are stuck in a certain inhibited mentality, Red Ocean, which deters their growth and success. By constantly searching for ways to create an uncontested market space, Blue Ocean companies will consistently stay ahead of the game and succeed more often. 30 NetJets Case, p 7-8.31 NetJets Case, Exhibit 1.www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

By succeeding in selling shares in his fractional ownership offering, Santulli was simultaneously increasing his fleet size and slowly making his company into a giant. Couple with this the five year commitment of monthly management fees and maintenance costs charged to fractional owners by EJA, and his model created an installed base. He focused on safety and top notch service to keep 70%32 of these customers coming back to EJA fractional ownership. Fractional ownership was truly a great business to be in, as evidenced in the critical forces chart above.

1990’s-2008 Fractional Ownership MaturingWith the explosive growth of fractional ownership, came the explosive growth of rivals. Because the business model was so attractive, many other companies entered the stage, including a number of suppliers.33 Therefore, NetJets lost the edge of FAR Part 91 because now other companies were operating under the same regulations. So now the differentiating factor became NetJet’s fleet, which had grown to the largest in the world. In order to remain the market leader, Santulli focused on keeping the fleet massive and dumped large sums of money into buying more jets and increasing the asset burden. This turned into growth at an alarming rate. With the recession and the severe lack of clients, those unused assets created the massive loss of $711 million which came to light in 2008. Santulli had flown too close to the sun, expanding his company way too fast when the economic cues were lacking.

2009 Crisis ManagementWith David Sokol in charge of the company now, NetJets must focus on best utilizing its assets. Sokol immediately started chopping heads, decreasing costs. But he must go further in smartly driving operational efficiency and creating new revenue streams. His major liability is assets, too many jets spread out all across the nation, barely being used. If he can effectively find ways to utilize these assets, he can rescue the company.

Future and RecommendationsNetJets’ future looks troubled, but there is hope if NetJets can accomplish a few important feats. First, NetJets must better utilize its assets. With all those jets, they must figure out unique and efficient ways to best utilize them. The jets must be reverted from a liability into a revenue stream. This might be done through more air chartering or more jet card activity. Second, NetJets needs to create a new Blue Ocean Strategy. They must remain on the innovative edge by creating a new market for their jets. They could target a new demographic or possibly break down to even smaller fractional shares to expand its customer base. Third, NetJets must be careful not to lose its recognition as one of the world’s safest and most reliable travel corporations. One slip-up with safety could be disastrous.

32 NetJets Case, p 9.33 NetJets Case, p4. Bombardier was an example of a supplier turned competitor. www.petesciulli.com. If you use this presentation for anything, please contact Pete Sciulli at [email protected] www.linkedin.com/in/petersciulli/

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petesciulli.competesciulli.com/wp-content/uploads/...Model-and-Cas… · Web viewIn August 2009, Richard Santulli, CEO of NetJets, stepped down from his post at the company. Santulli,