Tuesday, April 23, 2002

Ultimate Upgrade: More Fliers Decide that 1st Class Just Isn't Good Enough
The Wall Street Journal via Dow Jones

COLUMBUS, Ohio -- At the vast NetJets operations center at the airport here, the scene looks like any other airline. Meteorologists track a front moving across the West. Crew schedulers juggle pilot assignments. Dispatchers clear planes for departure across the country.

But take a look at the reservations area, which NetJets calls "owner services." Here, each agent has access to computerized files telling, for example, the names of the passenger's children, his wife's allergy to wool blankets and the couple's favorite brand of Champagne. To gain access to this information, the agents must sign a confidentiality agreement and undergo a background check that digs 10 years into the past.

On a recent day, manager Cindy Webster handled a passenger's request that his plane be stocked with doggie chew toys. "If we have to order dog bones for the doggie on board, we do," Ms. Webster says. Another call came in from a passenger wanting to know which airport is closest to a particular address in Atlanta. Ms. Webster would find out and make the NetJets plane land at that airport.
This extraordinary service helps explain why NetJets, a program run by Executive Jet Inc., a unit of Warren Buffett's Berkshire Hathaway Inc., is adding planes at a faster rate than any other carrier. It flies a fleet of 350 tiny jets -- Cessnas, Gulfstreams and the like, with seven to 19 seats each -- and is adding seven to nine new planes every month.

While it's still struggling to make money in a ravaged air-travel industry, there's clearly more potential than anyone envisioned in the concept that Richard Santulli, Executive Jet's chairman and CEO, pioneered in 1986: the aerial limo service. Today, the program boasts 2,500 paid-up owners, many of whom fall into an unexpected niche: not quite rich or busy enough to own their own plane, but flush enough to spare themselves the growing hassles of commercial travel.

Taking a page from the time-share industry for vacation properties, NetJets sells shares in each of its planes to as many as 16 parties for upward of $375,000 a pop, before various fees. But unlike time shares, fractional-jet owners don't have to take turns. If a NetJets owner's plane is busy, the company will send an identical plane or something better to pick him up. Or it will turn to the 85 jets it manages for corporate customers. Failing that, it will charter a plane from a roster of approved providers -- and in all cases will have a jet to the customer with just four to six hours of notice.

Business has been unusually heavy in the wake of the beefed-up security and increased delays brought on by Sept. 11. "Even before 9/11, I was wasting 10 to 12 hours a week in airports," says Nello Gonfiantini, chairman of a real-estate-investment trust in Reno, Nev. Shortly before the terrorist attacks, he bought a share in a Beechjet from three-year-old Flight Options Inc., a NetJets competitor. He quickly upgraded to a 3/16ths share in the plane and has paid some $825,000 for the stake. "After 9/11, it would be physically impossible to cover the territory I need to cover" on commercial airlines, says Mr. Gonfiantini, who travels to two or three cities a week.
As this airline model gains traction, commercial carriers -- some of whom have tried getting into the business, and then backed out -- can only tremble. They are being caught in an "hourglass" model of the marketplace that is also transforming cars, retailing, electronics and other industries: Consumers are flocking to the most expensive products and the cheapest products, fleeing the middle ground in between.

That's trouble for the airline industry, which is losing its most-prized passengers to NetJets and its rivals. United Airlines once estimated that its most lucrative frequent fliers represented only 9% of customers but 46% of revenues, because they tended to travel more and pay full fare.
And there's little commercial carriers can do to fight back. Even their best passengers must endure thicker congestion and longer delays than those faced by private-jet owners, who have the advantages of rarely needing to make connections, and being able to land at 5,000 U.S. airports instead of just the 500 or so served by commercial carriers. Though NetJets and others have beefed up security since Sept. 11, it's still much quicker to get through screening for a private flight than a commercial one. And faced with mounting red ink, airlines can't easily lower the rich prices they've been charging business and first-class travelers.

It isn't clear that even lower fares would slow the growth of NetJets and its imitators, because their passengers appear willing to pay almost any price for top service and convenience. Indeed, NetJets' pricing system already is wildly uncompetitive with that of the airlines.

The smallest fraction of any plane that a passenger can buy at NetJets is 1/16th. For that the buyer gets 50 hours of flight a year. The cost of a 1/16th share of a smallish Citation Excel, a twin-engine, seven-seat jet built by Textron Inc.'s Cessna Aircraft division, requires an up-front investment of $620,000, a monthly fee of nearly $8,000 and an hourly flight fee of almost $1,700. (That plane sells new for about $9.8 million.) At the end of their five-year contract -- or even before -- clients can cash in and get part of their original investment back, or use the fair-market value of their stake to reinvest in another plane.

"There is no way to justify the cost of this," Tom Wajnert says of fractions generally, and of the 1/8 share he bought in a Beechjet from Flight Options. But he can afford it and wouldn't think of giving it up. After retiring in 1997 from a senior post at an AT&T Corp. subsidiary, and giving up that company's corporate fleet, Mr. Wajnert, 58, says he spent a year "suffering along with commercial aviation."

Now Mr. Wajnert, who runs a small investment-banking business out of Naples, Fla., can show up on a clients' doorstep on a day's notice. He can also impress clients with what he calls "the ultimate: `I'll send my plane for you.' " The privacy of the jet -- the owner determines who goes on each flight -- means he can conduct a confidential meeting on board. Because the plane hews to his schedule, he can hold meetings in three cities on a single day.
NetJets is the largest player, with a 50% share of the fractional-ownership market. It employs 2,300 pilots in the U.S., Europe and the Middle East, a comparable number to the cockpit crew of the former Trans World Airlines. NetJets expects to operate 250,000 flights this year, up from 200,000 in 2001.
Its service is catching on among athletes and entertainers such as Andre Agassi, Tiger Woods and Don Imus. Dale Douglass, a professional golfer on the senior circuit, upgraded himself from an airline seat to a share in a Citation jet in 1996. "I believe the NetJets program has a lot to do with me still being able to play at my age," says the 66-year-old, who was on the road at tournaments 27 weeks last year.

Corporate accounts also are shifting to the fractional market, often to supplement corporate fleets or to serve as the equivalent of their flight departments. NetJets' clients include General Electric Co., Sun Microsystems Inc. and Prudential Insurance Co. When he was CEO of Texaco, Jim Kinnear had the oil company purchase a NetJets share in a small jet to augment the company's corporate fleet of larger planes and reduce the number of trips in which the plane is flown empty to get into position to meet a customer or return to base. "We really saved money," he says.

When he retired in 1993, Mr. Kinnear bought a personal NetJets share primarily for trips between his Connecticut home and his farm near Danville, Va. "There is no commercial air service to Danville," he explains. "And I travel with a shotgun and three bird dogs."