Aviation: Change Is in the Air
When the going gets tough, the tough invest in the future. Amid layoffs, restructurings, and rising jet-fuel costs, Flight Options, the Cleveland-based fractional aviation company, announced late last year that it would spend $1 billion for 150 Embraer Phenom 300 light jets.
According to CEO S. Michael Scheeringa, the company is also moving beyond its traditional fractional-ownership business model, adopting instead a system that offers greater flexibility to customers, as well as greater revenue potential to Flight Options. "The fractional model in which people buy an asset is a relatively mature market," Scheeringa says. "We plan to grow our jet-card and charter businesses. By making these and other changes, we expect an operating income of $100 million per year by 2012."
Flight Options’ extreme makeover comes at a difficult time for both the commercial and executive aviation industries. According to the International Air Transport Association, in the 12 months following June 2007, jet-fuel costs rose a crippling 90 percent. In May of this year, Flight Options laid off a reported 200 employees in a company-wide downsizing.
While business may be down, few expect it to stay that way. "Consistently, there is a significant demand for reliable, safe, high-end, luxury jet-travel options," Scheeringa says. With such potential in mind, H.I.G. Capital, a private-equity firm in Miami, purchased Flight Options from Raytheon in November 2007 for an undisclosed sum. H.I.G.’s strategy for rejuvenating Flight Options is multifaceted and, according to Scheeringa, already under way.
The company will take delivery of the first of the Phenom 300s in the fourth quarter of 2009. This seven-passenger, Brazilian-built light jet will join Flight Options’ 130-aircraft fleet, which includes the Hawker 850XP, the Cessna Citation X, and the Embraer Legacy 600. The Embraers ultimately will replace the company’s Hawker 400XP models. "By 2012, we will have a fleet of 300 airplanes," Scheeringa says.
Flight Options is also restructuring its operations to gain greater efficiencies and improve aircraft availability. For example, four years ago the company operated seven maintenance bases in North America, but only two of them were in Flight Options’ top-10 travel destinations. Consequently, aircraft sometimes had to make inconvenient flights to maintenance centers for service, which occasionally caused delays. "We have moved those maintenance facilities into the top-three destinations," Scheeringa says, "including a big new facility in Las Vegas."
The ability to provide current and future customers with greater flexibility, however, is an even more important differentiator for Flight Options. The company is even test-marketing an innovative hybrid card, which combines advantages of ownership and charter. "Customers still buy an asset that they can depreciate for the tax benefit, but the monthly management fee they pay will vary," Scheeringa explains.
Fundamentally, Scheeringa and H.I.G. Capital are reinventing Flight Options as a company that earns money by flying customers, as opposed to one that generates revenue by selling fractional assets. Given the success of the fractional model, this change could be risky. But Scheeringa thinks otherwise. "For a company that started making an operating profit just last year," he says, "we are not about to do anything to jeopardize our market share."