Back to the future?
By Patrick Margetson-Rushmore, chief executive, LEA
October 21st this year will mark a significant moment in popular culture, as it is a date on which Marty McFly famously went ‘Back to the Future’. This year is also an interesting time to re-examine an ambitious business model that some consider part of history, but which may in fact still have a role to play in the future of business aviation. I am talking, if you haven’t guessed, about air taxis.
About a decade ago, the air taxi was spoken of as the future of our industry. A new generation of low-cost business jets was going to enable a completely new approach to flight operations. High aircraft utilisation combined with smart routing software and standardised fleets would drive down charter rates to compete head-on with scheduled airlines. We were set for the most disruptive market development since Bill Lear woke up one morning with a neat idea for an aircraft.
Except that, of course, it didn’t turn out that way. The global recession certainly didn’t help, sucking away the bank lending and charter demand on which much of the air taxi vision depended. But, additionally, some of the other assumptions underlying the model were exposed as wildly optimistic.
Most obviously, the air taxi revolutionaries believed aircraft utilisation could be driven as high as 1,200 hours per year. Even with the benefits of a kinder economy and the most efficient routing systems, it seems highly unlikely that figure would ever have been achieved. Given the short-range nature of entry-level business jets, such as the Citation Mustang, it would be necessary to achieve double or even triple rotations each day to get close to 900 or 1,000 hours annually. Based on the experience of my own company, hitting 600 hours per year for an aircraft is no mean achievement, so business plans based on twice that level were always going to be on a hiding to nothing.
In the interest of full disclosure, I should say that London Executive Aviation was at one point a proponent of air taxis. We became the first European operator of the Citation Mustang and at one point had seven in our fleet. However, we quite quickly revised our views and changed from air taxi doves to hawks. While we still have several Mustangs, these have long been operated on a conventional charter model.
So, you might therefore assume I am entirely negative about the air taxi concept and have written it off as a failed experiment. You would be wrong. The European operators GlobeAir and Blink have shown that operating a one-type, Mustang-based fleet can work and that competitive charter pricing can be achieved. In doing so, they have also proved beyond question that the charter market feels comfortable with a smaller size of aircraft.
The missing ingredient that would enable both companies to get closer to, if not fully achieve, the original dream of air taxis is scale. With larger fleets the companies could achieve economies of scale, potentially reduce empty legs and lessen repositioning costs. Their aircraft utilisation would not, in my view, get close to 1,200 hours, but could be increased significantly.
What would be harder to increase would be the margins achievable with the air taxi model, thanks to the keen pricing of the over-populated light jet charter market. However, that should not be an impediment to attracting the external funding that would permit the necessary fleet expansion.
Would that money still come from banks? Probably not, as their lending criteria have become ever stricter in the face of capital adequacy requirements demanded of them by regulators. But, in these post-recessionary times, it could come from elsewhere in the financial community, such as pension funds. It is a myth that investors only want high-yielding investments: most pension funds are largely made up of stakes in safe, low-yielding assets such as utilities.
A key challenge for operators is therefore to help pension institutions understand how an air taxi investment can be made to match their desired asset risk profile. By finding ways to enhance the credit rating of the income flow, in part by minimising volatility through an optimally distributed fleet model, operators could finally access the long-term investment capital the air taxi concept requires.
With the benefit of that infusion of capital, it could become possible to build one or more European air taxi fleets of, say, 45-50 aircraft or more, which would achieve critical mass, deliver attractive returns and form a useful complement to longer established parts of the charter market. Personally, this is a situation I expect to happen within the next 10-15 years, if not before. As Marty McFly discovered on his travels, the future may not look quite as we expected it, but it can still be very exciting.
Published in FlyCorporate, 18th March 2015.
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