VLJs: The Future of Commercial Aviation

Our ongoing research into next-generation air travel, particularly on-demand models using very light jets (VLJs) or other small planes, supports the view that this technology and business model indeed have a long-term impact, as have other disruptive technologies such as steel mini-mills and express package delivery services.

Business funding, mainly in the form of private equity financing, continues to attract new entrants focused on building market demand, and production infrastructure for the new breed of light jets and small piston aircraft, which define this sector. Present and prospective U.S. on-demand air transport operators such as Day-Jet, Linear Air, SATSair and POGOJet are increasingly mirrored by European cousins such as JetBird and Blink.

Airport infrastructure upgrades are also underway to accommodate on-demand services. Upgrades range from projects such as the largescale transformation of Stewart International Airport in New York, to installation of Small Aviation Transportation System (SATS) technologies for safe higher-volume, low visibility condition flight operations at local, minimally-equipped landing facilities nationwide.

Orders and deliveries for technologically advanced VLJs and other small aircraft for on-demand air travel services continue to increase as this new personal air travel paradigm emerges into being.

Business models, marketing strategies and client service success drivers are still in gestation and expected to be core priorities for industry players during 2008. Most providers are striving to deliver new levels of transparency, quality, responsiveness, and value to develop their markets effectively.

In short, the industry continues to develop with more resources as it moves toward providing the varieties of on-demand air travel services. We are expecting more of the same in 2008, but also believe that we will see more evidence of how various marketing approaches and business models work in practice.

Two notable new players were funded in the European market: JetBird and Blink. Each have their own similarities and differences versus the existing U.S. players. These deals do lay the foundation, and provide the means to begin offering service that can be used as a proof point for further investments.

Blink raised $30 million to begin purchasing its first aircraft. Blink will be using the Cessna Mustang four-passenger jet to build and operate a fleet of 30 with a focus on the European market. The company is offering a pay-per-use model as well as a pre-paid contract that offers discounts. Because Blink has partnered with a well-established operator in the charter industry (TAG Aviation), it will be able to start offering service in May 2008.

Blink will start out with a bit of an advantage, given the density of continental Europe and the wildly varying rate structure on short flights. One hour flights can be had for anywhere from $50 to $1,500. Efficient point-to-point options for business travelers are a clear opportunity that will be reasonably easy to justify for many. Blink seems to be mostly aiming for the corporate or business traveler with its initial offering. Blink's planes are positioned as a "boardroom in the sky" and will be sold on a per-plane versus a per-seat basis.

Overall Blink has removed a number of risks from the equation. Financial risk is limited thanks to the funding round. Operating ramp risk is limited by the TAG partnership, and asset risk is minimized by going with an already proven jet from a longtime manufacturer. We expect that the focus for 2008 will be managing the customer experience and learning more about the market. The good news for the industry is that Blink launches operations in May 2008, so it will be blazing a trail very soon.

We find the TAG partnership also interesting as a potential window on what some of the existing charter aircraft companies might do. They may offer their own air taxi services using the new VLJ category to simply expand their offerings. If some charter operators can solve the customer experience, transparency and fast-booking challenges, they might be in a position to benefit from an expanded market in on-demand air travel. Our initial experience with the charter operators is that they don't really understand the customer requirements well enough to succeed in this way. Time will tell.

JetBird, an Irish company planning to offer VLJ service in Europe, raised about $30 million in financing driven by its founder/financier Domhnal Slattery. The company seems to be taking some pages out of the low-cost European commercial airline playbook (RyanAir and easyJet) and the new technology of VLJs to create a disruptive offering in the market for private jet services. JetBird placed an order worth up to $300 million for 100 aircraft with delivery starting in April 2009 and stretching through 2013. JetBird chose the Embraer Phenom 100, which is a larger, more commercial option than other VLJs. They placed an order worth up to $300 million and expect to start taking deliveries in April 2009.

What remains to be seen is how effective JetBird will be in delivering this fairly high-end private jet travel at truly disruptive pricing. Today the company is relying on its "low cost ethos" to bring about transparency and low flat hourly rates for customers. As with all the new operators, finding the right market segments to drive price and volume to support the business model will be the primary success factor going into 2009.

Infrastructure upgrades

Passenger volume and air traffic demands on the national air transport system are increasing steadily. Air travel is expected to grow in the largest U.S. markets by 100% to 300% by 2025. Already today, maintaining maximum safety standards with an air space management infrastructure dominated by decades-old technologies causes routine system strain, congestion, and travel delays.

A major, broadly-based planning and development program involving industry and government is underway to implement a next-generation national air transportation system. Part of that initiative will include flight operations infrastructure upgrades at the major hub commercial airports, as well as at others being converted from non-commercial uses.

One such project is occurring at Stewart International Airport in New York. Stewart is a former Air Force base located in Newburgh, NY, about 55 miles north of New York City. The Port Authority of New York has taken over the facility and plans to convert it into the fourth major airport in the region. Although presently serving only 300,000 passengers annually, it has long runways and doesn't share airspace with any other airport. One of the two existing runways at Stewart is the second longest in the U.S. and is designated as a backup landing site for NASA's space shuttle program. Over time an expanded Stewart will offer an alternative, more convenient option to as many as 10 million passengers.

Brazilian Aircraft Manufacturer's Phenom 100.

Apart from big efforts such as the Stewart program, the next generation air transportation system will also encompass thousands of small local and regional airports as an important component of the overall plan. These locations represent an unprecedented expansion of the traditional hub-and-spoke air transport model. As such, they comprise a fundamental pillar of the developing on-demand personal air travel sector. A SATS proof-of-concept plan developed under a five-year (2000-2005) NASA program set in motion the deployment of advanced SATS-compliant infrastructure technology at all such sites nationwide. The objective is to enable safe, 24/7, higher-volume flight operations to include landing in low visibility conditions at all of these "airports," many of which have neither a control tower nor terminal radar and are considered "minimally equipped" facilities.

Technology

Today's newest aircraft models are defined by advanced fabrication materials; high fuel efficiency, environmentally sound engines; and digital avionics. In addition to meeting rigorous regulatory standards, these engineering and manufacturing advances also enable strong economies of scale benefits, essential to the success of any large scale production enterprise.

Meanwhile, the mindshare leader in the VLJ segment, Eclipse, met its aggressive milestone of producing more than 100 Eclipse 500 aircraft in 2007. The company expects a dramatic increase in production volume up to several hundred units in 2008. Although Eclipse is quoting the next available delivery position as 1st Quarter 2010, there are a number of aircraft available for delivery throughout 2008 and 2009 via the company's Buy Now program. Prices for the Eclipse 500 continue to range from $1.4 million to $1.7 million.

It certainly appears that the manufacturers of aircraft for this formative on-demand sector – from upstarts such as Eclipse to traditional names such as Cessna and Embraer to advanced single-engine piston aircraft manufacturer Cirrus – stand at the leading edge of a very robust market.