The Netjets Effect
I am sure that a lot of you saw the CNBC interview with Richard Santulli a few weeks ago. If you missed it, I would recommend you take a look, I have posted the link below.
A few things jumped out at me during this interview. The first was to see the change in demeanor of the interviewers in their discussions about corporate jet usage when in Mr. Santulli’s presence. I don’t watch CNBC regularly, so I don’t know if these anchors were ever guilty of demonizing corporate jet travel like so many other members of the media have this year. When introducing their guest, they seemed to shower him with kindness, calling him “almost legendary”. They said time and again how happy they were to have him there and said that they would “try to make this as pleasant as possible” for him. A far cry from the introductions most of our industry representatives have received lately.
During the interview, Mr. Santulli cited several interesting facts about his company Netjets and our industry in general. He pointed out that business jet sales have a strong correlation to corporate profits and that aircraft usage is tied more directly to the stock market. I have heard the correlation of aircraft sales to corporate profits from my father for many years and have observed that to be pretty accurate. I had not considered the tie between the stock market and aircraft usage before, but it makes perfect sense. It will be interesting to see if the recent market rallies have had a significant effect on usage for the second quarter.
Mr. Santulli noted that their aircraft usage is down about 26% and that the industry is down about 30%. I would think the industry might be down a bit more than that, considering some of the numbers I have heard from several charter operators. It was very interesting to hear that the usage for personal trips seems to only be down 8%. I guess once your wife is used to summering in the Hamptons, it is hard to change her mind regardless of the hit your portfolio may have taken.
I think the most important statement Mr. Santulli made during this interview was a small one and one that many of you may have missed. Towards the end of the interview he was asked about downsizing and his response was that Netjets was going to “sell our way out of it” (4:48 in to the interview). Ouch! The entire industry is already covered in inventory, demand is down, prices are cut in half and Netjets is going to be dumping aircraft. Not just any aircraft, some of the highest time aircraft around that will likely sell for very low prices.
Just when you thought it was safe to go back in the water……no market is safe. We are already feeling the effects of some of these aircraft hitting various markets (G-IVSP, Citation Excel, and Falcon 2000). Until now, I had hopes that some of these markets might start to see some stability around the corner. Now I am afraid that we might see another round of hits in many markets due to this “Netjets effect”.
I remember in 2002 when Flexjet started dumping Lear 60’s on to the market. I remember it pretty clearly because we were representing a client in the sale of a Lear 60 at the time. We brought the airplane to market in April of 2002, right about the time several Flex airplanes started surfacing. We had researched the market and made some pricing recommendations, but by the time the airplane was released to market that pricing was out of date. We had to chase that market for a couple of months, before the seller decided that they needed to get ahead of the market to sell. It was the right call and we accepted an offer on that airplane in late summer. Prices continued downward for some time after that and in many ways never really recovered.
Hopefully Netjets will be a bit smarter this go around. They seem to be putting one or two airplanes out at a time which should minimize the impact. But, the marketplace is smarter and better informed than ever, and I don’t think they will be fooled for long. My recommendation to sellers is that they need to get ahead of the market and capitalize on some of this activity we are all seeing right now. That was one good thing that Mr. Santulli mentioned in his interview, that aircraft are now selling. I agree with that, and can only say that it is about time!
Toby J. Smith
JBA Aviation, Inc.