May 5, 2019
At the beginning of the year, PrivateFly CEO Adam Twidell predicted that 2019 would be a make or break year for shared charter programmes: “For the past few years there has been lots of noise and investment around seat sharing in private jets. However, no-one has yet been able to prove the viability of the business model. Investors will not be able
to keep pouring money in if these companies continue to make losses.” Charter Broker asks what seat brokers bring to the market, how ad hoc charter brokers are impacted by them and what the risks and rewards are.
Flying with people you don’t know
Hunt & Palmer manager executive aviation Julie Black puts it succinctly when she says that for her, selling seats is for airlines and is something of a paradox in the air charter world. It is directly opposed to the bespoke nature of aircraft charter, where you choose your own time, route, aircraft and travelling companions. She has spoken to many who have provided aircraft capacity for seat sale flights and they say it can be somewhat challenging: you have a flight attendant who is trying to provide a tailored service to the varied personalities, cultural differences and dietary requests of a group of passengers who have never met each other before. In an environment that normally offers the ultimate level of familiarity and comfort it instead, rather awkwardly, becomes a group of strangers together in an enclosed space. More social experiment than exclusive experience.
Netherlands-based JetConsult owner Rieko Dalhuisen agrees. Over the last few years he has seen start-ups emerge, play the celebrity endorsement or huge sponsor card, yet blow some large investment in the process. “I truly think that seat selling doesn’t work, especially not in Europe,” he says. “Imagine travelling two hours with six people you don’t know on a CJ2. That’s not private travel, it’s smaller and more crowded than average economy seats. Imagine you have to go to the bathroom…”
In the Middle East too, Aviation Services Management executive director fuel and special projects Priyantha Brito finds some reluctance among Gulf state clients. Despite the luxurious setting, fast track immigration, private FBO and convenient airport – potentially halving travel time on flights of less than 1.5 hours – it is unlikely that UAE and Gulf-based jet owners or regular charter users would appreciate the idea of sharing while they can afford a private flight for themselves.
Seat prices are made on a per head cost but, notes L’Voyage chairman Diana Chou, there is always a caveat that they have to reach a minimum number of seats before the aircraft can fly. After all, operators and brokers still have to pay for the operating cost of the flight, regardless of its occupancy rate. So some service providers will opt to cancel the flight to minimise their financial loss, but this must be made clear in advance. “Most countries will require brokers and operators who sell seats on jet to have a travel agency licence,” she says, “and this is definitely the case here.”
Brito adds that in Europe, all-you-can-fly monthly charter memberships can cost about the same as commercial business class, a lot less than the charter price for the entire plane. Serving routes that connect cities without any scheduled airline flights looks like a good idea. Yet, in the UAE and other Gulf countries with smaller territories, this can be done by car or helicopter if necessary. “The major outbound charter broker market for ASM is the UAE where regulative and geographical limitations apply,” he says.
However, Brazil’s jet and helicopter platform Flapper offers shared flights in the south-east of the country and plans to launch two more routes to the coastal cities of Paraty and Búzios. “During our first year we arranged seats for more than 4,000 passengers,” says CEO Paul Malicki. “We are aiming for 10,000 seats sold this year.” The price on the popular São Paulo to Rio de Janeiro route can vary from R$950 for a shared place in a turboprop to R$9,500-R$17,000 for a private charter.
Australian legislation forbids the sale of individual seats on charter aircraft advises Independent Aviation MD Ian Button, indeed the Federal Court has determined that an operation conducted in accordance with an arrangement whereby individual seats on a charter aircraft are sold to the general public is a regular public transport operation. Having said this, the company has obtained Civil Aviation Safety Authority approval for a charter sharing facility for different departments of state or federal government, or of a large commercial organisation. “We offer an automated system whereby charters booked by one department are advertised to other members of a closed user group, with a view to utilising spare capacity and minimising cost across the entire organisation,” he explains.
Sustainability versus legal and financial implications
As in any business demand is key, says Lara Langlois, Zimbabwe-based Executive Air charter sales. Only a few operators in Zimbabwe have succeeded in offering seat rates, as a decline in tourism meant there were not enough ‘bums on seats’ to make this option viable. Operators were often left either running a flight at a loss, or cancelling the flight altogether.
French helicopter booking platform HeliPass sells seats on its sightseeing and airport transfer services. President Frederic Aguettant maximises the load factor by offering limited flights, limited choice, and a good schedule, and suggests that break-even point is reached at a load factor of 50 to 60 per cent. It is another way of selling and creates opportunities he says. HeliPass launched Ubercopter, in partnership with Uber, during the Cannes Film Festival. Rather than offer charter flights bet-ween Nice and Cannes, HeliPass took the risk of selling on a seat basis. But it paid off, and the company increased passenger sales from 80 to 400. “So, a great success,” Aguettant says.
UK-headquartered ACS group marketing director James Leach sees six variants on the seat selling prospect for brokers. “In terms of financial stability and sustainability of the business models, some are highly risky, but some are not,” he says. “The risk pretty much increases in line with the public appeal of the product.”
The sustainability of low risk, low reward models depends on the amount invested in sales and marketing, but aren’t always risky on a transactional level. The first is seat sales on existing ad-hoc charters, where brokers ask full fare-paying clients if they want to take other paying passengers to discount the cost. “There is no financial risk in the transaction, but charter customers want their privacy and would probably not bite that often,” he adds. “The supply of aircraft would be too low to be worth investing much in promoting.”
With seat sales on empty legs, the basic risk is low because, as far as he is aware, it doesn’t involve the broker buying the empty leg before they have a buyer. However the number of empty legs available on worthwhile routes, operated by operators willing to sell seats, is always going to be too low to generate the income needed to support a business of the size required to market it, and provide customer service to the volume of customers needed to build a decent business.
A crowdsourced charter is only booked if costs are theoretically covered by a certain number of seats being sold, but when he looks at the number of different airport pairings for business aviation flights, few people want to fly at the same time on the same day from the same point of departure to the same destination. Financial exposure in this case comes from offering fixed price seats, usually without having secured a fixed cost by contracting an aircraft in advance to perform the charter.
While it is possible to buy hours from an operator to fix the cost, there is the risk of buying hours that don’t sell.
A riskier model, in some countries, would be selling seats on private aircraft not on an AOC, operated by private pilots. In theory he is told this exploits a loophole that allows pilots to share costs with those who fly with them, in effect a seat sale. But what happens when regulators catch up with what is essentially a scheduled service flight, with a pilot that is not commercially trained to authority standards, on an aircraft that is not approved for commercial charter by their relevant CAA?
Another model is to offer scheduled service seat sales on private jets, which involves paying up front for an operator to fly on a specific route, at a specific time, and selling seats on that aircraft. The biggest challenge is how to price seats in such a way as to make them more affordable and reach a new audience without risking significant losses, he continues. It requires a high load factor: “For example, if you charter an eight seat mid-size jet for $20,000, you would need to sell all the seats at $2,500 to cover costs, and $2,750 to make the 10 per cent margin that most brokers make on a flight. If you cover yourself to break even at a 50 per cent load factor, ie sell four seats, the price you need to achieve shoots up to $5,000 per seat. But this limits your market to solo travellers, as anyone wanting to buy two seats could charter a light jet with two passengers for the same route for just over $10,000 potentially. Why would you pack yourself into an eight-seat mid-size with six strangers when you could charter a light jet with six seats for just the two of you, for roughly the same price? If you want to make the product appealing, and if you want to justify the risk by increasing your margin on a full load to 20 per cent by selling at $3,000 per seat, you still need to sell seven out of eight seats to break even. The problem is you expose yourself to a loss of up to $17,000 per flight if you sell just the one ticket for a maximum return of $2,000.” The average load factor for commercial scheduled service airlines, even low cost carriers, is around 80 per cent, which would equate to 6.4 seats sold per flight on an eight seat charter. Even if it were possible to refine a model in the manner of the commercial airlines it would be a big ask to achieve that regularly enough on enough routes to build a large sustainable business. “You can play around with the price all you want,” he says, “but the reality is you will always be treading a fine line to get it right, with small rewards for success and huge penalties for failure.”
“I don’t care to belong to any club that will have me as a member” Groucho Marx
The membership model is the riskiest of all, as you need to balance income from membership fees with providing scheduled capacity on enough routes to attract new members and keep them renewing. Firstly the broker needs to put on scheduled flights out of each city in which customers are targetted, to a number of attractive destinations, and do so regularly. These flights will cost the broker the full charter price and need to be in place before members are signed up in order to attract them to buy. Even if a company invests in the losses to gain a membership base, it will only be profitable if customers use a limited number of seats and load factors are high. For example a $20,000 membership would only pay for one mid-size jet flight. So before taking off overheads, which would be substantial, if you achieved a commercial airline’s load factor, an average usage of less than 6.4 flights per year would be required per membership to break even. This would be just three round trips. If you artificially restrict this figure by reducing the number of flights available for customers, or if you increase the membership cost, the closer this new audience is pushed to the point where they are priced out of the market or where chartering their own aircraft offers better value. “If members struggle to get seats because there are not enough flights, you will lose renewals and you will lose income required to book future flights, and you start a downward spiral,” says Leach.
“If someone wants to use a seat service they first have to put down money to join a membership,” says Le Bas International COO Tracey Deakin, “and the first thing that’s wrong with that is there is no escrow account. As with ATOL in the UK, you are not protected. And when a company goes out of business, as many have, the clients won’t get their money back.”
ATOL regulations exempt, inter alia, small aircraft with a maximum approved passenger seating configuration of 19 or less, and any flight to or from the grounds where a sporting event is taking place on which the only passengers carried are persons travelling in connection with attendance at the event, from the need to hold an air travel organisers licence, according to the CAA.
According to the US Law Office, Part 135 effectively prevents an operator or agent from selling single seats on charter flights because all flights must be on-demand. Charter flights become scheduled flights when the operator or agent advertises the departure location, departure time, and arrival location. But to properly understand single seat sales, MemberJets and Aviation Marketplace CEO and founder Ty Carter says charters are historically flights where a person pays for an entire aircraft and all of the seats in it, regardless of whether those seats are occupied or not. Based upon that, single seat sales occur on flights that are otherwise chartered aircraft. He explains that the US DOT refers to these flights as ‘public charters’, and the agencies that arrange them are ‘Indirect Air Carriers (IAC)’.
Once you become a member, you say where you want to fly from and to and you post this data. In the eyes of the DOT, this strays into Part 121 scheduled service carrier territory. Other members can react to the post and join that flight, but it’s posted via a Part 135 air charter carrier not Part 121, which must be breaking the rules. “It’s an invisible scheduled service, that is only visible to a membership. Part of the regulations for Part 121 state that you have to show the day, date, time, but here you can only see the details once you have paid to become a member. It’s a closed circle,” says Deakin.
Canada-based Elevate Aviation Solutions principal Rob Rennert, however, believes there is tremendous upside to shared charter, if it is well managed. As more consumers become aware of the option, and operators and brokers clearly demonstrate its value, so more people will be drawn to it. He says operators understand that the opportunity is there to broaden their business. Do you sit out that aircraft for days on end, or do you put it to use and make money? This is another tool for operators that own their fleets, and owners that are looking to pay down their investment more quickly.
He prefers a no-membership approach, as there is always the risk of over-promising and under-delivering when you start to take fees from consumers, and who then start to expect flights and other services where and when they want them. That can become unsustainable. “The amount of money that companies end up spending on customer acquisition and retention is beyond what the market can support at this time,” Rennert says. “There are no quick bucks to be made; you’ve got to be patient and build the market just as you’ve worked to develop your core private charter clientele. The good news is the segment of the market willing to share charter is young and growing.”
The seat selling business model has been viable since the early 1970s, when 14CFR380 (aka Part 380) became law. In the past ten years there has been a discernible shift in the attitude of the travelling public towards a shared economy; this is readily apparent in the success of Uber. But the translation of the concept to aviation, while popular with consumers, has seen accom-plishment and failure. “The failures are not caused by Part 380 in itself, as witnessed by the success of businesses that understand it’s a service model,” says Carter. “Looking forward, the deliverable is unchanged, but the process must evolve with the expectations and demands of the consumer.” He has heard some in the industry say they’re a technology business and, while there is no denying that investment in technology is elemental in the delivery method, it is a means to an end. “This is a service-oriented industry and it doesn’t matter how flashy your graphics are if you can’t provide the service that’s paying for the show,” he adds.
He goes on to say that Part 380 exists only because travellers were being scammed by tour operators frequently enough that the US Congress took action. In essence, it is a consumer protection mechanism that holds a passenger’s payment in escrow until they complete their itinerary. Only when the journey is concluded does the IAC get paid.
He explains the financial implications: the first and most direct is that IACs are perpetually bonded to meet DOT compliance standards. This requires a substantial capital commitment to the process. The second is a threshold in Part 380 that prevents a flight from being cancelled for any reason other than safety from 10 days before the schedule departure. The consequence is that a public charter flight must operate, even if only one seat is occupied, meaning the IAC must be prepared to suffer monetary loss on a flight even if it cannot cover the expense of operation. “This is a legacy holdover from the time when the regulation was written,” Carter says. “There was no internet, fax machines were not yet commercially viable, banking was overnight at the very best, and mail was the dominant method to convey the written word. By sharp contrast, even though scheduled airlines are not supposed to cancel flights for light passenger loads, they may do, or at least consolidate with another flight.”
Worth noting also is that commercial aircraft are competitively selling inexpensive seats because they offset against cargo fees and economy seats, says New York-based Luxury Aircraft Solutions managing director Joseph Catanese, which reduces the cost of ticketed passengers. They also have algorithms that calculate seating occupancy in a way that is nearly impossible for private aviation, where the market is unpredictable. Commercial carriers also filter into other scheduled flights they operate, or code share carriers, which again eases the pricing risk.
Competition, opportunity or environmental sense?
“There is no threat from seat sellers,” says Jettly CEO Justin Crabbe, who reckons these clients, at best, would otherwise purchase a first class commercial ticket, not a full aircraft charter. “It is a matter of making a small subset of the private travel market available to people who could otherwise not achieve that access.”
Seat charter opens up a new and untapped segment of the market says Rennert. There will always be those who will want and can afford an aircraft to themselves, but given the technology and the right business approach there will also be opportunities for consumers to share an aircraft at a lower price point. It is not about taking a slice of business away from private air charter but rather growing the entire pie. It has been widely reported that shared flights are going to be more popular with a new and younger segment of the market that doesn’t care to charter an entire aircraft. This generation is highly tech savvy and wants convenience and comfort but is also cost conscious.
“It’s evolution,” says Carter. “We allow charter brokers to create flights in markets of opportunity and to convert any flight to Part 380 at no cost to help their principals and prospects offset or recover the expense of charter by selling excess capacity.” He feels that brokers, especially the new breed borne into social media, hold an innate understanding of the reality of a shared economy. They are empowered to maintain relevance at a time when everyone else is suggesting the consumer cut their broker out of the equation. For him, a conscientious broker goes beyond simply selling a seat or a charter. They arrange limousines, special catering, heli-shuttles. They are a concierge, focusing on the needs and wants of their client, and his company facilitates the growing method of semi-private air travel.
Security is a big threat says Crabbe, as having multiple and unrelated passengers onboard an aircraft poses risks not only to the seat-selling company but to the other passengers onboard. Security rules are less stringent, and no-one knows what they are carrying in their bags. He suggests that government issued IDs should be collected and the passenger manifest should be run through by no-fly list and aviation security auditors. Each passenger could be pre-screened at sign-up or point of purchase and physical security checks at the airport should be in place. He would like to see baggage scans, weight and balance checks to ensure the aircraft is operated within its limits, and drug sniffing dogs at the point of entry into the passenger cabin and cargo hold.
In the US seat buying passengers tend not to go through TSA at all. Some broker flight departments will do a background check, but there may be no security screening at the FBO. Indeed, would it be popular among the business aviation community if there were?
And because the aircraft go at different times of day, there is a risk that corporate handling agents may be closed. “You can’t make the passengers sit in the aircraft all night,” says Deakin, “so if landing late at night they may well have to go through the main terminal; this is a problem in the US where you must be TSA checked prior to
using it. So they risk making a sterile area non-sterile and thus a security risk.”
ACS’ compliance department has know-your-customer procedures, but in terms of onboard security, checks may be carried out by the authorities at the local airport. “The issue with seat sales is that you are in a small cabin, with no lockable door between you and the pilots, and you are touching knees with strangers who may or may not have gone through security,” says Leach.
“Most of us have seen the video of the passenger coming undone on a shared charter flight,” says Carter. “There is no mechanism to prevent this sort of thing from occurring anywhere, at any time, but that is not to say that nothing can be done.” To that end the company has tapped a group of retired and off-duty air marshals to ride on random scheduled public shuttle flights listed in the Aviation Marketplace. “To the best of our knowledge, nobody else in the industry does this. It adds a layer of expense and complexity, but we see it as a proactive response to a legitimate concern.”
There is also a built-in layer of vetting in his B2B approach he adds. The presence of a broker in the transaction creates an additional opportunity for personal interaction with the client. That relationship experience does not happen with a click-and-fly app.
Chou warns that in order to offer lower fares, seat brokers may intentionally contract an operator with insufficient insurance coverage or arrange aircraft without a proper AOC. Clients may not be aware that the aircraft is not certified for charter and that if an accident occurs they will not be covered by the insurance. Both passenger and broker will suffer not only loss of money but, occasionally, loss of life.
“This is up to the FAA and the DOT,” says Catanese. “Security is not up to standard on shared private flights. I cannot believe the FAA and TSA have not stepped in to increase security measures.”
The drive-up-and-go nature of US FBOs unsettles Julie Black a little. That said, the comfort, service and perceived exclusivity of private flying is undeniably attractive, and if the per seat model makes it more affordable it will gain traction so long as the economics work out, for the operators and the passengers. And that, to her mind, is where it will all come unstuck.
Flying at a loss is not healthy for the longevity of the business. So while she is a fan of any scheme that brings new customers to the industry, she is not too happy with anything that threatens its future financial stability nor anything that devalues the USP of aircraft charter and makes it all about pricing.
A shared flight plan, impersonalised trip details, no single key customer, all these things can easily upset a VIP customer resulting it the loss of business says Brito.
Where to go from here?
Leach believes seat selling is positive for the market in the long term as it will introduce more people to business aviation, through companies artificially lowering the entry price point by chartering aircraft at a loss. “As long as their investors are happy to expand our market for us, we have no objection in terms of the temporary competition,” he says.
He is, however, concerned at the practice of brokers making money from selling seats on privately operated aircraft. As we have already seen with the Emiliano Sala incident, where the Argentine footballer lost his life when the Piper Malibu he was travelling on went down in the English Channel, the reputation of the industry can be damaged by people allegedly attempting to exploit what seems to be a legal loophole. “In my opinion, there is no place for companies trying to make money through advertising seats on aircraft that, from what I understand, could be piloted by anyone with a PPL,” he says. “And this, I’m given to understand, could include a 17-year-old with 10 hours’ experience, who has recently passed their PPL, flying solo in a poorly maintained single engine piston aircraft made in 1972.” From an operator’s point of view, most of the business aviation costs are focused on ensuring they meet CAA standards that are there to protect passengers. These private pilots do not have the same obligations.
Leach concludes: “One thing I cannot comment on is the legality of seat selling on the whole in all markets, even on aircraft flown by pilots who are correctly certified to operate public charters. There are some who argue that no matter which model companies follow, the practice of selling a seat on a private charter is actually technically illegal in many jurisdictions in which companies are offering it, and the only reason they are able to offer it at the moment is that regulators are simply slow to catch on. I don’t know the answer to that one, so I’ll leave it to the lawyers.”
There are no differences in service quality and safety standards between seat selling and whole aircraft chartering at L’Voyage. The company has a set of stringent standard operating procedures that is recorded in its customer relationship management system and details information on each aircraft specification, insurance coverage, AOC and pilots’ credentials to be checked before they are contracted. Moreover, contract terms are well-defined and easily understood.
Having a fully accredited travel agency licence means the company can introduce seat selling as a new product mix, and has done so via organised interest trips or tours. The company has targeted pet owners who wish to have their furry friends travel with them in the cabin. The company advertises pet travel by applying seat selling concepts, allowing passengers to bring their pets onboard more affordably. The trip is sold with a fixed departure and return schedule and it is only operated if the minimum number of seats are booked. The most popular pet destination is Japan where there are numerous pet friendly hotels and parks.
Should there be rule changes? Should seat selling fall under Part 121 or 135 in the US? If it goes to 135 then the authorities have to address posting the day, date and time, and customers must be protected financially. Getting Part 121 can take years.
The drugs guy on the jet in the YouTube video would have been thrown out by security on a commercial flight, and he was only able to get on a private jet because it was priced down says Deakin. Le Bas will on occasion take a group of TSA inspectors to individually check passengers and inspect bags, but this is an additional expense. Normally it is only the crew who do any checking. “The politicians are asleep at the wheel,” he warns.
“Seat selling defies the purpose of private aviation, which is, and must remain, private, exclusive and flexible,” says Lunajets CEO Eymeric Segard. “Seat selling is simply commercial aviation in a very, very small aircraft.”
Neither is there control of the flight schedule, or the atmosphere onboard, and it increases FBO traffic and introduces risks, according to Magellan Jets COO Todd Weeber. It also presents taxation issues that increase the complexity of each experience for travellers. “We advise our clients and members that if they are interested in sharing aircraft, they will have a better quality experience flying commercial first class,” he says.
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