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International brokerage: There's more than one way to buy charter
There are fewer brokers in the US, in Asia, in Africa or in the Middle East, than in Europe. We can see this at the office on our database, and we certainly came away with that sense from the NBAA-BACE last year. Charter Broker magazine wondered why, and thus began a lively circulation of ideas and comments that stem largely from the fact of geographical differences: “The US is massive and has one language throughout, unlike Europe,” says Tim Procter, managing director of UK-based Air Charter Ltd. “It has one currency throughout, unlike Europe, and it has the one government, unlike Europe.”
There are far, far more aircraft in the States, and Procter suggests that the cost of ownership, and of keeping aircraft running into their dotage, is less in America than in Europe. For example, some of the US baseball teams run their own B737s, old 300 or 400 series liveried in team colours and attracting sponsorship. Such a thing would be far too expensive in Europe with its different government legislations and onerous maintenance procedures. In the States, owning an aircraft is second nature, after all it's where they built most of them in the first place. The US operation is altogether far more relaxed and prolific.
Tracey Deakin, COO of California-headquartered Le Bas International, describes the US as “the biggest market on the planet, followed by Europe, then depending on the time of year, probably the Far East over December and South America in the summer months.” There are Canadian and Australian brokers who tend to work along the British model, but the US has far and away the most affluent air charter market.
But it is important not to make the mistake of assuming that because US firms tend to be small that they are regional or less international. “On the contrary,” says Joseph Catanese, managing director of New York-based Luxury Aircraft Solutions, “some of us handle flights in Europe and Asia most every day.”
Justifying commission
Attitudes to brokers come into play. Procter says: “In the States the broker has got to represent some worth; justify his commission. He's got to bring some added value to the deal.” In the US there are not only a lot of aircraft but also a lot of information about them. “In Europe the average person, even a HNWI, would find it very difficult to find an aircraft because there aren't enough. Therefore there is a more tangible value to using a broker that's worth paying for, because they find you an aircraft.”
“Those US clients who are just looking for the best price are going to source planes differently to those who have other priorities,” says Adam Steiger, president of Florida brokerage Air Charter Advisors. “A Fortune 100 company looking for a private jet will have its own already and will be looking for supplemental lift, and will have more stringent requirements for safety and insurance.”
Completeness of the deal
European charter prices are usually all inclusive whereas in the US one tends to buy just the flight, the rest are add-ons. “It's a bit like O'Leary of Ryanair,” says Procter. “He goes to the bar and asks for a pint of Guinness. The barman says that will be one euro. 'Great,' says O'Leary, 'I'll have that'. Then the barman says to him 'I can see you want a glass as well.' And the glass turns out to be ten euros. So in America it will be extra for the lobster, the sat nav, or the car to pick you up.”
Peter B Lindgren Jr, president and chairman of Chateaux de la Vie in Boca Raton, Florida, agrees: “In the US there could be an extra $20,000 in catering.” The European market is more in tune with the needs of the client so the extras are already included. “In the US I have to take my client's catering order like we were in McDonalds: what would you like to eat and drink on your flight? Do you have any special requests? It's a different mentality.”
But the thorn in the side is de-icing, and for Americans doing European charter it's a huge and irritating add on. If you are flying out of Helsinki in February at six in the morning the aircraft will need de-icing, but it won't if you are flying out later in the year. So the charge is excluded from the charter price. It's very expensive, in the region of thousands of dollars, and Procter explains: “If the aircraft were de-iced and then delayed, perhaps because the passengers didn't turn up on time, it may need to be de-iced a second time: it's still seven o'clock in the morning and minus 10 outside. Another thousand dollars or so. More money.”
Overbroking the order
“Here in the US, unlike in Europe, people celebritise flying privately, it's a luxury,” says Lindgren. The European clientele is typically better trained: “American clients are after the best price, but they flood the market with requests. This gives the broker no wriggle room. European customers know that if they go to just one or two brokers they will get a better deal than if they go to every brokerage in the known world.
“When I get a call I ask the client which number I am, the first broker or the fifth broker that they called? And I tell them the reason I'm asking is that I will be the most expensive option, because I provide the safest option. That's our sales pitch.”
Kym Rambo, founder of Jackson, Wyoming-based Independent Jets, agrees that passengers new to charter will simply go online and search for private jet prices, asking the first five brokers they find to quote on the one trip. Operators end up getting hit by the five brokers for the same job, and once the operator quotes to one broker he has to quote the same to all the others. The broker loses his negotiating power and the price is locked in. “And if you can't lower the operator price, you have to lower your commission, and that's why some brokers go for cheaper planes, because they want to be able to get as much spread as they can. Eventually the clients move on to brokers who give them better planes for better prices.”
Rambo's business is referral only and she does a lot of European charter: “One thing I've seen is that there is not a lot of one way pricing. Europe's kind of old school, whereas I think the US gets stuck with one ways and you end up being holed up in Omaha and paying overnights or doing everything you can to sell your way out of it.”
Geographic fragmentation
Per Marthinsson, co-founder and US managing director at Avinode, finds that there are sizable brokers in the US but there is a lot less geographic fragmentation. “A New York broker might have a subsidiary in Chicago and LA, but he is still able to cater to all his US clients from the New York base.”
Within Avinode, a number of US brokers have a single US office but have set up mailboxes and local phone numbers in, for example, London, Dubai or Brazil, to make the end client feel more at ease. “It doesn't matter if it's an international trip, the client is happy that they're dealing with someone locally.” It is worth noting that some European brokers apply the similar tactic offering toll-free 1-800 numbers for US brokerage.
Furthermore, US brokers tend to establish relationships with brokers in emerging local markets so that they then can outsource the trip to someone who has better local market knowledge.
“When looking at size from an Avinode presence perspective, our largest US broker has the third largest number of users of any broker globally. There are an even number of US and European brokers in Avinode's top 10, based on number of active users.”
Oliver King, managing director at Avinode, says: “When you think about the brokerage industry, London is a very important market, both domestically and internationally, given its population and connectivity. That is easy to forget when you sit in the UK looking out.” UK-headquartered consulting company AT Kearney produces a global ranking of cities based on a number of factors including economy and connectivity, which places New York and London first and second. King notes that these two cities are home to the largest global brokerages including Air Charter Service, Air Partner and Apollo Jets. But he adds: “Other leading global cities such as Paris, Hong Kong, Zurich and Los Angeles are also important to the broker industry, served either with strong, local established players or satellite offices of the larger players.”
Very few US brokers have satellite offices abroad. Christophe Lapierre, Luxaviation chief commercial officer, says: “These brokers tend instead to be smaller, domestically minded firms who rely on brokers in other markets if needed. This difference reflects the size and maturity of the US charter market: “There's plenty to keep brokers occupied at home and international travel is less of a priority. Also, there are more franchise businesses in the US, where a broker can work under a bigger brand but essentially set-up and run their own firm locally. We don't really see that model in Europe.”
Lapierre notes that the grey market, the rise of online B2C booking tools and price transparency through the internet are making business even more competitive for brokers. Luxaviation is to address this issue with the launch later this year of a group broker service desk, a single point of contact through which brokers will be able to access aircraft across its 14 AOCs worldwide. “We'll also provide quotations tailored to brokers' needs, with the emphasis on immediacy rather than on exhaustive detail. If, by doing this, we can help brokers win more business internationally, this is obviously also good for us.”
Misconceptions
In the US a first time customer may call an airport, or FBO, to look for local operations, and a corporation may only want to work directly with fleet operators because they think they will get a better deal. Steiger says: “Brokers are not always well respected within the industry and people also believe that they will get better service and pricing by dealing directly with the fleet operator. But as we know, this is not necessarily the case. Passengers could actually be spending a lot more that way.
“It costs a lot for an operator at Teterboro airport to base its aircraft there, where it also costs more for fuel than it may at another smaller, less congested local airport. So his prices are going to be higher.” The client could save money by using a plane that's transient, and conveniently sitting in Teterboro. “Or maybe we will reposition a plane from another airport that has fewer and lower charges and is therefore less expensive to utilise.”
Steiger feels there are a lot of uninformed customers in the marketplace: “They go on to websites that list hourly rates for planes, where a light jet is marked as, say, $35,000 per hour and because they want to do a two and a half hour flight from New York to Miami they multiply up the cost and estimate their price at $87,500 for the trip.That's not how it works.”
The impact of fractional ownerships and jet cards on brokerage
According to Marthinsson most of the larger brokers are offering some form of jet card alternative or fixed hourly rates. Frequent users of private aviation have a fraction, or a jet card, and work with two or three brokers as well. “If you want to go one way to North Dakota you'd use your fraction or jet card so you don't have to worry about paying for the empty leg back, but if you're doing one-way from New York down to Miami, in many cases you can get a cheaper option from a regular charter.”
King says: “In the US, fractional, or Part 91K, has experienced a decline in overall activity over the past five years as a result of consolidation.” Industry growth has provided an opportunity for the Part 135 sector to expand and this has benefited the US brokerage sector. But he notes: “There is a tradition of operators, such as XO Jets, having their own direct business, with customers or clients booking directly. It is difficult to estimate, but this may be a magnitude of six times higher than in Europe.”
Fractional ownership did not reach the same level of activity in Europe and overall market growth has been incremental, so Avinode has seen a different dynamic play out for European brokers.
When Rambo's clients start thinking about going into memberships she does take time to explain the pros and cons. “We can use most of the membership's planes so there is no need for anyone to put all that money up front. When you go into a membership you are committed to their fleet, which is why their hourly rate is so much higher. And there is often a monthly fee too.”
She continues: “A funny thing is that people use brokers when they feel they don't have enough money to join a membership, because joining a membership is like joining a country club. Their friends belong to, say, NetJets and they aspire to belong to the same club as their friends. So they leave us for a time and they go and buy a plane or join a programme, but when they start having mechanicals with them, or they see how expensive their fees are, they realise that the product we deliver is just as good as any membership product, and then they come back to us.”
Rambo agrees that the fractional market in the US is starting to disappear. “When people come out of the memberships they may start to purchase planes, perhaps with friends, but I give them a year to realise that they can't always use the plane when they want and they are still chartering to subsidise their flight times. They usually get out of that too. It doesn't make sense. You own a fourth of an aircraft but you are never on the same plane twice.”
Mike Ryan, co-founder and head of supply for UK-headquartered Victor, says that: “Before the global financial crisis of 2007-08, jet cards and fractional ownership were popular alternatives to using a broker; however, today it's firmly the other way round.” Whereas in the past buyers wanted the highest level of service and guaranteed aircraft quality and were willing to pay a premium for card or fractional schemes, now the sector has been digitised and disrupted. Victor is now seeing heightened pressure from the shareholders of listed companies to take owned or fractionally owned private aircraft off their balance sheets.
Interestingly, Light Jets Australia sales manager Ross Kelly says the company has recently launched its own jet card programme and the response has been positive: “Everyone says they saw this in the States and were waiting for someone to do it in Australia.”
Ian Button, managing director at Australian brokerage Independent Aviation, notes that while three of the major UK brokers do have offices in Australia, in general Australian brokerages tend to be smaller and concentrate on flights within Australia and the Asia Pacific region. “Apart from a few major corporations and high net worth individuals, private jet ownership is not common and Australian clients frequently go direct to the operator to source a charter. Probably the largest users by volume are the Federal and State governments together with their associated agencies such as Shire Councils and Indigenous Organisations. The physical remoteness of many communities makes charter an essential tool in providing basic services such as healthcare. Other major charter customers include the resource companies with their workforces structured on a 'fly in, fly out' basis.”
There is money to be saved by going on demand
Steiger adds: “There's a handful of brokers who really push jet cards, but we really push not to have them. Sure we can take $250,000 from someone, put it into an account for them, hold it and debit it, but it's not really necessary. It's not beneficial for most people to have a jet card, it's more a vanity thing, for people to say they have a membership.”
But everyone's requirements for flying are different. For someone living in the middle of the States where there are no planes based close by and who wants one way flights, maybe a jet card or fractional ownership that allows for free repositioning is a good deal. However, that's unlikely to be profitable for the company.
Aircraft ownership is really only viable for those who fly above 180 hours a year and, says Deakin: “If it is to be looked after properly it will need maintaining and washing regularly. Some people didn't want to do that, it's a burden, so they went with the jet card or fractional companies. When Le Bas International first started 27 years ago it would often support the jet card fleet owners with its Learjets.”
Since that time brokers have gained a foothold in the industry because they are not dedicated to filling the aircraft seats: “They are there to service the client, wherever they are. Flight departments don't have a very good reputation for taking care of clients, they offer a lovely product but they don't have the people to undertake customer support, apart from the likes of NetJets and FlexJets, and that's where we come in.”
Whereas having a fractional aircraft is like having a time share, you've got it when you want it. But he recognises that jet cards are a particularly American thing: “Europe is so small compared to the US. You can get from Rome to London in two and a half hours on a good commercial airline service. To go from California to San Diego is like going from London to Paris, but in America we will drive it. From Rome to Paris is like San Francisco to Los Angeles, and again, we will drive it.” “
What will change the marketplace in America,” he concludes, “is if it gets serious about putting fast trains in, as they do in Europe.”
Catanese believes fractional ownership takes market share away from brokers: “Often owners are tied into the fleet they have invested in and then when their aircraft or type is not available, operators will sub out to other operators. Overselling fleets leads to an abundance of operator to operator business, which leaves clients paying much more for the same product.”
Online aids to client base expansion
Marthinsson says that new online companies have a much bigger impact on regular charter business than traditional fractional and jet card programs.
Returnjet aviation director Steve Westlake points out: “In the business of ad hoc charter a client or broker is shopping around for a single flight at a time, as opposed to buying a block of hours or a share in a plane or any other kind of contract flying deal.” The way online platforms are evolving means there should be no charges for operators to market their aircraft or brokers to make searches and bookings. “Nobody pays to search for products online anymore.”
Rather than flood the market with requests, brokers can use, for example, Returnjet's branded white label app, which allows the client to perform their own searches and the broker to add the margin. “Feedback from our brokers is that the majority of their clients still use the traditional method of calling or emailing the request through for ad hoc charter requests,” says Westlake. “However they have all experienced an increase in clients requesting online search and comparison facilities and those that don't have this are now finding out how to provide it without a significant investment.”
Another way for brokers to try and get ad hoc loyalty from a regular client is to offer a block hours deal where the client buys a number of hours and the broker offsets the hours purchased to pay for ad hoc flights. This often gives the client a small discount for their loyalty and the broker can still search and compare the market to find the best deal, or ideally a suitable empty leg, that will work for the flight request.
Referring back to the over broking of flight requests, Jonny Nicol, founder and CEO of London-based booking platform Stratajet, agrees that customers usually want to shop around, especially first-time fliers testing the water. But this creates wastage for those brokers and operators whose quotes are not taken up. “It is because of this wastage that operators are often reticent to provide quotes for first-time fliers or will want to, in the very least, qualify that the passenger is able to pay for the desired quote. As a result, the industry has been unable to attract new customers and has been in decline,” he says.
Since its launch, 32 per cent of Stratajet's business has been first-time fliers against an industry average of less than one per cent. “Nowadays everyone is in a rush, everything is needed at the click of a button, and everything is available online. In the travel industry it takes mere minutes to book a flight on a commercial airline via Skyscanner for example. A customer would quickly get frustrated if the process took any longer, such is the expectation of the increasingly fast-paced world we live in.”
So the platforms are facilitating the expansion of the client base in a way that shows efficiencies in both time and price.
A united state
The US is an older and larger industry and most experienced fliers will have several options open to them at any time. Brokerages of every size are facing the challenge of the extent to which they should be online. “If you're a brand-new player the answer is obvious: it's everything and then work backwards the old fashioned, offline way,” says Avinode's King. For established players with history and an existing clientele base, it's more of a challenge to decide whether to take any of the business online. Will it affect existing business and do they have the capability? “I think that's a common strategic debate on both sides of the Atlantic.”
With regard to regulation, while brokers are not regulated in the same way as, say, IATA travel agents, with requirements for holding a bond and regulating activity, the US Department of Transportation (DOT) has proposed rule making to force registration and ultimately standards for air charter brokers. “This has been a long time not coming,” King says, “following a request for input by the DOT from interested parties in 2014. That delay, coupled with the arrival of a new US administration, means that it will certainly be an interesting area to watch. However, increased regulation has the potential to change the shape of the brokerage industry in the US and in Europe.”
Procter concludes: “Differences exist and will continue to exist because of the nature of the two continents. The original European dream was to have a United States of Europe and I think we all know that's not going to happen now. It is proving impossible to bring together all the disparate states that have been founded, independently, over the past hundreds and thousands of years. The US has had the opportunity to build the country from scratch.” But more than that, he does not believe that there will ever be sufficient aircraft in Europe to have a similar type of charter operation. “I can't quite see it,” he adds.
“Over time,” says Lapierre, “we expect to see less distinction between US and European brokers. A few larger, international firms will emerge with offices in major international cities. However, this will take time to develop and depends on the resurgence of the global economy.”
Broking – an industry in need of licensing?
Peter B Lindgren of Chateaux de la Vie has worked in the aviation industry both in the US and the UK and says that, while the entire process is essentially the same, the buying factor for the European clients is not just pricing but the firm's history and reputation. Getting their business is like submitting to a job interview, whereas in the States the relationship is more price driven, certainly in the early stages.
But he is concerned about the jet card aspect of the market. “The American market needs to wake up,” he says. “It is buying jet cards like they are going out of fashion.” He is concerned that having bought in, effectively paying the broker's commission up front, the client then becomes just an account and does not achieve good service.
Alan Ashkenazie, president of New York-based Wingz Up, also argues that with so many small brokers in the States it can be difficult to determine who is legitimate, but the independent broker should be able to achieve prices of even 50 per cent lower than those within memberships. He adds: “Brokers give all the benefits without the huge pre-payment commitment and without the terms and conditions.”
And some platforms have very low access requirements. The danger here is that 'kitchen' brokers, who claim to be global, are in fact simply a small office with a fax machine. “We are an unregulated, unlicensed industry in the US,” he adds.
Certification is a step in the right direction but he believes brokerage should be a licensed profession, to protect not just the clients but, for example, employees within those commission-only brokerages that cold call 80 hours per week. Technology is only as good as the people using it. While there may be tight regulation of operators, if the broker cannot understand documents like the Tripcheq, then his client service must be inferior. And this reinforces the need to educate clients, who need to be able to understand the safety implications of this market.
Lindgren adds: “We are putting people two miles up in the sky at 500 mph. Accidents happen, but you must never sacrifice quality.” And that's the risk when prices are driven down. “Europeans typically have a greater respect for aviation than Americans,” he says. “The American market needs to catch up, to be trained and professional, and to stop over broking each order.”
A lot of companies are investing heavily in marketing and as a result forego educating their flight coordinators properly. “There needs to be a balance,” Joseph Catanese of Luxury Aircraft Solutions says. “The end result is to have salespeople rather than aviation people, mistakes happen and quality of service can be low. Membership companies are attracting a good amount of new customers with the club aspects of a programme, but once the customer realises they are not receiving the same perks as a country club – tennis, pool or golf – and that they are paying a premium hourly price along with yearly fees, they will dive into the ad hoc charter market.”
Cost implications of an ageing fleet
Aircraft in Europe tend to be younger than in the US. Kym Rambo of Independent Jets notes that most date onwards from 2000, whereas in the US they are from the 1970s, 80s and 90s. And while there can be little difference in maintaining a young or old aircraft, there is a difference in the underlying operational cost.
The financing of a new aircraft will be reflected in its charter pricing. But in the States, if the aircraft is 10 years old, some or all of the finance will probably have been paid off so it's cheaper to run. And since the States is home to Boeing and Gulfstream and other manufacturers there is also a plethora of maintenance companies, spare parts and cheaper fuel so the whole environment lends itself to a much cheaper operating regime for those aircraft.
Considering idiosyncracies
There are many idiosyncracies in Europe that are fairly unintelligible to the rest of the world without a broker to guide you through. Tim Procter of Air Charter Ltd elaborates: “You can't fly into London City airport on a Saturday afternoon because it closes at midday, due to local by-laws and original planning permission agreements. Similarly, when flying into Geneva, passengers can either turn right and clear into Switzerland or, by taking the door to the left, clear straight into France.”
These sorts of situations are perfectly normal to European brokers, but it may not be straightforward for overseas brokers to navigate. “In the US the whole place is the same; the currency is the same; the area is vast; they have got aircraft coming out of their ears; and its just so easy,” he says.
Educating the customer
The majority of Adam Steiger's business at Air Charter Advisors is corporate within the US and Caribbean. “We are a small boutique brokerage based in Florida. A client in California may think we have to bring the plane up from Florida, they don't realise we are going to use aircraft based near them, or transient near them, or that we have good deals on floating aircraft. But that's part of educating the customer, which is something that we have to do very often over the phone.”
Commercial connections
Throughout Europe there are a lot of remote locations not well served by commercial aviation. “ Here in the US that's not so much a problem,” says Lindgren of Chateaux de la Vie. “You can pretty much get a commercial flight with a connection anywhere.” In Europe, private aviation is sometimes the only choice. And that gives Americans extra leverage on price.
However, Independent Jets' Kym Rambo notes that around her base in Jackson, Wyoming, there are only one or two operators within a 500 mile radius and they usually advertise online or in yellow pages. Clients will reach out to local operators to get a quote unless they have a broker already. But if those operators are busy, they don't usually refer the business out to brokers because they want the client to call them back the next time.
