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CORPORATE AVIATION 2008: Outsourcing keeps costs grounded

 

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FT REPORT – CORPORATE AVIATION 2008: Outsourcing keeps costs grounded

By Alistair Gray
Published: May 20, 2008 

When BP sold its corporate jet late last year, in a cost-cutting move under its new chief executive, it became the latest in a long line of companies to shed these glitzy yet pricey assets.

Its disposal, ordered by Tony Hayward when he took over last May, will save up to £1.5m. It follows the UK example of British Gas, GlaxoSmith-Kline and Tomkins.

In spite of recent corporate belt-tightening, however, it would be premature to conclude that the use of corporate jets is on the wane.

For many top executives, the private option remains the most reliable, flexible and time-efficient form of transport, which few would want to forgo, particularly when body searches by security guards and forensic examinations of hand luggage continue to slow travel on scheduled services.

Instead of scrapping their use altogether, European companies are tending to opt for third-party services from the likes of NetJets Europe, the market leader, which can count as clients 15 of the eurozone’s largest 50 companies. And, now, BP.

For some, a main incentive to outsource is the perception of shareholders and customers. Even if Royal Dutch/Shell, whose fleet dates back to 1927, says it is more economical for it to run its own operation, the image of the champagne-quaffing chairman enjoying a luxurious flight to his foreign holiday home still lingers, however inaccurate.

For others, the decision is simply down to hard economics. “Operating an aircraft is actually very complex,” says Lloyd Brown, aviation partner at Ernst & Young. “Not only do you have to get very skilled staff. There’s the maintenance, the regulatory compliance…

“You’ve got to have a big team supporting it and, if you’ve only got one jet, you’re then adding huge costs to what’s already a fixed asset.”

Mr Brown expects more companies to outsource. “As the corporate jet market expands, so competition increases and prices come down. As they do, owning your own jet becomes much less attractive.”

Joint headquartered in London and The Hague, Shell owns three executive jets – two Dassault Falcon 900EX aircraft and a Gulfstream V – but also uses third party support, for example to transfer North Sea staff offshore.

Shell, which along with Royal Bank of Scotland is one of the few British companies that retains its own aircraft, appears unlikely to follow the BP route, at least for the time being.

“Benchmarking results show that [our] unit cost for business jet travel is significantly lower than charter services or fractional ownership,” the company says.

Under the third party model, such as that chosen by BP, the client will typically pay for a fraction of asset, plus a share of the costs. For a customer that flies 100 hours a year – the average is 70 – NetJets would charge €320,000 for fixed and annual variable costs. The cost of capital for an entry-level aircraft, worth $6.4m, would be $800,000.

Robert Dranitzke, director of European business development at NetJets, says: “In Europe, we’ve seen several companies sell their aircraft fleet to do their flying with us.

“In this day and age, if you’re the CEO, is it a more comfortable conversation for you to go to your board and say you’d like to buy a new Gulfstream 550 for $49m, or to say I want to buy a quarter of it with NetJets?”

Sensitivities abound. News Corporation, for example, declined to comment on the issue altogether, although publicly available documents show Rupert Murdoch, chief executive, last year used its corporate aircraft for his private use because of “health and safety reasons”. It cost shareholders $337,000.

For its part, BP may be subject to less scrutiny now that it has disposed of its jet. “We’ve never seen a case to my knowledge of a company being admonished for use of NetJets,” Mr Dranitzke says

 

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