Charter Operators Facing 'Race to Bottom' on Pricing

 - May 20, 2020, 5:51 PM

This story is part of AIN's continuing coverage of the impact of the coronavirus on aviation.

Charter industry leaders are seeing flight bookings edge up, in part thanks to a new segment of customers. However, at the same time, they are concerned that operators are facing future perils by offering fares at unsustainable prices. 

“There’s a race to the bottom in pricing,” Noel Fournier, v-p of business development for Worldwide Jet, said during the National Air Transportation Association's "Air Charter Roundtable: Forging Ahead" webinar on May 20.

Phoenix-based international charter operator Worldwide Jet has seen major shifts in flying from “a lot of international trips” to those that have moved over to domestic in the past few weeks, Fournier said, adding that his company is now trending toward normal pre-Covid-19 operational levels. 

The challenge is the environment in which charter operators are now competing. “We are competing to get trips just to survive,” Fournier said. “We’re trying our best to capture the trips, but that doesn’t feel good when you’re flying a one-way trip North to South for 30 percent, 40 percent less.” In the U.S. at least, this is buffered, for now, by the fact that operators have payroll protection assistance provided under the CARES Act.

“The big question is how are we going to maintain future sustainability? That’s the concern going forward,” he added, expressing concern for the sector after the CARES Act funding runs out. “Right now, we’re operating just above DOC [direct operating costs]…It’s got to return back to the original and pre-Covid-market levels of pricing and margins.”

Fournier argued that industry must work together to “re-bridge” that gap to ensure sustainability into the future. This is particularly important, he added, as new customers enter the market. “That's a discussion that we need to continue to have: How do we all work together [to] educate the retail clients that the $11,000 one-way you got is really a $17,000 one-way. How do we educate them going forward so that we can meet their expectations, that they think that this is really not the current market price and it's going to stay that way.”

Colby McDowell, managing director of acquisitions for business aviation consultancy VanAllen, said that particularly with the high-net-worth-individual and “family office” client space, “we are having lots of dialogs” from traditional airline fliers who are interested in moving up into fractional membership or even ad hoc charter, as well as manufacturing firms now interested in corporate shuttles. In his view, the current situation presents plenty of new opportunities for the private charter sector.

This uptick is readily apparent in the U.S., added Todd Weeber, COO of jet membership firm Magellan Jets. “The numbers in the U.S. differ from the rest of the world. We have more private wealth per capita than any other country in the world. We also have a higher population of people that are at greater risk [to come in contact with] the virus than any other country in the world. And when you put two plus two together, the number four for operators equals that if you're willing to take people's health care very seriously, you're going to see a line of customers you haven't met before.”

Magellan Jets is already seeing this jump. The firm is reporting new client acquisition that is 2.5 times than what it was in 2019. “These new clients have little or no experience with business or private aviation," Weeber said, adding that it is necessitating an education process for the first-time private flyers. Early on, operators were providing feedback to the effect of: “‘What are you doing to me? This person's walking around the airplane…and is a hazard to traffic on the ramp,’” he explained.

Elleana Spanos, legal counsel- North America with charter broker Air Charter Service (ACS), agreed with this perspective. “In the private jet space right now, we're seeing a lot of first-time charters,” she said, adding that her firm is getting a number of inquiries from first-class or business-class commercial airline flyers.

A byproduct of this is “sifting through those requests,” as many are not willing or able to pay charter rates. But for others, ACS is able to offer lower pricing with charter rate changes the firm is seeing from the operators, as well as due to the suspension of the federal excise taxes for air carriers. “Naturally now that travel is down, you know, prices for chartering have also fallen,” she reported. In her view, the upside is that new prospective customers are entering the market.  

However, ACS also must navigate the financial pitfalls that the industry is facing with some going out of business. “You know to do your best effort to ensure that you're choosing a financially secure operator for your client,” Spanos added. Brokers must avoid scenarios where they book with one firm, only to have to find another after the first suddenly goes out of business. “If you've already paid deposits or any money down, how do you go about getting that money back? Because it's not only a problem for brokers, it also ends up being a problem for the end customer,” she said.

Accordingly, ACS is scrutinizing operators more carefully and is warier of operators asking for higher upfront payments than they had pre-Covid, or looking to see if they are open to paying into escrow accounts. “It kind of gives you some insight on where they stand financially,” Spanos said.