NetJets plays long game in China

When NetJets decided that the time was right to enter the Chinese market, it chose not to go in with the fractional ownership scheme that the company is best known for. Instead, it decided to focus on management and charter.

In partnership with private equity and investment companies Hony Jinsi Investment Management (Beijing) Ltd and Fung Investments, NetJets China set up base at Zhuhai’s Jinwan International Airport, in southern China’s Guangdong province.

Two Hawker 800XPs were dispatched from the European fleet to take on charter duties, which finally began operations in September following a protracted process to get a local Chinese operators certificate.

ALSO SEE: NetJets China gets operator certificate

Meanwhile, Executive Jet Management, the aircraft management arm of the NetJets business, had already taken a Bombardier Global aircraft under management in Hong Kong.

With the Chinese market in a state of flux, Corporate Jet Investor took the opportunity to sit down with Robert Molsbergen, the president of Executive Jet Management, to talk about his company’s Chinese ambitions:

How long has NetJets been considering entering the Chinese market?

“It has been talked about on and off since 2007 as I understand. I wasn’t part of that discussion, but the real start of serious discussion about wanting to have operations there started in 2012. This is a little bit of a new venture for NetJets, going beyond the US and European market. We had been involved in the Middle East if you look at the history, but the model of going in there is quite different from how they developed the European model, as that was from day one a fractional model and it took some time to get that up and running because of the very intensive capital allocation required for mounting the infrastructure.”

“So when looking at China or any other region that you want to be in the future we decided that the management and the charter business would be best. Building that expertise in the market and then looking at the market from the inside out, when it would be ready for a fractional programme.”

When do you think that China will be ready for a fractional programme?

“Very difficult to say. It depends on a couple of major factors. One is how the infrastructure within China is being built up , which again is dependent on a lot of factors, obviously the government play a very important part and then private industry. And the second is the growth generally of the economy within China.”

How strong is the NetJets name in China, will it help you gain a foothold there?

“I think it is going to play a huge role, I mean NetJets is a brand name that is recognised within general aviation and it does not really matter where you are. It’s what I’ve noticed, no matter where I’ve been you say NetJets and somebody will say that they know them, so that has a great advantage.”

“It will be a factor, I think that what we see will be a combination of the addition of the flying customer from that brand recognition, and the customer base that we currently have in the US and in Europe. Both of those will be instrumental in building our business.”

The other part will be our partners. So we have two great partners in the country, very well recognised within their respective companies that have great recognition and influence and we are looking at them as well to make sure that they bring part of the business to NetJets China.”

Why set up base in Zhuhai?

“I think that there are a couple of elements that basically made the decision a little bit easier to go into Zhuhai. Obviously it’s an airport that has all the facilities and infrastructure that you would want for general aviation. It’s in the perfect location, they are just in the process of building a bridge from Hong Kong to Zhuhai that will cut the travel time to around 30-40 minutes, which makes Zhuhai instantaneously a reliever airport for the very heavily congested Hong Kong Airport.

“Also if you’re looking at pricing at Hong Kong for general aviation, if it comes to landing fees, hangar space etc which are exorbitant. People will be looking at reliever airports around Hong Kong, and Zhuhai was the first most strategic location.

“On the charter question, what we have seen in the very short period of operating under our certificate is that there is great demand. A lot of that demand is of course generated by our current customer base that have already been flying in China but had to do that with other operators. Now they have somebody that they have trusted with their flying needs for a long long time and can now have the same experience and same expertise with an emphasis on service and safety. And we’re seeing nice demand from both European and US customers.”

How important is China to NetJets?

“In the long term, I think that NetJets are very realistic, as are our partners, that this is an investment for the long term. It has the capability of becoming as big as the US if you’re just looking at demographics and economic growth, but you have to be patient. I think it is the right time for us to come in there, I think with the transition of the economy with a growing middle class is typically the precursor of getting an appetite for more travel for leisure and business travel is growing.”

How will NetJets charter business grow within China?

“Quite frankly, it’s very well defined. Whenever we go in, whether we get there is obviously dependant on many factors. But the plans within NetJets are very solid. We do a 10-year planning exercise every year, so that is no different for China.”

“Part of the consideration in China is the limitation to our certificate right now, that is imposed by the government and the CAAC (Chinese Civil Aviation Authority) in particular that you can grow by 12 aircraft under management per year. And that’s for all the right reasons, they want to make sure that you can operate the aircraft, that you will have the infrastructure to operate the aircraft safely. There is room to change those aircraft counts, but they will be discussed with government officials. And when they feel that you have good operating principles and you show that your operations are well run, that might change.”

How long will it be before the China fleet is as large as the European fleet?

“The Europe fleet? Now that is a very interesting thing. We’ll see. I cannot predict when that be. But what I can hope is that the European fleet for the moment would out-pace the China fleet, just because of the way that the markets are shaped. Over time that will start to tilt, and then the question that you would ask would probably be how long before the China market would be as big as the US market.”

Can you talk about the decision to use Hawkers for the start of charter operations?

“The Hawkers are specific to the flight patterns that we would see flying in the beginning, which is typically all on the east coast, Beijing, Shanghai, Shenzhen, Zhuhai, Macao, all of the known suspects, and the Hawkers are very capable aircraft for those kind of legs. And their DOCs (Direct Operating Costs) are pretty good for those legs. So there was a conscience decision for choosing those aircraft to be there. I’m not sure if you’re aware, but we have our first managed aircraft in Hong Kong, which is a Global, which we can also charter which would satisfy longer legs. And we would hope that the fleet under management will be of a certain composition that would allow a certain flexibility on lots of legs, not unlike what we have seen here in the US and in Europe.”

“I want to put something into context that you might not be totally aware of. The business model that is being introduced in China is the EJM (Executive Jet Management) business model. If you’re looking at NetJets Inc as a company, there are four distinct product groups. So you have the two book-ends, one is the charter, and one is the whole aircraft side of the business. Then you have fractional and cards that NetJets is traditionally known for.”

“What it does, and it’s something that you might be interested in, both NetJets and EJM are by far the biggest in all of these categories. So the EJM fleet right now is well over 200 aircraft, which is impressive all by itself. The charter part is the biggest in the world so we are flying 63,000 hours, we have an aircraft taking off every eight minutes which people just do not realise that EJM has that kind of volume in our fleet.”

“Quite frankly the reason why this ancillary business of EJM is important is both for the geographic expansion and having a lower cost solution to getting a geographic penetration, but it is also supplying a supplemental lift for the fractional program. So we feel that going into China with this business model will be the most advantageous for the company, and gives us the long view and the longest legs, you can get to a model where your profitability is a lot less dependant on how well you occupy your fractional fleet.”

How long will it be before NetJets start making money in China?

“We are taking the long view, and like I said for us we are fortunate that we have two great partners in China who are partners on both the financial side, and on the business side. So to us, that makes all the difference in the world.”

It’s fairly clear that NetJets has done a lot of research on the Chinese market and has chosen the a solution that they can grow into and expand over time as the Chinese public’s travelling habits evolve.

Zhuhai is the perfect base for NetJets to build their presence in China. Even if the city itself doesn’t rank among the Chinese megacities, it’s very close proximity to Guangzhou, Shenzhen, Macao and Hong Kong should supply a steady stream of flyers.

The timing however could have been slightly better. With Xi Jinping’s anti-corruption and austerity measures ramping-up day-by-day there’s a big question mark hanging over the Chinese charter market right now. Travelling Chinese officials are barred from chartering aircraft, and a general backlash against luxury goods within the country has extended as far as private jets.

However, the one thing that NetJets has that Chinese operators don’t have is the NetJets name itself.

There’s no doubting that NetJets China will be a great successes, even if the Chinese travelling public shy away from chartering aircraft for the time being NetJets have a solid global customer base that can keep the charter side busy.

“The one thing that NetJets has that Chinese operators don’t have is the NetJets name itself.”