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Hyatt Regency San Francisco - June 24, 2019
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NetJets' Patrick Gallagher talks:
With more than 750 aircraft across its operating companies, private aviation management company NetJets already is a giant in its industry, accounting for more than 15 percent of private aviation traffic, said EVP of sales and marketing Patrick Gallagher. In fact, that ranks it high among aviation companies in general based purely on fleet size. "We operate more airplanes than Southwest, for example, though we obviously move a lot fewer passengers," Gallagher said. The company plans to continue to grow in what remains a highly fragmented industry; the next closest competitor has fewer than 100 aircraft, and hundreds of operators have 10 or fewer, he said. In an interview with BTN transportation editor Michael B. Baker, Gallagher detailed those plans, along with what he sees driving private aviation demand from the corporate sector.
BTN: What are your growth plans?
Gallagher: Over the past five years, we've taken 300 new aircraft into the fleet, which is unheard of in the private aviation world. We had an average of 60 new airplanes a year, and we're on a trajectory to do even better with 70 airplanes slated to be delivered in 2019. We have billions of dollars worth of capital invested in our business to continue to grow it. We grew by about 20 airplanes net last year, and we'll grow by another 20 net in 2019. We continue to outpace the industry's overall growth. With that growth comes a lot of pilot hiring. We added 150 pilots last year and will add 200 more this year. In the industry, there's a lot of talk of pilot shortages, and that puts us in an advantageous position relative to the rest of the private aviation community because we're a destination employer relative to all those small operators.
BTN: Will you hit new markets?
Gallagher: In terms of international destinations, no. We're very well established in the U.S. and Europe. We were, a couple of years ago, heavily invested in Asia, and the Chinese market was not quite ready for private aviation the way we hoped, so we took our losses there, packed up NetJets China and tabled that for the time being. We've just barely scratched the surface of the opportunity that's in the U.S. and Europe.
BTN: What demand growth do you expect this year?
Gallagher: We're expecting to see similar growth [as last year.] We expect to see 5 to 6 percent overall growth in 2019.
BTN: Is it from any particular sectors?
Gallagher:We just went through this in late December and looked at our overall breakdown. There was nothing that was statistically significant. We've seen retail continues, even with the tough times the industry has seen, to be a good market to us because retailers need to get from store to store and it's tough to do commercially. I can take a group of senior executives in one city and hit five cities in a day. A lot of times, our customers will fly from New York to L.A. commercial, do the first meeting of the day in L.A. and have a NetJets airplane waiting to take you to Chico, where you do two site visits. Then you get back on the plane and fly to Santa Rosa. At the end of your five-city tour, the next morning, you fly back home commercial because it's the more efficient way to do it. Real estate continues to be good, but overall, finance and insurance continues to be our real bread and butter.
BTN: What is driving demand?
Gallagher:We see big opportunities in the U.S. just in terms of our business travel versus our leisure travel, in the sense that the corporate flight departments, the smaller operators that have a couple of airplanes, are facing a couple of big headwinds right now. One is the pilot shortage. If you're a single-airplane operation or two-airplane operation with four to six pilots on staff, that's not a great job for those pilots. They're always on call. The compensation can't compete with what we offer. When the airlines are snapping these people up and companies like NetJets are snapping them up, we've seen people who have operated their own airplanes for a long time are grounded because they don't have crew or they have to reduce their standards of what they're willing to hire, which is frightening for some people. You also have an aging pool of airplanes out there and some big changes that are coming relative to the avionics requirements of those airplanes. If you own an airplane that is 20 or 30 years old, they're having to make a decision whether to invest $50,000 in avionics upgrades to a plane that's only worth $600,000 or trade it in for a new $9 million airplane. It'll probably push some people out of aircraft ownership into alternatives like ours. That's a segment of the market we're all over. Everything you read about in the financial world is about the transfer of wealth of Baby Boomers. You have the Baby Boomer CEO of a privately owned company that owns his plane and is 75 today, passing the business on to his kids. The airplane's been there flying him around for 30 years. The pilots are retiring, and you can't find new pilots to fly the airplane.
If you own an airplane that is 20 or 30 years old, they're having to make a decision whether to invest $50,000 in avionics upgrades to a plane that's only worth $600,000 or trade it in for a new $9 million airplane. It'll probably push some people out of aircraft ownership."
BTN: What's your strategy in servicing customers?
Gallagher: The biggest trend I'm seeing is more customization in terms of our offering for that flight department travel manager. [That] comes in where we have big corporate accounts where we have NetJets employees onsite at their location that actually work within their travel management team to help source their NetJets flights. Some of that customization and handling is building the models for people and helping them to build out their own internal policies to help them through that decision-making process. When does it make sense to use your own plane versus NetJets versus commercial? So, we've gotten very good at understanding a company's needs and helping them build those models. We've built spreadsheets for people, even to go down to the level of time savings: What's my executive's time's worth.
BTN: What are your primary booking channels?
Gallagher: We have an app that you can book through. We have an online portal you can book through. Or you can pick up the phone and call a dedicated 800 number. [From] our corporate customers, we tend to see greater adoption of the web portal because it's often an admin who's multitasking and sitting on the computer and adding catering to the flights for that day or changing the ground transportation associated with it.
BTN: What amenities do your corporate customers focus on?
Gallagher: We've spent a lot of time on catering because it's a big area of focus for our customers. What's been successful is regionalizing our menus and making them more seasonal. We work with thousands of different caterers around the country at our different locations. The biggest change is really understanding what works well on an airplane and what doesn't and coaching our customers on what they should and shouldn't order. In the past, we'd say, "Sure, whatever you want," and then the customer is disappointed because they realize a turkey sandwich—the bread dries out at altitude and tastes terrible. We've really worked hard in educating our customers and directing them in providing a menu. At first, people saw it as being more limited and restrictive. "If you want something else, we'll still go get it for you, but here are our recommendations and you'll be happier. Trust us." We've gotten more creative with our partnerships, as well. We've introduced the NetJets Vintner Circle. We have a lot of customers who own wineries, so we go to different customers we know and created our own wine club. We're not selling wine; we just created this club where we have 15 different wineries. We also now rotate those wines through our airplanes, so we can elevate the experience there.
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