Business Jets: Should the CFO Just Say No?

Snooty. “We have a very important meeting going on right now,” the pilot-type person at the doorway of a Dassault Falcon Jet F7X said. “Then we expect another group of VIPs.” After all that, he added, “you’re welcome to snoop around.”

 
Snootier. “Leave your bag here,” another pilot-type at the foot of a Gulfstream G550 told me. “I don’t want it to scratch the woodwork.”
 
There was no one guarding a Bombardier Global Express XRS (pictured), so I climbed aboard without fuss. Inside, a young go-getter was making a sales pitch. “NetJets used to buy just Falcons and Gulfstreams,” he told a prosperous looking Chinese man, referring to the Warren Buffet-owned aviation firm that offers fractional ownership of business jets. “They’re now going to buy lots of Bombardiers.”
 
Welcome to Asian Aerospace 2011, the international expo and congress held in Hong Kong in March. Asian Business Aviation, whose centerpiece is a static display of 21 business jets at the Hong Kong airport tarmac, is a key component of the bi-annual event.  
 
The exhibition area teemed with business jets manufacturers – Bombardier, Cessna, Dassault, Embraer, Gulfstream, Hawker Beechcraft – and companies that maintain, operate and lease the aircraft. Business executives and high-rollers are welcome – but not, perhaps, CFOs. “Oh, the people who say no,” a marketing manager at a chartering company’s booth said when I told her who I was writing for.
 
Asia’s Bluer Skies
Finance chiefs may find more occasions to say no – or perhaps gives the thumbs up – in the near future. Canada’s Bombardier Aerospace, which claims to be the world’s largest civil aircraft maker after Boeing and Airbus, projects a steep rise in new deliveries of business jets to Asia within the next ten years.
 
Excluding India, there are currently 430 business jets flying the Asian skies today. By 2019, says David Dixon, Bombardier’s Regional Vice-President for Sales, Asia-Pacific, there will be 600 new such planes in China, 70 in Japan, 22 in South Korea, 205 in Australasia and 190 in Southeast Asia. The total – 1,087 new business aircraft – represents a 152% increase in less than a decade.
 
Part of the big rise will be due to the region’s growing affluence, allowing the likes of sitcom actor and TV director Benshan Zhao, for example, to plunk down millions of dollars on a private jet. The mainland Chinese entertainer, who was born to a peasant family and was orphaned when he was six, took delivery of a Challenger 850 from Bombardier last March for his Benshan Media Group.
 
But the main driver for the surge in plane numbers, Dixon believes, is the rapid growth of Asian businesses, particularly those in China. “We’re seeing Chinese companies move outbound into being overseas investors and buying up companies,” he says. “They’re competing with European and American companies and they need the transport to get around where the resources and manufacturing facilities are around the world.”
 
Just two years ago, says Dixon, the projection was that China will see 200 new business jet deliveries in the next decade. The fact that the estimate has now been upgraded to 600 shows how exponential the growth is going to be. Personally, adds Dixon, “I think the [projected] numbers in China are hugely understated,” because if just one of several current restrictions on private-jet travel is lifted, there will be a huge impact.
 
Among those restrictions are the 20% duties on aircraft purchases, the ban on the use of certain airports in China by foreign-registered airplanes, including those registered in Macau and Hong Kong, and Cold War-era policies that prevent most aircraft from flying into the airspace between China and Russia.
 
‘Business Tool’
Even with these restrictions still in place, there’s already a surge in new jet orders. Shenzhen-based Donghai Jet, for example, has just taken delivery of a Challenger 300 plane from Bombardier, one of five it ordered last year for a reported US$121 million. Donghai Jet offers charter, trading consultation, management and maintenance services for business planes.   
 
CFOs are likely to hear more justifications why the company should purchase or at least charter private jets rather than have top executives fly scheduled commercial flights.
 
“This is a business tool,” argues Dixon. “The image might be that it’s golfing trips and all of it, but we just know from the statistics that [business jets] are seldom used for that. They are going from A to B for a reason.”
 
“The rationale [for using a business jet] is the same in North America and Europe and in this part of the world,” he adds. “It’s a time saver. If you look at a multi-billion dollar company and you can get an extra month in the office of productive work time, that’s a 13th month year. That’s a time benefit. It’s also a security issue in certain parts of the world and also flexibility in traveling to mines in the middle of nowhere.”
 
Presumably, Benshan Zhao’s new Challenger 850 will be used for his gigs across China, ferrying him and his entourage over the country’s vast distances. With eight passengers and two crew members (the 850 can be configured to seat up to 14 passengers), the plane has a range of 2,811 nautical miles, putting Hong Kong, Macau, Singapore, Seoul, Ulan Bator in Mongola, Almaty in Kazakhstan and other nearby Asian cities within non-stop reach of Beijing and Shanghai.
 
The Challenger 300 planes that Donghai Jet ordered have a longer range – 3,100 nautical miles – and can fly business executives non-stop from Shanghai further off to New Delhi. Bombardier’s top-of-the-line Global Express XRS, which can carry up to 19 passengers, can fly non-stop from Hong Kong to London, well within its 6,150 nautical mile range. Other city-pairs include Beijing-Sydney and Shanghai-Moscow.
 
Bombardier will introduce the Global 7000 jet in 2016 (range: 7,300 nautical miles) and the Global 8000 the following year (range: 7,900 nautical miles), allowing for non-stop Asia-America, Asia-Europe and Asia-Africa business travel. The new city pairs that will be opened up include Hong Kong-Toronto, Singapore-London, Beijing-Washington, Mumbai-New York and Sydney-Los Angeles. Angola, South Africa, Brazil and other trans-Pacific places will also become accessible non-stop from China and the rest of Asia.
 
Should You Say No?
For finance, the key question would be the cost of actually buying a plane and the associated fuel, staffing, maintenance and other expenses – set against the benefits that could be gained from the purchase. These big boys' toys aren’t cheap. The list price of Bombardier’s Learjet 60 XR (range: 2,405 nautical miles) is around US$14 million, the Challenger 300 US$20 million and the Global Express XRS upwards of US$54 million.    
 
On the other hand, private planes probably have a good resale value. The speed with which multi-millionaires are being minted in China and elsewhere in Asia far outpaces the long lead time required to manufacture the aircraft. Demand should be strong even for second-hand aircraft if economic growth in this part of the world remains robust.
 
The required infrastructure is also falling into place. Many of Asia’s charter firms can staff, maintain and lease out business jets when not in use by their owners. Benson Zhao has hired Shenyang-based Lily Jet to lease out his Challenger 850 when he doesn’t need it, which can potentially cover some of its maintenance and fuel costs.
 
In China, bank financing is becoming available. Major bank ICBC has set aside up to US$8 billion for advance payment financing, delivery financing and leasing solutions for would-be aircraft buyers. The manufacturers are also strengthening their presence in the region in anticipation of surging demand.
 
Bombardier has just opened a regional support office (RSO) in Hong Kong, including a parts depot. RSOs are due to start operations in Sydney and Singapore later this year, joining existing offices in Dubai and Mumbai.
 
Fractional Ownership
NetJets is also coming to Asia. Buffet’s company has placed firm orders for 50 Bombardier jets and options on 70 more, for a potential total price of US$6.7 billion. “That is partly driven by what is happening in this part of the world and internationally,” says Dixon. “NetJets is moving out from the domestic domain in North America into the international field, so I’m pretty certain we’re going to see a large number of these airplanes in Asia and in China, specifically.”
 
NetJets pioneered the concept of fractional ownership of business jets, yet another option in addition to outright ownership and chartering that CFOs can consider. The scheme involves purchasing or leasing an undivided interest in a specific serial-numbered jet depending on how many hours the company anticipates it will need in a year – a 1/16 share, for example, is equivalent to 50 hours of annual flight time.
 
Because NetJets operates the world’s largest fleet of business aircraft, the client company is guaranteed the use of the actual jet it fractionally owns, an identical one or a larger plane. It also does not need to worry about maintenance, staffing and other costs. NetJets promises that “all aircraft interiors, exteriors, and flight decks by aircraft type are virtually identical, so there is no difference in appearance or the level of safety.”
 
All these options should give companies in Asia and their CFOs room to make cost-benefit calculations. Perhaps finance chiefs will find themselves getting a warmer welcome in future business aviation shows.
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.
 

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