The Origin of Fractional Jet Ownership

Introduction This paper will examine the origin of the fractional jet ownership business from its birth in the mid- 1960s to present day. I will analyze and discuss various applications of the principles of management that are relevant to the course. This will describe, in detail, the beginning of the fractional ownership business and how the specific application of the principles of management such as managerial vision, control, the five management tasks, intrapreneurial action, and creativity/ innovation interact with the history of the business.

The fractional jet ownership business, although no longer new to corporate aviation, is a completely different way to “manage” a corporate aircraft. The obvious benefits are the simplicity of obtaining luxurious, private, on-demand jet transportation. It does, however, bring about new challenges in the form of managing an aviation business. Meeting the challenges of fractional ownership has been accomplished by some of aviation’s most successful visionaries from the origin to present day and they have pioneered a totally innovative way to travel and a completely new segment of the aviation industry.

The fractional jet ownership business has a somewhat obscure history dating back to the 1960’s when a group of retired Air Force generals, including Curtis Lemay, as well as show business notables Jimmy Stewart and Arthur Godfrey, founded a company branded Executive Jet Aviation in Toledo, Ohio. They were led by the president of the company Paul Tibbets, the captain of the Enola Gay in World War II. These men provided one of the most important ingredients needed for such an unusual endeavor, vision. The vision they had launched one of the most entrepreneurial voyages in aviation history.

The company began as a type of Part 135 aircraft charter group and continued on building business quite successfully through the years. Enter Richard Santulli, a managerial and mathematical genius named Richard Santulli who had earned post-graduate degrees in mathematics and had an extensive history as a very successful corporate manager at several companies including Goldman Sachs and a very successful helicopter leasing company named RTS Capitol Services. Around 1984 Santulli discovered that the purchase of a private jet for his own use did not make very good financial sense. Also, having a full-time partner in an aircraft presented chronic scheduling problems.

By now the charter business Executive Jet was up for sale and while losing money, still had a reputation for reliable service. Santulli put his managerial mind to work and came up with a vision of a company that could provide a network of personalized jet service to over 5000 airports in the U.S. without the high cost of jet ownership. Thus, in 1986, the concept of fractional ownership for corporate jet service was born. Employing his awesome analytical skills, he concluded the best aircraft for his purposes at that point would be the Cessna Citation, so he immediately contracted for eight of them.

The company would be named NetJets. Santulli not only had a fantastic analytical mind, but also had the managerial control to ensure the people he hired were skilled and capable. He knew the value of a good employee, especially in a service-oriented business. By December of 1987, he was up to fourteen aircraft. He kept the Executive Jet Company intact to maintain the operational side of the business while the NetJet staff was out selling the new product to the business world.

The response, while initially slow, began to come around in the early to mid-nineties. Strangely enough the recession of the early nineties was actually a blessing in disguise for the company. The owners of business aircraft were no longer able to justify or afford the high cost of fuel, maintenance, and other costs associated with ownership and Santulli’s creativity and innovation began to make sense. Initially, 1/8 shares cost were approximately $900.0 per hour for the Cessna. There was also a guaranteed four hour response time from anywhere in the U.S. as there were ample spare aircraft to facilitate that. The mid-nineties were a time of gentle improvement for the company.

The company did not have to give out financial statements, due to it being a private organization, but it is thought to have had profits triple in the mid-nineties because of the offering of larger aircraft and the selling off of many wholly owned corporate aircraft. The introduction of larger aircraft was due in part to its new agreement with Gulfstream, referred to as Gulfstream Shares. This was the beginning of a long-standing agreement with the mid and large cabin aircraft that could theoretically make a nonstop New York-Tokyo. Gulfstream also handled the marketing for that program.

Like most great business ideas, they are going to be copied and it wasn’t long until there were many new players on the field and the competition was as fierce as ever. The management needed something to rein in the competition. Santulli and his team had been doing very well at all five management tasks; planning, organizing, staffing, leading, and controlling their company but now once again were in need of something a bit more inventive to cement their lead in the ever more competitive arena of fractional ownership. Santulli challenged his team to come up with a unique innovation that they could offer their customers.

They responded with an intrapreneurial product called the Marquis card. The Marquis card was an agreement whereby you pay a certain upfront fee and that entitles you to the use of any of nine aircraft, fly domestic or internationally, and no ferry fees or other “hidden” fees associated with aircraft charter applied. The card was a marketing success but just as with the invention of NetJets itself, the competitors soon had the same type of offers. Competitors such as Bombardier Flexjet, who was associated with American Airlines, Flight Options, and Delta Air Elite, and others joined the bandwagon.

Fall of 1997 found Boeing itself entering the fray. It was now offering a V.I.P.P. version of its extra range B-737 that was now negating the precious nonstop transatlantic edge that the Gulfstream was offering with the cabin of an airliner. Record orders to Raytheon were placed at the same time they themselves were entering the market. Shortly after, the most expensive order for corporate jets ever made was placed by Executive Jet to Cessna for use with Netjets, their

subsidiary. That record order was followed by a billion dollar agreement with Gulfstream for aircraft and maintenance Armed with a rich history of creativity and innovation, the company was purchased in1998 for $725 million in cash and stock by Berkshire Hathaway Company and Warren Buffet took control. Berkshire’s superior credit rating lowered its interest rates which greatly helped the balance sheet. Eight years later and the economic devastation of 2008 hit the fractional ownership market as hard as any other aspect of the economy.

The ridiculous actions of the Big Three automaker’s CEOs did not do much to help as they showed up before a congressional committee to beg for billions of dollars, arriving on their private jets. Netjets reported a loss of approximately $350,000,000.00 for the half of 2009. In August of that month Mr. Santulli tendered his resignation to an unenthusiastic Buffet. It had been twenty years since Santulli had first started the company. His “official” reason was that he wanted to spend more time with his family but it strangely coincided with other corporate officer’s request for a downsizing of the company when it was widely known that Santulli did not want to make the steep cuts.

Conclusion My conclusion is that the management style of Mr. Santulli was a decentralized one and that he achieved many long-term strategies that put him at the top of the industry. In reviewing several of his situations I noticed that he employed an optimizing approach by establishing rank, gathering all available data, identifying and evaluating each of the alternatives and selecting the best one. Also, there were several examples of entrepreneurial (as when he started the business) as well as intrapreneuriel with the example being the production of the Marquis card which was employee driven.

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