In a recent meeting of shareholders, Berkshire-Hathaway executives reported that NetJets has returned to profitability after big losses in 2009. The company reports that NetJets had a pretax profit of $ 57 million (US) in the first quarter of this year which is compared to a $ 96 million (US) loss last year.

Warren Buffett attributes the turn around to putting David Sokol in charge. David Sokol also runs the company’s energy – utility business, MidAmerican, and is a candidate to take over Berkshire Hathaway’s operating businesses as a successor to Buffett.  

We have posted a couple articles on NetJets over the past few months regarding the viability of their business model built on fractional jet operations. NetJets is a key leader in our industry and how they fare will make a big difference in the future of private jet travel.  

The key will be if the company can sustain profitability over the long haul. If they can, then it proves they have a working business model. One quarter of profit or even one year of profit does not make a business. You can cut overhead and get most any business profitable if there is some present sustainable revenue stream, but can you grow it in the new economy? Will more people line up to buy fractions of business jets as they did in the last 15 years?

A lot of new business jet orders were canceled in the downturn of the economy. Will NetJets start ordering new aircraft again? Will they operate under a similar business model as they have in the past or will they have to come up with a new way of structuring their fractional business to make it work in the future?

It costs a lot of money to own and operate a business jet and there are fewer companies today than there were two years ago who are willing to spend the money, whether it is a whole aircraft or a fraction. NetJets may get new business from companies who overreacted by shutting down their flight departments last year; but, that will be limited.

Unless business jet travel innovates to the point where the occupied seat cost is brought down significantly, the NetJets client will remain the high end business user and elite traveler. That market is small in comparison to the rest of the travel market.

So where does the new client for flying on a business jet come from?

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In yesterday’s Conversational Currency, our good friend and provocative thinker, Dan Robles, shares some powerful insights as to how Social Media can be used to allow people in large urban areas to share the cost of big-ticket items they don’t need regularly, specifically cars.  The ZipCar company he cites is a great illustration of how this can work.  Now, let’s stretch our minds a bit and put that concept into a private aviation setting.  Aircraft used on the ZipCar model really is using Social Power by the Hour.

Social Media Power By The Hour

Making human knowledge and intentions tangible in a market place opens up the possibility of a whole new class of business plans.  We call this Social Power by the Hour.

A Social Trifecta

1. Obviously, Social Media is powerful.

2. Fractional ownership or rental of assets is an emerging trend in our environmentally, geographically, and monetarily constrained economy.

3.Vendor Relationship Management (Doc Searles) promises to change the shape of traditional advertising in the future.

What if we combined all three?

ZipCar is an excellent example of the fractional membership for automobile transportation. There are many advantages but also huge drawbacks. $7.00 per hour is a lot to add to a casual lunch at a sidewalk café or any social experience.   Then there are all the lost options like the one-way-trip, guaranteed availability, all those rules and regulations.  So, it’s pay now or pay later.

Social memberships

What if your friends in the social network also had ZipCar memberships and the scheduling were interchangeable?  Suppose you could find a ZipCar anywhere and park one anywhere?

Now, enter the Vendor of goods and service. What if the Vendor were to subsidize the cost of the ZipCar to bring 4 people into the restaurant, club, or event?  What if amusement parks, zoos and art exhibitions helped pay for full car-loads of friends to drive themselves to events?

The Vetting Mechanism:

What if the real social value of the ZipCar could be compared to car ownership for each intended trip?  How would this influence your decision to drive, plan, or combine events into your user experience?  What if Vendors could influence that cost to drive incentives?

Power By The Hour Game

The Above schematic is What I’ll Call the Social Media Power by the Hour Game. Everyone is part of the same social network and can talk to each other.  Each Box represents a player that can influence the cost of the power by the hour. The True Value Calculator keeps score by comparing each transaction value to the equivalent car-ownership or public transportation value.

Set your filters and wait for the proposition…

Instead of scheduling, everyone (including passengers, vendors, social network) start by setting a bunch of filters that represent their approximate intentions.  The system compares the intentions with ZipCar locations and compares it to the True Value Calculator.  When a suitable transaction is in play, all the players are notified.

Once the game starts and enough people play, statistically, there should be ZipCars distributed proportionally around the city and all vendors will be managing their marketing campaign with 100% ROI on their impressions.  The system will become a self optimizing money game.

A fully convertible currency

At first, this may seem like an application to sell ZipCar memberships, but actually, it is selling odds and entrepreneurs are placing bets.  The ZipCar is simply a mechanical device that converts social currency into money.

A few Scenarios:

Scenario 1: When a vendor notices a group of friends going to the mall, they can pay for part of the ZipCar with a lunch coupon.

Scenario 2: Amusement park or event promoter can see when a family has no plans and can offer a free ZipCar to them

Scenario 3:  The bigger your social network, the cheaper it becomes for you to drive a car

Scenario 4: Vendors can bid for the ZipCar audience with Packages of discounts, coupons and also earn impressions and trust.

Scenario 5: Friends can see what other friends are doing and can jump in the same ZipCar

Scenario 6: ZipCars can be parked densely at events since you will not necessarily leave in the same car that you came in.

Scenario 7: As soon as you park, the zip car becomes available for someone else.  As soon as you need one, there is a high probability one is parked close by.

Scenario 6: ZipCar options can be traded like currency to buy things on, say, Craigslist

And many many many more……..

End result: The bigger your social network, the cheaper your Power By the Hour.  The bigger the social network, the more effective WOM marketing becomes.  The bigger the social network, the more options are available to users.   The greater the social network, the more SOCIAL VALUE a ZipCar membership will have in comparison to independent car ownership. The bigger the social network, the more social currency can trade hands as the Dollar fails.

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In a recent article in Aviation International News Online, Chad Trautvetter writes that the fractional jet industry is undergoing a major transformation.  He quotes business consultant Brian Foley, who says, “The problem is that the existing business model is geared to rapid growth…So long as fleets expanded, providers could profit by buying new aircraft at discounts and selling them at list price to customers.  But now, with fleet size nearly constant, the emphasis must be on making the operational side profitable, or changing the business model altogether.” 

Understanding the operating economics of aircraft, I have long wondered when the industry would realize that you can’t sell a product for a profit, then commit to losing all that same profit (plus some) on the service contract after the sale.

The Fractional Jet Programs have been good for our industry.  They have brought in a whole new group of users of private jet transportation.  The premise that it is a better deal to own a 1/8 share of an expensive asset, spreading the cost of ownership is sound.  High utilization of that asset across a number of users to spread the other fixed costs is also a great idea.  So far so good – two great ideas, so what went wrong?

The problem was the pricing of the variable part of the service.  When I bought a fraction of a jet I got to use it some specified number of hours per year.  I paid a variable rate for those hours and paid only when I was occupying the aircraft.  I was promised that I would always have an aircraft at my disposal within a few hours notice.  Seems simple enough, and it is  – for the consumer.  Thus the sales guys had an easy job selling the product.

The problems came with the poor guys in flight operations who had to execute the service.  What happens when all 16 owners of the same jet want to go flying on the same day? One want to be picked up in Des Moines, IA, but the other 15 owners want to be picked up in 15 other cities.  In addition to having 16 different points of origin, the owners have different destinations; so, none of the trips will patch together.  Now my head starts to hurt thinking about how you put all that together and make it work both operationally and financially.

As the fractional business expanded rapidly, the providers had to start chartering aircraft from their aircraft management affiliates and traditional air charter companies.  It didn’t matter if the cost of the charter was more than the variable revenue received for the flight.  The owners had a contract in hand and expected the service.  In honoring the contracts, reputable fractional jet companies covered the trips and swallowed the losses (making it up by selling more fractions).  The not so reputable companies (or maybe just not so well-funded) went broke.

So where does this industry go now?  In this unforgiving economy, there will be some shakeout and turmoil.  It will be Suvivor on the island of fractional ownership.  The not so smart and under-funded guys will get booted off.  The smart guys will fix the broken model by adjusting prices as their contracts turn over innovating and creating a better model.  The island will stand firm because the consumers are now hooked on an efficient and pleasant method of travel and don’t want to go back to the airlines.

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