“Everyone’s biggest competitor is the status quo”

If you know anything about business aviation, you will know NetJets. It has gone from being one of the industry’s biggest disruptors to being by far the biggest operator. Patrick Gallagher wants it to keep growing.

“Everyone’s biggest competitor is the status quo”

If you know anything about business aviation, you will know NetJets. It has gone from being one of the industry’s biggest disruptors to being by far the biggest operator. Patrick Gallagher wants it to keep growing.

YOU KNOW NetJets is big; but you probably do not know quite how big. NetJets has a fleet of more than 750 aircraft across its three operating certificates – and more than six times as many as the second largest business jet operator in the US. Only three global airlines have more aircraft. Based on its current fleet and scheduled deliveries, by the end of 2019 NetJets will own and operate just shy of 550 aircraft globally. Executive Jet Management, its subsidiary management company, adds another 220 aircraft. Some 6,000 employees serve 7,500 customers. NetJets also works it fleet hard. Argus International, the safety and data company, says that the fleet flew 365,710 hours in 2018 – when you add in the 61,982 hours flown by Executive Jet Management’s fleet, the company flies more hours than the top 18 US business jet operators combined. On Sunday July 7, 2019 NetJets flew more than a thousand flights.

In the past five years NetJets has quietly taken delivery of 300 aircraft – about 10% of all business jets deliveries. Patrick Gallagher, president of sales and marketing, started in business aviation at Avolar – a business jet subsidiary for United Airlines in 2001 after stints at the Tom Peters Company and Cintas, a corporate apparel company. When the airline shut the division during the dot.com downturn Gallagher moved to Jet Aviation, before he joined Flight Options as vice president of sales. He was then poached to sell jet cards at Marquis Jets in 2008. In 2011 he was made head of sales for all of NetJets, before being promoted to president of sales and marketing in March 2019.

CJI: There is a lot of talk about the sharing economy. NetJets has been doing this since 1986, do you think there has been a fundamental change?

Gallagher: Ironically, when Uber co-founders, Garrett Camp and Travis Kalanick wrote their original pitch book for their ride-sharing business, they described the idea as the “NetJets of car services.” Today, there are so many people referring to the sharing economy or Uberization, but as you suggested, it’s something we have been doing for over 30 years. Indeed, we have seen more card businesses pop up than I can count, and we have seen a lot of new companies providing what we refer to as branded charter — a dedicated fleet that you pay for as you go. Meanwhile, people and companies continue to buy aircraft outright and operate them through management companies or their own flight departments. The biggest change in my opinion has been the buyers’ need to be more careful as it’s become so much harder for the industry outsider to sift through the various options, to understand who they are flying with and what they are getting for their money.

You worked at Jet Aviation, do you see a genuine trend away from ownership?

I wouldn’t say that there is a trend away from ownership, but I think the market has become more educated as to the various options. I probably have a different perspective than a lot of people in the industry not just because I’ve worked on the whole aircraft management and charter side, but also because NetJets participates in so many different parts of the market. And because we are so often the last stop before buying your own plane or the first stop after you sell one. Executive Jet Management [EJM], our charter and management business, is one of the largest charter providers in the world and manages well over 200 aircraft. A week doesn’t go by that we aren’t helping a NetJets owner move into whole-aircraft ownership or helping someone sell their plane and move into a NetJets share.

It happens so frequently that we stood up QS Partners a few years ago and subsequently bought Cerretani Aviation. QS Partners is a full-service brokerage and acquisition assistance business. For every company or individual that we talk to who wants to sell back their NetJets share to move into whole-aircraft ownership, there is someone who is trying to sell a plane in favour of a share.

Do you worry that new customers will not want to commit to fractional ownership? Based on our performance over the past several years, we certainly aren’t seeing that. Growth in our NetJets shared-ownership and EJM management programmes are outpacing sales in our card and lease programs. Some of our competitors point to our model and question why somebody would own a share, but it’s a big part of our competitive “moat.” Those who own fleets and have minimal commitments from their customers bear enormous interest and depreciation expenses in a capital-intensive business such as this. Instead of paying interest, we are able to invest in things like safety programmes, IT infrastructure and cyber security, new aircraft amenities, industry-leading pilot compensation and training.

There have never been so many card options, membership schemes — how do you keep leadership?

It boils down to two things at NetJets: safety and service. There is no shortage of people out there competing for wallet share. The vast majority of those are brokers with little skin in the game, in the sense that they don’t own any planes or employ any pilots; they simply work on margin.

In our opinion that significantly limits their ability to control safety and service. According to JETNET, there are about 22,000 jets in operation worldwide, 68% of which are in the US. Of those 15,000 in the US, around 3,300 are on a Part 135 certificate.

And there are more than 550 Part 135 operators here, so it’s a highly fragmented market to say the least. An astounding 500 of those operators have fewer than 10 aircraft. I think there are fewer than 10 operators out there with more than 50 aircraft on certificate. Now consider how many brokers and card schemes there are which allow you to gain access to those same 3,300 aircraft. It’s impossible to keep track. We do keep track of all that have come and gone over the past 20 or so years. And that list continues to grow. We maintain our leadership by setting the standard in safety systems and processes and by providing a level of service that can’t be found elsewhere because of our scale, investment and our experience.

Who do you see as your biggest competitor?

As a career sales person, I would say that everyone’s biggest competitor is the status quo. That’s on the new-customer acquisition side and by that, I mean that our team is selling against competitive programmes, ad hoc charter and outright ownership, whatever their ‘status quo’ might be. New customers to NetJets are coming from a fairly even mix of the three. On the existing customer side, our number one reason for someone leaving us is a change in their personal or business needs. We are more likely to lose a customer due to a bankruptcy, change in control or divorce than we are to a competitor. Our most formidable competition is really the prospect of potential customers buying their own aircraft. We see individuals and companies looking for accessibility and attempting to manage costs, who end up investing in their own aircraft. Unfortunately, many of those aircraft go underutilised.

And this is after investing serious time and money into understanding how to manage and maintain the new aircraft. When you’ve been in business for as long as we have, you see its cyclical nature — someone buys a card, then a share, then they buy their own plane, then they upgrade, then they sell and come back to NetJets.

Berkshire Hathaway says you had strong sales in 2018, 2017 and 2016 — how do you see the rest of 2019 and 2020 being?

We are very proud of our results over the past several years. We exceeded our sales plan in the first half of this year and our flight demand is up year over year. We see no sign of this slowing down. We expect to add the Longitude to our fleet in 2019 and have just begun selling the Global 7500 in anticipation of our new flagship arriving early 2021. There’s a lot of excitement around both of these aircraft, but the sales pacing of our existing fleets also remains brisk.

We recently took delivery of our 100th Latitude in just three years. And we still have a backlog. Our four primary goals in the company are tied to safety first and foremost, then the likelihood to recommend our net promoter scores of our customers, next our employees and our profitability. We are exceeding our goals in all areas, but always working to get better.

In the past few years, new disruptors have generated far more press coverage. Is this deliberate?

First, I think it is safe to say that not all press coverage is positive, particularly in the case of some of our competitors. We monitor our share of voice in the market and maintain a wide moat here with by far the largest share due to our brand recognition and stature in the industry. We garner a lot more mentions. While we do some proactive press, we tend to let the scoreboard do the talking for us.

“It boils down to two things at NetJets: safety and service”

Another big travel mega-trend is experiential travel — you have always been a leader in this market, with your exclusives and access programmes. Can you grow this even more?

Absolutely! Our mission statement is “To enhance the life of each owner, one exceptional travel experience at a time.” It is an ambitious statement, and frequently our owners are simply looking for the safest way to get from A to B, but we are always looking for ways to expand on that. That might mean surprising a customer by decorating the cabin of a plane for someone’s birthday or another special occasion. It could mean providing a money-can’t-buy experience at one of our owner events such as a private concert with Andrea Bocelli, hitting a ball around with Roger Federer or a round of golf with Dustin Johnson. Or it could mean leveraging one of our partnerships to help someone plan an incredible family vacation. We are talking with new potential partners all the time. Obviously, there are a lot of brands that are interested in exposure to our large international customer base. That interest often translates into valuable benefits for our owners. Likewise, by aligning with the right brands, we are able to tap into new prospect audiences. We are very fortunate to be able to work with brands like Four Seasons, the PGA and Walt Disney World Resort, just to name a few.

One of the big attractions of NetJets is that you consistently deliver a highquality product tailored to customers. How do you keep the excitement/make each trip memorable?

The key for us is understanding the context of every flight. It’s no easy feat to deliver personalised service at our scale, but we have done it successfully by keeping personal relationships with our owners. And we heavily leverage technology to ensure that our knowledge about their flight preferences and experiences are shared with others throughout the business who can affect that experience. We celebrate the memorable experiences that we create for our owners and even have some internal competition to see who can do it best. And we measure it with a sophisticated survey/feedback loop from our customers wherein we are constantly tracking various satisfaction metrics and making improvements accordingly.

There is a lot of talk about pilot shortages. Is this behind your new pay deal? Do you have issues finding pilots?

Our flight crews are the face of our company, so our new pilotcompensation package is designed to reward our crews for the work and service they provide each-and-every day for our owners. We have very strong interest from pilots who want to start and end their careers at NetJets, so our attrition rates are enviably low. We are actively hiring pilots, and this allows us to stay ahead of the pilot shortage that many other operators and airlines are experiencing. We are staffed appropriately to meet the needs of our owners and we continue to hire new pilots every month. We’ve partnered with our pilots’ union to build a strong process for recruiting and that allows us to attract and retain the best pilots in the industry.

“We tend to let the scoreboard do the talking for us"

You have a saying that “1,000 people touch every NetJets flight.” Will technology change this?

Technology is certainly changing that by improving efficiencies, but to conduct over a thousand flights safely in a 24-hour period takes thousands of people working in unison. We have all the technology enablement you can imagine from online booking portals and a fullservice mobile app that our customers can use to book or change flights to our schedule optimisation software that algorithmically pairs the right aircraft, crew and passenger flight to ensure that we are getting the maximum utilisation out of our fleet. In the end, though, this is a high-touch service business so we are always looking for technology to enhance that, not replace it.

Do your customers still want to speak with representatives or are they driving online/app purchases

It is becoming increasingly common for our sales people to bring on board a new owner without having met face-to-face, but to my knowledge we have yet to go without at least a phone call.

We will always follow the prospect’s lead based on how they want to interact with us but, more often than not, they appreciate the expertise that our team brings. As for the booking of flights, once someone becomes a NetJets owner, again, we leave it up to them. They are enabled with the toll-free number to contact their dedicated Owner Services team, our secure online portal and our mobile app. About 22% of our flights so far this year were booked via our online portal or app. That’s up about three points from last year. And the breakout there is about 80% desktop portal and 20% mobile app, so it’s clear owners still want to talk to our teams in person despite having online accessibility.

You have no issues with things like owner approval and lots of data, how much are you investing in things such as artificial intelligence?

NetJets is a data-driven company that leverages data in a variety of ways. For example, we have had bespoke optimisation algorithms designed specifically for our operations for many years and recently upgraded our capabilities in that area. We believe the analysis of this volume of data is a strategic differentiator for NetJets and we take advantage of that in a variety of domains such as safety, operations, sales and marketing. We have a sizable IT group and we have a team of analysts dedicated solely to analysing and optimising our operation. Those teams have deployed a variety of tools including AI, optimisation and forecasting engines and, lately, machine learning. We believe that we have access to specific insights nobody else in the industry has because of these investments and it is a part of what makes NetJets so successful.

CJI: Arguably no other company has brought as many people into business aviation as NetJets. Can you keep growing?

Gallagher: Thank you for that. We are quite proud of that. We talked earlier about all the new entrants and new lower-commitment models to the industry. Ultimately that’s good for us all as they will continue to help grow the industry, just as NetJets has. There are a lot of people out there who have the means to fly privately but aren’t ... yet. According to a report from Credit Suisse recently, the number of individuals with a net worth between $10-100m more than doubled between 2011 and 2017. There’s around a million people in that cohort. We have about 7,500 customers flying NetJets today, so I think it is safe to say that we have a lot of opportunity!

CJI Connect

Patrick Gallagher, NetJets, president, sales and marketing +1312 525 9924 | [email protected]

NetJets – along with Flexjet – is one of the few buyers or business aircraft that can almost guarantee that an aircraft model will succeed. Although large fleet buyers get discounts and can cancel large orders, they help manufacturers plan production and also introduce the model to many potential customers.

Alasdair Whyte, Editor, Corporate Jet Investor