Powering up
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Posted Date: 16/09/2008
Issue: Executive & VIP Aviation International October 2008
Publication: Executive & VIP Aviation International
When XOJet announced that it had secured financing agreements for up to $2.46 billion, the news raised plenty of eyebrows. Given how credit is not exactly easy to come by in these lean times, it was hard to work out what was more impressive: the fact that such funding was secured at all, or that it was done so by a company with less than two years of operational experience under its belt.
But multiple investors, including aviation specialists TPG, Export Development Canada and the UAE’s Tasameem Real Estate Company, have demonstrated their confidence in the company’s development plans with some serious backing. Having already secured $500 million in previous funding in 2007, the latest package saw the release of some $964 million – much of which is now being used to strengthen XOJet’s rapidly expanding North American operation.
“We continue to grow at 80-90% year-on-year in the US,” explains Paul Touw, the entrepreneur who founded the company in 2001, but then spent five years studying the intricacies of the commercial and business aviation sectors before finally launching XOJet in September 2006 (see Due diligence, Executive & VIP Aviation International, December 2007).
The remaining $1.5 billion was released later as part of a separate joint venture with Tasameem that has since seen XOJet open an operating base in Abu Dhabi – its first venture overseas.
So, how has XOJet managed to raise such capital in the current climate? “There is always capital available for great ideas,” notes Touw simply. “A year or so ago the bad ideas got funded as well, but now it is not difficult as long as your ideas are good.”
The “good idea” that XOJet took to investors is one founded on a model that caters for two distinct groups: “fleet exchange” customers who fly more than 100 hours per year and need guaranteed aircraft availability; and on-demand customers who want the flexibility of planning their travel one trip at a time without prior commitment.
To ensure an optimised operation and keep service levels high, XOJet strictly limits the number of guaranteed customers per aircraft. Meanwhile, a comprehensive allocation system distributes capacity between the fleet exchange and on-demand customers, so balancing aircraft assets with customer demand and eliminating any unpaid repositioning.
Crucially, the amount of capital raised means that XOJet is now perhaps the first large-scale business jet operator to fund much of its own fleet. It is a self-financing that removes much of the financial burden from customers and helps the company really push on with other efficiencies, believes Touw.
Commercial crisis
And it seems that the continued difficulties experienced by the commercial airline sector have only served to strengthen the XOJet argument. Touw for one believes the sector is stuck in a vicious circle that plays right into the hands of operators like XOJet; the combination of operational complexities, hefty fuel bills and the inability to find capital to continue operating during a crisis period results in flights being cut, aircraft being parked and staff being laid off – with the end result being that service levels go down.
“In that scenario, we are perfectly placed to pick up premium passengers,” he contends. “In a down market, people look for the most efficient solutions. We are one of the most efficient providers in the market, while our model means that we are also approximately 20% cheaper.”
The XOJet executive team has also noted with particular interest the demise of all-business class carriers such as Silverjet, Eos and Maxjet over the past 12 months. Given the loss of jobs, it is never pleasant to see a carrier go out of business, but Touw feels such collapses were inevitable given the low number of flight frequencies on offer
“There was definitely a piece missing [in the operating philosophy],” he argues. “If you look at carriers that command a high business class fare, the common factor apart from the quality of the vendor is the frequency of departures. There is a straight line between price and the number of frequencies.”
And this is where XOJet is able to step in. “A business jet offers the ultimate in utilisation and travel time – you can fly whenever you want, point to point, with infinite flexibility and frequency. That’s why you command very high premiums.”
Given the travails of the domestic commercial sector, it is perhaps no surprise that business jet travel in the US is growing at an unprecedented rate. Growth is expected to top 12% per year through to 2012 – a demand that XOJet aims to meet with a steady increase in aircraft. The company has deployed an additional seven Citation Xs this year with six more to come, plus a further 20 in 2009 as it builds a fleet that is expected to reach127 aircraft – worth $3.1 billion – by 2012.
Stepping overseas
Meanwhile, with the overseas business jet market showing an even greater appetite for expansion, XOJet has decided that it is time to take its first step onto foreign shores.
For Touw, the choice of Abu Dhabi in the UAE was relatively straightforward: with 18-20% GDP growth, the UAE is one of the most rapidly developing parts of the world and XOJet expects business aviation in the region to grow by 20-25% over the next four years.
Touw considers the UAE to be a real shining light in the region and one that, perhaps surprisingly given its wealth, has relatively little in the way of private jets. “It is a safe, hospitable place in which to do business and there is currently very little competition,” he comments. “People are also making a lot of money, so it is a ready market for our product.”
The choice of Abu Dhabi – the capital of the UAE – rather than Dubai is an interesting one. “Dubai often gets the fanfare, but Abu Dhabi is also doing plenty in its own way,” says Touw.
XOJet already has people on the ground at the emirate and started flying privately in July while awaiting its air operator’s certificate. The expectation is to have an interim certificate in place by the autumn and full authority by the end of the year. “By that time, we will operate with at least five aircraft and have 50 people on the ground,” he says.
But the question is which aircraft will be best suited to the job? It is an interesting one, admits Touw who intends to test the market, probably starting with the Citation X and Challenger 300. “My guess is that it will be the Challenger 300 as there are not so many of the long hops that we have in the US where a Citation can take an hour off the time. With flight legs generally shorter, speed will not be so much of a factor, but the cabin will be.”
If all goes to plan, Abu Dhabi will signal a wider expansion into other regions in the world that are industrialising and demonstrating similarly strong GDP growth. “Once we have fully tested that we can transfer our model then we will look elsewhere,” explains Touw. “It will all be about controlled growth.”
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