JANUARY Utilization. XOJET s McClellan, California-based hanger. New Business Plans for Charter XOJET

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1 JANUARY 2008 Utilization XOJET s McClellan, California-based hanger. New Business Plans for Charter XOJET

2 Utilization Customer demand, fractional ownership limitations, operator consolidation and a whole lot of money have combined to create the national charter service. By David Esler Three of jet charter s traditional limitations a fragmented industry, lack of consistency and reliance on managed aircraft are being addressed in bold new business plans that have emerged in the United States over the past 18 months. Two new ventures, Pegasus Elite Aviation and XOJET, plan to own all or portions of their fleets to facilitate guaranteed availability and consistency. Furthermore, they re planning to offer ondemand one-way flights without traditional cost penalties. To pull this off, they ll be operationally structured like their fractional competitors and airlines. Meanwhile, the Sentient Flight Group, whose super charter brokerage and Atlantic Aviation charter operation were recently merged into Jet Direct, itself a consolidation of several widely spaced operators, is transforming itself into a gigantic operator. Notably through the recent acquisition of TAG Aviation USA and others it has become the first truly national jet charter service and perhaps, with more than 200 managed aircraft on its soon-to-be single FAR Part 135 certificate, the largest on-demand commercial operation on the globe. Its principals claim that through one telephone number, a customer anywhere in the country can book a Sentient charter flight to anywhere else with only a few hours notice. At the same time, Sentient s card membership program continues, only with a greater supply of aircraft at its disposal and claimed better service. A Response to Limitations of Conventional Charter What forces have conspired to create operations with national reach in what has traditionally been a fractionated assembly of regionally deployed, disparate operators, most small, some even qualifying as mom-and-pop businesses? For one thing, demands by the user community for consistency of service, quality and safety. The inconvenience, discomfort and lack of reliability of airline travel; a healthy business climate, despite the sub-prime mortgage meltdown; and more disposable income among high-income individuals are all fueling a busy charter market. Many of these users have been exposed to fractional ownership, either as former shareholders or jet card customers, and have appreciated the consistent in some cases, seamless service offered by the major providers. Pegasus Elite evolved from the fragmented charter industry and investors looking to take advantage of the fragmentation, that operator s founder, President and CEO Jim Segrave said. Any institutional investor will look for a fragmented opportunity, and this industry is ripe for that, which is why you see them making investments in this sector. All the banks have, at the same time, found [it ready] for consolidation. Also there s more money out there right now with which to do this kind of thing. On the other hand, in an industry where 85 percent of aircraft are managed, service levels can be inconsistent when owners pull the equipment for their own use. Then, too, the condition and quality of aircraft vary from operator to operator, as do safety and pilot qualifications, which became glaringly apparent in 2005 when two chartered business jets crashed on takeoff, one at Teterboro, N.J., and the other in Montrose, Colo. The Teterboro accident led to an extensive revision of Part 135 operational control specifics (see Charter OpSpec A008: One Year Later, Business & Commercial Aviation, October 2007, page 30) and subsequent clampdown on operators by the FAA that led to the suspension of some certificates. According to XOJET chief strategy officer Nick Solinger, The winds are flowing in one direction: There is a demand for national operations, consistency of fleet, a professional pilot organization. It s similar to the concept behind FedEx: a need for consistency and high standards. And the XOJET leadership maintains there has been dissatisfaction with the limitations of fractional ownership, the peak-period restrictions, missed pickups, aggressive fee schedules, even airplane interiors that are beginning to show wear. In conventional charter ops, they say, there is also grousing about positioning fees and charges heaped onto one-ways and missed pickups. In the eyes of some analysts, supply isn t meeting demand, and, consequently, the industry is long overdue either for consolidation or innovation. The three operations that follow in this report address both. Some Competition for Fractional Ownership The dissatisfaction with the fractional industry is largely around availability, rules, restrictions and day limitations, Solinger claimed. As a result, it doesn t feel like owning your own airplane any more. The fractional industry has flattened out the model is static in numbers of shareholders and airplanes. They re stealing customers from each other. Even [NetJets founder and President Richard] Santulli admits that NetJets growth is in the charter card through Marquis. We re seeing them going from 16 owners per airplane to 32 owners per airplane through the Marquis card, which effectively is like a 32nd share of the airplane, or 25 hours of guaranteed use which prevents them from having a differentiated service offering for their best clients. We [at XOJET] wanted to serve an owner segment dissatisfied with fractional but wary of running their own in-house operation, Solinger continued. At the same time, we saw the on-demand markets stronger than ever, and from our background, we saw companies focusing on one or the other. Am I a fractional company or a charter company? Do I service owners or the charter customer? Sentient Flight Group CEO Steve Hankin, addressing his company s decision to pursue a national initiative through massive acquisitions, put it this way: The industry is changing more than some people might recognize, and this was a good time to do this [as] investors are interested in [the charter industry] because it s growing. Our track record and understanding of the economics and the timing came together to make it work. I think the primary reasons are that private aviation is really good right now; the wealth creation has been significant, the product has come from behind the scenes to be visible, there are good innovations like the charter card, airline service is declining all this has attracted people to the business. Overall, charter has seen very little innovation until recently, Hankin observed, and I think you are seeing 2 Business & Commercial Aviation January 2008

3 people coming in with lots of good ideas, and there is a lot of consumer appeal for some of [them]. It s good for the industry and will help it grow. Certainly fractional ownership was the first big innovation, and it demonstrated that there were customers who weren t having their needs met by charter and ownership. It started the national branding notion in the industry. The [membership] cards then came, and [the Sentient/Jet Direct merger] is a continuing evolution of that. This is a clear statement that the consumer wants the safety and service levels that a national player provides. Building Consistency Through the Owned Fleet Owning their aircraft has been elusive for most small charter companies due to the high capital costs endemic to turbine equipment and the necessity to keep the airplanes moving constantly in order to create a reliable revenue stream. Only a handful have been successful in doing it, and most of those have had to rely on old equipment, often powered by Stage 2 engines, for purchase prices they could afford. Hence the fact that by some estimates as much as 85 percent of the business jet charter fleet involves aircraft owned by others and managed by the charter operator. Jim Segrave at Pegasus Elite decided to change this charter model by assembling a fleet of company-owned late-model aircraft and keeping them moving around the country through a sophisticated optimization software program. He also chose to standardize his fleet on three aircraft types, one each representing the most popular business jet classes: Hawker 400XP (light entry level), Hawker 1000 (midsize) and Gulfstream IV (large long range). Initially, most of the aircraft arriving at Pegasus are preowned, though reconditioned by their manufacturers and, like a fractional fleet, all outfitted identically. In fact, the Hawker 1000s are all former NetJets aircraft, their fractional shares bought back from ex-owners, and the aircraft sold back to Raytheon for resale to Pegasus. Accepting an airplane every eight days since the company began operations last summer, Segrave expected to have five Hawker 400XPs, 15 Hawker 1000s and a single Gulfstream IV on line by this month. Two of the Beechjets are new and the others are used; the oldest we have are 1997 models, Segrave said in a telephone interview from Pegasus headquarters in Kinston, N.C. The GIV is leased from one of the company owners. Pegasus business plan is based on a total fleet of 100 aircraft within three years. The company operated 650 hours of chartered flights in October and was projecting monthly activity to reach 1,200 hours by January. We have had very little trouble finding the airplanes so far, Segrave said, discounting the notion there is a shortage of good equipment available to the charter market. We re finding them well priced, as well. The Hawker 1000 is well suited for charter, especially due to its range, which is transcon east to west, and we have two of them doing coast-to-coast trips today. It s an incredible airplane, and that range really makes it nice. Raytheon built only 52 Model 1000s, and the Pegasus aircraft average 8,000 hours total time. While Segrave and the other purveyors of these new business plans claim they are responding to the limitations of fractional ownership, Pegasus, at least, is emulating fractional in its operations and the appearance of its fleet. We re basing the operational concept on the fractional model, Segrave said. All the airplanes are outfitted the same. Cockpits are standardized. Our self-conforming certificate means you add airplanes without having to have the FAA conform them we can add them to the certificate by conforming them ourselves. This requires a lot of experience and a good relationship with the FAA, which will spot-check behind us they are requiring and expect extremely high standards. It is thus incumbent on us to maintain a very high standard, as we don t want to lose this privilege. Show Me the Money: Selling the Concept To pay for the aircraft and fund the startup, Segrave was able to sell Merrill Lynch investment bankers on the Pegasus concept. Merrill Lynch is an equity owner and provides financing, he said. We went to them and they bought the concept it took a year. I don t know how you get much stronger. Pegasus is an outgrowth of Segrave Aviation, a charter/management company also based in Kinston with 20 aircraft in its portfolio. (It will continue to operate independently of Pegasus.) I met some people who were involved in trying to [put together a concept like Pegasus], Segrave recounted, and they saw the Segrave operation and liked what we were doing, especially that we were heavily into IT with a tech-based system that gives us good tracking and controls. Also, they liked the one-way model that we were running, which is unique.... So we lent ourselves well to the concept that became Pegasus. It was a joint idea, Segrave claimed. There are huge differences between us and the other new concepts, although XOJET is probably closest to us. Citing Sentient s huge managed fleet of multiple types, Segrave touted Pegasus decision to concentrate on only a trio of aircraft types. They must have a minimum equipment list... an approved inspection program, and a training program for every type [and] they have 200 owners to deal with, so if you compare that level of complexity to what we are doing... we have three training programs, three MELs and three AAIPs [approved aircraft inspection programs]. What we re trying to do is streamline and standardize. We also own the fleet, he continued, and so we don t have owners pulling the airplanes from us. We have guaranteed availability because I have legitimate control of the airplane. Our pilots work for us not owners of managed aircraft so we have zero operational control issues. We have incredible economy of scale in terms of operational efficiencies. Insurance companies love it because we are experts on the three types we operate. How It Works: Making Money With a Floating Fleet But can the concept make money? To justify the owned fleet, Segrave must reduce deadheads as much as possible, or to put it another way, a majority of movements must generate profitable revenue. We have a floating fleet and operate a one-way model, he explained. That is, we don t have to bring the airplane back home, and that allows us to maximize our hourly yield on it, yet at the same time offer a more competitive price to the customer. Unlike the fractional model, we can price trips to fill gaps. The fractionals don t sell charter, he continued, they only fly the demand that comes through the door [in the form of shareholder requests] they aren t selling anything [except shares]. If I have an empty leg, I can market that trip to everyone and price it so that it s advantageous to take that trip. We are selling our dead legs. We have an optimization system similar to a fractional model, but we develop empty legs, which are automatically marketed to every customer we have. So we sell a lot of them, and the operational efficiency in the form of paid flight time we get is higher than what a fractional operator would typically realize. This is accomplished through Pegasus proprietary software optimization program, Segrave claimed. We are quoting based on real availability, and so we can be extremely aggressive on pricing Business & Commercial Aviation January

4 Utilization when we need to move an airplane; the fractionals have to eat those empty legs. They are fancy management companies while we are a very sophisticated charter company. The optimization program is designed to quote trips based on live availability for a floating fleet and makes those quotes based on statistical probabilities of where the next trip is likely to originate. It is unreal, Segrave boasted. We spent years developing this and have data programmed into it from five years back. I have every charter operation that s ever happened in my database all flight data for any leg that s a major route and I can quote on actual experience. Statistical winds have nothing to do with real experience, he went on. For example, it doesn t account for the actual ATC situation at O Hare or flights into South Dakota. A normal quoting system accounts for models and statistical winds, but it does not factor in that [ATC at] Teterboro will send you 75 miles out of your way to put you into the traffic flow and then slow you down to 250 knots. Mine factors everything into that, based on five years of experience. It s a very accurate system. Segrave keeps three programmers on his staff and a consultant who comes in monthly to tweak the program, and we are constantly refining and adding more capabilities to it. The initiative currently is to add traffic flows on peak days, adding fuel costs for every airport so it can quote on real fuel data. Then we ll start diverting trips to airports that give us better pricing. You can pay $7 a gallon from an FBO at Boston and $4.75 at Hanscomb in Bedford, and so you can take that data for any airplane we fly, and the system will give the customer a Bedford pricing option as well as Boston. Driving Demand for a Lower Price The idea here is to drive demand and drive the trips by the airport that gives the best price, Segrave said. So we will increase volume to the airport that gives us the best price and therefore increase buying power ours, buying fuel. So I ll fly you to Bedford and get you a limo into town. The Pegasus business model is about a standardized, streamlined economy of scale, all intended to give the customer a competitive price and make a profit for us, Segrave claimed. This is how we are able to buy these airplanes, as most charter companies have not been able to make that model work in the past. The owned aircraft charter model in the past has been difficult to make profitable due to the intense capital requirements to purchase an aircraft and the lack of economy-ofscale savings. Segrave further claimed that his optimization program would reduce or eliminate the need for backup charter to meet a commitment. However, he said, in a mechanical disruption, we will use another charter company, but the idea would be to just buy more aircraft. Less than 10 percent of the full fleet will be necessary for backup. Pegasus will maintain its Hawkers on Raytheon s Support Plus maintenance service plan. This will support that fleet for breakdowns anywhere, he said. Meanwhile, the Gulfstreams will be supported by their manufacturer. By the end of November 2007, Pegasus had 226 employees, 45 of them pilots and 15 maintenance coordinators, and at maturity, expects to have about 400 people on the payroll. Other principals in the management group include Nelson Massey, director of operations; Mike Guina, vice president of sales; and Paul Busick, chief operating officer, a former U.S. Coast Guard admiral and DOT director of intelligence and security. Just like with the airplanes, Segrave claimed not to have any problems finding qualified aviators during an alleged pilot shortage. We have five people recruiting them, and they re coming from everywhere. They are highly qualified [and] mostly older. We re paying them well in cash. Pegasus pilots pull duty for a certain number of days and go where they re sent. They re positioned by airline, just like the fractionals do, Segrave said. The company maintains a training contract with CAE SimuFlite. When the operator s fleet reaches the goal of 100 airplanes, Segrave plans to have about 300 pilots on his roster. Surprisingly, Pegasus is not directly marketing its charters but working entirely through brokerages. At some point we will probably sell memberships; however, we re starting it off as a wholesale provider by providing the service to brokers like Jets International, BlueStar Jets, Air Partner, Delta Air Elite, Skyline Jets, Air Planning and so forth, Segrave said. We are not doing direct marketing; if the brokers meet our modeled rates and aircraft utilization hours, there wouldn t be much need for me to spend the marketing hours to develop the brand, although we have the money budgeted if we ever wanted to do that. If they meet the demand, we wouldn t need to, though we d spend the money buying more airplanes. Using Charter to Improve the Efficiencies of Ownership Sometimes it takes someone from outside an industry to reform it, or so XOJET founder and CEO Paul Touw believed. After having traveled on chartered business jets for several years while heading his former creation, procurement software company Ariba, Touw bought his own Cessna Citation X in I looked at all the options, and the fractional program seemed like a rip-off, Touw said during an interview at XOJET s headquarters at San Carlos, Calif., just south of San Francisco. Sometime after completing a successful IPO, the entrepreneur began looking for other opportunities to exploit and remembered his experience with charter. I d chartered a lot of airplanes, and it was a real grab bag. It didn t seem like a professional environment: The airplanes were really inconsistent. The customer is looking for a Four Seasons experience and often winds up in [the equivalent of] a cheap hotel. It was like going to New York and renting someone s personal apartment to stay the night. Viewing charter from the perspective of a customer, Touw concluded that no one was in it professionally as a primary business because most of the aircraft were managed and not owned. Relative to how other industries have matured, there wasn t a good charter product out there. It was analogous to overnight shipping before FedEx; you had 2,000 vendors across the United States freight forwarders, expediters, courier services, the airlines. FedEx, on the other hand, made it their primary business. So charter was a messed-up product, and fractional was an expensive product, so-so with beat-up airplanes. Ownership was smart if you knew how to make it work. So in 2003 and 2004, I began exploring the industry with alternative models I even researched Jet Blue, which was an alternative low-cost airline and in 2006 we officially started XOJET. From his research, Touw concluded that the existing charter model was lacking, as most operators were using the airplanes 600 hours a year, and so they were in the air for less than 4 percent of the time. Fractional ownership was a little better, but it had a lot of deadheading they use the equipment but inefficiently. They were especially inefficient on peak days because of the need to outsource to charter but also on slow days, because then you have aircraft sitting on the ground. Then, you have the problem that 30 percent of their flights are deadheads. So this was why it was more expensive than operating your 4 Business & Commercial Aviation January 2008

5 own airplane, as they were passing the inefficiencies on to their customers in terms of higher costs. Using the analogy of a condo or hotel room, strategy officer Solinger inserted that an airplane is one room you have to balance between 16 people, and that s where the dissatisfaction came from in fractional. That s where the peak days came from, where the deadhead charge came from every flight is an owner flight in a fractional model. Another major inefficiency with fractional, as Touw sees it, is the providers diverse fleets, 18 aircraft types with consequent pilot training and qualifications, maintenance issues and so forth. Jet Blue and Southwest learned this a long time ago, he claims. Once the fractional model was locked down in 1984 [by Santulli s NetJets], you couldn t change it because of the ownership contracts and interchange agreements. So the only way to grow the business was to sell shares, which is why they kept adding types. Finally, Touw believes that the fractional industry shoots itself in the collective foot by applying the same pricing model to every customer who comes in the door. In the world of supply and demand, he pointed out, you don t lock your prices in this concept was abandoned by the airline industry in the 1960s when the CAB gave them the privilege of varying their pricing to flatten out their demand curves. If your equipment is standardized, too, he continued, you can apply dynamic allocation, or allocating your equipment to meet demand. What we do [at XOJET] is statistic dynamic allocation of our capacity on a daily basis either to the charter market or our own market [i.e., the owners]. This solves the problems of under-capacity and overcapacity the fractional problem. We can deliver better service because we don t run out of airplanes on peak days. So summarizing the five built-in inefficiencies of fractional ownership according to Touw, we have: (1) charter outsourcing during very busy periods, or under-capacity, (2) AOGs (i.e., assets sitting on the ground, either underutilization or overcapacity, depending on how you look at it) during slow periods, (3) the deadhead conundrum, (4) too many aircraft types in the fleet and (5) having to charge the same price every day, as this is contractually locked in with the shareholders. Managed Whole Aircraft With Charter to Cover Deadheads It should be pointed out here that the core of the XOJET business plan is managed whole aircraft ownership with a companion option for leasing blocks of unused capacity, then selling charter to cover deadheading and periods when capacity is available to the on-demand market. While Touw criticizes the fractional model, to some extent, he also emulates portions of it with a standardized fleet of new Citation Xs and, soon, Bombardier Challenger 300s, all identically equipped and operated in-house by a cadre of experienced line pilots. For owners and lessees, aircraft availability is guaranteed. XOJET sells whole airplanes and leases blocks of capacity, and both owners and lessees are guaranteed an airplane when they need it, Touw explained. Then we THE INCONVENIENCE, DISCOMFORT, AND LACK OF RELIABILITY OF AIRLINE TRAVEL; A HEALTHY BUSINESS CLIMATE, DESPITE THE SUB-PRIME MORTGAGE MELTDOWN; AND MORE DISPOSABLE INCOME AMONG HIGH-INCOME INDIVIDUALS ARE ALL FUELING A BUSY CHARTER MARKET. sell charter on demand when the aircraft are available, i.e., during the slow-use periods. When you buy a fractional share, the provider will tell you there will be so many days a year with extra restrictions peak days, international demand days and so forth so you have to buy into their calendar. In XOJET s program, there are no restrictions on the ownership or lease arrangement; you can fly anywhere in the world with no ferry fees, whereas in fractional, there are positioning fees. He continued: In the fleet exchange lease you don t own the airplane, but you receive a block of time from the fleet from 100 hours to any number you need [i.e., you lease the time]. There is no residual value exposure, and it s more efficient with a lower financing cost. In the ownership model, you buy the whole airplane, you pay no management fees or fixed cost, and so you save a million up front every year, since there is no pilot pay, insurance or hangar rent, and you receive 400 hours at the DOC rate only: fuel, engine MSP and trip expenses. Owners who require additional hours can pay an all-in rate that includes fixed cost plus DOC. You get to use the entire fleet, as your aircraft floats, Touw said. Then, if you use less than 400 hours, XOJET will write a lease contract with you [the owner] and lease the excess capacity back and sell it to fleet exchange lease or charter customers. For example, if you agree to use the aircraft for only 200 hours, XOJET will write you a lease and pay you $72,000 a month for five years, and effectively, you re flying for free outside the interest cost on the asset. XOJET addresses the deadhead, or positioning, problems with a tactic dubbed coupling. Touw described it this way: If I am going to fly 1,000 hours and my cost per hour is $4,200, all I have to do to get my total cost per year is multiply the hourly rate by 1,000. Figuring out my pricing with a 10-percent profit, that would be $4,600 per hour. The problem is you don t have enough revenue to cover your cost because 30 percent of the hours are unpaid due to deadheads. So in the fractional model, I have to park the 30 percent cost in the pricing for the owner [i.e., the management and hourly fees]. In the XOJET model, 97.3 percent of our flight hours are paid for by coupling on-demand and guaranteed hours together. That is, the [charter] customers pay for it. This is the value of the fleet exchange model where you combine ownership with charter. Saving Owners Money With Opportunistic Charter Here s how it works, according to Touw: In the coupling model, we re coupling charter trips with owner trips so that the deadheads get paid for. We re doing it opportunistically by charging only a small amount of repositioning to the charter customer because we have airplanes moving around the country all the time and will often have an airplane near from where the customer wants to depart. By blending the two types of business, everyone pays less. Having a standardized fleet also helps here, too. So we fix the five inefficiencies of the fractional model, Touw claimed. When you add up all the model efficiencies over fractional, we are a good 20 percent less per flight hour to the customer than a frac- Business & Commercial Aviation January

6 Utilization tional carrier. The reason why coupling works for us and not for the fractionals is because the charter customer is paying for the reposition a small amount and the fractional shareholder is not paying for repositioning in the primary service area, so the provider has to eat that cost or charge substantially more to the customer to cover it. So XOJET s repositioning flights are claimed to be much less for the charter customer because the operator generally always has an aircraft somewhere reasonably close to the customer s location. In the general charter market, Touw said, the customer is either charged for the return trip of the aircraft or for minimum daily fees, usually two operating hours per day. XOJET commenced operations two years ago this month with a small fleet of Citation Xs. At the end of 2007, this had grown to 17 of the 0.9 Mach cruisers, with 30 more on the way in a $600 million order that Cessna announced at the NBAA Convention in September 2007 at Atlanta. Meanwhile, the company s growth plan calls for the Citation X fleet to cap out at 127 by the end of Touw claims the Citation X is a good candidate for charter service because of its speed, as it can fly coast to coast and back in one day with the same crew and not violate duty time requirements. XOJET also flies them very high FL 430 to FL 450 to get above the airline traffic, he said. The aircraft are maintained on a progressive schedule to attend to its many demands so that the operator s claimed dispatch reliability is 99.5 percent. Also at Atlanta, XOJET announced placing an order with Bombardier for 20 Challenger 300 super-midsize business jets, with options for an additional 60 aircraft. Valued at $1.9 billion in terms of list price, the order represents the largest for the Canadian OEM so far in the production history for the type. The Challenger 300s will begin coming on line in the 4th quarter of this year, and XOJET will have five by year-end. Assuming the options are exercised, the remaining 75 will be delivered through the end of There will be two separate business plans for the two aircraft types, but some interchange will be allowed between owners when availability allows. Financing of whole airplanes is generally more efficient than financing fractional shares, Touw said, because the bank has clear call and title to the entire asset which is repossessable whereas shares cannot be repossessed. So there is more risk associated with fractional shares for the banks. There are a lot of banks financing whole airplanes and very few financing shares. XOJET prices its charters to move airplanes strategically where they re needed. Nevertheless, the average price for a Citation X is set at $4,050/hour. Usually, one-way pricing is offered, which Touw said gives the operation a competitive advantage. He also claimed that in its first year of operation the company had not been forced to outsource charter to meet guaranteed availability for its fleet owners or lessees. Airline Operational Model But With a Better Culture All flights, no matter what category, are operated under or to Part 135 standards, which Vice President of Flight Operations Dave Cox said are exceeded by the company s own procedures, which are modeled after those of the airlines. This isn t surprising, given that Cox comes out of an airline background. We began building XOJET two years ago to be scalable and sustainable, he said. The airlines have been good at that but often lose the employee culture, and we wanted to keep a feeling of a corporate flight department. We ve created a structure that gets us down the road to that. The company s operations and dispatch center is located at the former McClellan Air Force Base in Sacramento, Calif., also site of its West Coast maintenance base, which is supplemented by a line maintenance facility at Van Nuys. An East Coast maintenance center is located in Wilmington, Del. XOJET Chief Pilot Blake Hirth said the 100 pilots currently employed by the operator come from a wide range of backgrounds, including corporate, airline, former military, even flight testing. One of our guys is retired United Airlines seniority one, he said. Everyone is treated with respect, and we try to empower them. Pilots are arranged in teams of five to eight, each with a team leader and standards captain. The team leader goal is to be the point of contact with our safety department, Hirth said. This provides an outlet for voicing feelings to the team leader. We listen to everybody through the team leaders and standards captains. XOJET assigns four pilots per aircraft, backed up by surge crews, the latter reserved for positioning or substitution for regular crews who have exceeded duty time requirements. Originally, we had everyone based in Sacramento, Hirth said. As we built the teams, we built a culture, and now we are allowing pilots to choose where they want to live, with the understanding that they have to be available at a regional collection airport [a field with appropriate scheduled airline service to position a pilot for an assigned flight]. They will pay for their own transportation cost to get to those airports; right now, all of them live within driving distance. Currently 12 airports are designated, and that will grow to between 50 and 75, determined by the level of business. You will either crew an aircraft there or airline to where you re needed. To retain pilots, an organization has to create a culture to keep them, Cox said. It s an extensive training process, modeled after a Part 121 program. It starts with company indoc for a week at McClellan, then the pilot goes to FSI [Flight Safety International] or SimuFlite for three weeks of aircraft training. Then there s more company training when they come back: CRM, three takeoffs and landings with a check captain, in-depth walk-arounds and preflights, and stocking and cleaning the aircraft when on the road. We have a corporate safety officer who developed the in-house CRM program. Currently, XOJET pilots work an eightday schedule with six days off. They start either on a Tuesday or a Thursday, and the schedule is arranged so that when you re off, you ll always have a weekend, Hirth said. An on-duty crew is assigned to one aircraft that then moves around the country as necessary to meet guaranteed availability for owners and lessees or ondemand charters. Often, you will stay with that aircraft for the full eight days. What will change that is duty time limitations or mechanicals. As the fleet divides into two aircraft types, pilots will be qualified on only one type. Women constitute about 10 percent of the pilot roster. Starting pay for an XOJET captain is $90,000 a year, topping at $145,000. FOs start at $52,000, peaking in the mid- $80,000s. We upgrade not on seniority but skills and peer review; the standards captains and team leaders will mentor [pilots] to captaincy, Hirth said. Minimum experience for copilots is 2,000 hours total, 500 PIC, 500 ME, 150 instrument and 100 turbine. For captains, it s 3,500 total, 2,000 PIC, 1,500 ME, 300 instrument and 1,500 turbine. One out of 50 applicants is hired. The interview process is rigorous, as we re looking for good people as well as pilots, Cox said. Three have resigned seniority numbers at major airlines to stay with XOJET. As the San Carlos interview was closing and Touw was preparing to attend an evening banquet where he would accept the San Francisco Business Times Most 6 Business & Commercial Aviation January 2008

7 Admired CEO Award in the emerginggrowth category, we asked him what his most difficult task was in launching XOJET. Securing the financing, he answered, unhesitantly. We had to raise $550 million to get it off the ground. The capital costs in this business are so huge. It s one of the reasons why so many good ideas never come to fruition. And how much did he have to raise to get Ariba started? About $6 million, Touw answered. Point taken. Sentient Life Going From a Brokerage to a Mega-Operator Of the three business plans described here, Sentient/Jet Direct is probably the most conventional, only larger a whole lot larger than anything that s preceded it. Sentient, of course, rocked the charter business on its ear in the early decade as one of the first super charter brokerages and card membership (i.e., block charter) programs, offering customers one-stop shopping at competitive prices for ondemand flights. It did this by arranging charters among a huge but informal network of operators. But as its business grew, Sentient began encountering difficulties finding operators with sufficient numbers of available aircraft what CEO Steve Hankin refers to as supply. Hankin joined Sentient in June 2004, coming aboard with a strong background in the upscale hotel and resort business. What we came in with was a couple of perspectives, he said, speaking at Sentient s corporate headquarters in Weymouth, Mass. The notion that we had a good card program that was appealing and that over time we would have to become an operator ourselves from a supply standpoint. We saw an opportunity for a larger national player akin to NetJets offering service, safety and product breadth that the consumer wanted. That has been a theme as we ve gone about this. Sentient made its move from being purely a charter arranger (a DOT term for brokering) to an actual charter operator in spring 2005 when it acquired Atlantic Aviation Flight Services at Teterboro. Now it was inside the charter business, and the opportunity turned out to be a learning experience. Atlantic was our first understanding of how an operation ran and [a vehicle] to learn about what it would take to be a larger operator, Hankin said. We didn t do any more for a year and a half while we learned the business in its detail. Then Sentient was bought by Jet Direct, an aggressive operator based outside Philadelphia. Jet Direct is a story in its own right. The creation of Philadelphia investor Greg Campbell, Jet Direct was primarily an aircraft management company operating out of a single location when two years ago Campbell and his backers began to acquire other operators around the country. They started out believing it was possible to put together a national network of operators, Hankin said. When we were introduced last fall [2006] they had already purchased six certificates, two in the Northeast, and one each in Florida, St. Louis, Dallas and Van Nuys. The marriage broker was an investor who believed that the businesses were complementary, that Sentient would provide Jet Direct a seasoned management team and that the 110 aircraft that Jet Direct controlled at the time would solve Sentient s supply problem. The deal was inked in April 2007, and shortly thereafter Hankin was named CEO and Campbell ascended to chairman. With Atlantic Flight Services, that gave Jet Direct seven Part 135 operating certificates, and within months, the conglomerate was to add two more plus a major aircraft management operation. In rapid succession, the new company which assumed the overall name Sentient Flight Group in September 2007 gobbled up Sunset Aviation in Northern California (operating from six bases) in June and, only a day apart in late October, Hawker Beechcraft Charter Management, purchased from the Wichita-based OEM, and TAG Aviation USA. Surprise TAG The last was a surprise that sent ripples across the industry, as Swiss-owned TAG was a major player in business jet management both in Europe and the United States. But as readers know by now, TAG s U.S. operation got caught between its primary charter provider, AMI Jet Charter, and the FAA in the latter s ongoing operational control inspection and enforcement program. When the feds suspended and then withdrew AMI s Part 135 operating certificate, TAG was in a bind since many of the aircraft it managed were carried on the AMI certificate. Right before the suspension, TAG s owners concluded they had to sell the company and were talking to people, including us, Hankin said. A lot of the focus was on the pace we could proceed after the suspension. They were comfortable with the way we were working and what could be done quickly. We reached an agreement within two weeks. We haven t quite closed yet and are working to preserve the value of the business. Ultimately, the TAG name will disappear from North America, and the operation will be fully integrated with the Sentient global brand. TAG managed a little more than 100 aircraft before the transaction, and the vast majority have stayed with us, Hankin said. Some European aircraft are staying with TAG Holdings. It s a testament to the client loyalty to TAG that they [the clients] are staying with us. There was immense satisfaction with the management capabilities of TAG. The transition will be seamless to the owners of aircraft that had been managed by TAG, Hankin claimed. Meanwhile, the TAG management team will play a larger role in Sentient s overall aircraft management component. We will use their expertise, Hankin said. Jake Cartwright [who had headed TAG s U.S. operation] will be president of Sentient s aircraft management division, and I can t be more thrilled. Concerning Hawker Beechcraft Charter Management, Hankin said, We have a good relationship with Hawker Beechcraft, and it was obvious they were going to sell the charter management business. It s been a strong outlet for Hawker to showcase their products, and we are excited to be working with them. It s a good team in Wichita and brings in more than 20 aircraft. Over the last eight months, the combined company has evolved a fair amount, Hankin claimed, and has focused primarily on execution. The membership business has grown significantly. We re learning and excited about being an aircraft management company, which is separate from supply and charter. And we ve grown the retail charter business. We are working closely with the FAA to consolidate nine certificates into one, and that s going well we have a detailed plan, and the core certificate will be in place by mid-january. 1,000 Employees, Nine Certs, 200-Plus Aircraft = Big Job A lot of this involved the daunting job of building infrastructure and integrating nine operations representing more than 1,000 employees, 300 alone in the company s national operations center at Weymouth. We are maintaining strong regional operations where we have bases, Hankin said, currently eight in addition to Weymouth. We have concentrations of aircraft in those areas, and now have north of 200 aircraft on the certificate and a total of 250 to 300 managed, making us the largest management fleet and charter operator in the country. Business & Commercial Aviation January

8 Utilization It s a lot to handle at once but we are very focused and very confident about the game plan, Hankin continued. We ve been successful in keeping the management teams in place and running the certificates independently. It will be easier with one certificate, and we will complete integration by the middle of next year. The combined operation is dispatching more than 100 flights a day, and the business continues to grow, Hankin said. On the membership side, this year we will have flown 85,000 to 90,000 hours. We have a lot to do but it s built on a good foundation. While brokering and card membership are still at the heart of the operation, Hankin believes the company is more balanced now. The Sentient Jet Membership business is a strong part of it. My reason for making a distinction is that we like the management business, and this has evolved from being a source of supply to a well-rounded aviation company. If you re a card member, it works the same way as it always did. We are still an active user of our network of independent operators, too. From a membership point of view, not a lot has changed. We have a national telephone number and have salespeople in each region. The retail charter business operates separately with its own sales and service team. To Segrave s contention that Sentient s huge fleet will be cumbersome, difficult to manage and defy economies of scale due to multiple aircraft types, each of which will require its own MEL, training regimen and maintenance program, Hankin responded, Yes, we have 30 different types, but we re comfortable with it. We have an experienced maintenance team, and people dedicated to each type. It adds a complexity to the business but is certainly manageable. If someone came to you to manage a new airplane, you wouldn t turn them away. We have the capability to do it. This has been very well thought out, Hankin continued, and our head of maintenance [Tom Mealie] from NetJets has experience from a large fractional company. This is not a determining factor in the operation. We have grown purposely and methodically and aggressively and have invested a lot of money to pull it off. XOJET, Inc. 959 Skyway Road San Carlos, CA Posted from Business & Commercial Aviation, January 2008, copyright by The McGraw-Hill Companies, Inc. with all rights reserved. This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity. # Managed by The YGS Group, For more information visit