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United eyes private jets
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April 26, 2001: 12:11 p.m. ET
Airline says it may aim at top fliers by offering shares in corporate jets
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - United Airlines is looking at flying a fleet of corporate jets seating six-to-14 passengers in a move aimed at top executive fliers, according to the airline.
The carrier, which is owned by UAL Corp. (UAL: up $0.04 to $36.04, Research, Estimates), said it is considering operating the jets, and leasing all or part of each aircraft to corporate customers. That kind of arrangement, known as a fractional ownership, allows a company to pay a small percent of a jet's initial cost up front, and then get a guaranteed number of flight hours on the plane or a similar plane over the course of the year while playing additional fees to cover maintenance and flight time.
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United Airlines is looking at getting into the executive jet business, renting shares of the private jets to corporations for use by their executives. (Source: CNN file photo) | | |
"Many corporations and individuals view these products as a necessary supplement to traditional commercial airline service in today's global, high-paced business environment," said United's statement. "They are also products with respect to which a commercial airline such as United could bring significant operational expertise. At the same time, the individualized customer service requirements of the business aviation marketplace encompass a different set of challenges than commercial airlines generally face."
United's statement said it is not yet committed to proceeding with the new offering because of the differences from normal commercial aviation. But a company official, speaking on the condition his name not be used, said the airline is likely to go forward with plans.
It has already started to recruit executives, according to the official, although it is not yet hiring pilots. And he said it is in discussions with aircraft manufacturers on purchases that would be announced soon. The airline is looking at buying up to 200 of the corporate jets in the next five years, he confirmed.
The company's statement said any entry into the market would be through a wholly-owned but separately operated subsidiary from United Airlines.
UAL is the second-largest airline company behind AMR Corp. (AMR: up $0.25 to $37.29, Research, Estimates), which owns American Airline and Trans World Airlines. UAL is currently awaiting approval to buy US Airways Group Inc. (U: unchanged at $27.80, Research, Estimates), which would make it the largest airline company once again.
The United official said the new business jet unit will likely be set up in July, although it won't likely have its first flight until the first quarter of next year. He said he believes the unit would eventually offer services that other companies offering fractional ownership currently do not offer business travelers, including charter flights, fleet management and corporate shuttles.
"We think we can offer a broad range no one is currently doing," he said. "We would get to the people who get to stage in life that commercial flying is no longer a consideration -- high income individuals, pop stars, people who for reasons of privacy, access and speed, need this service. And we this will help us with corporate clients for whom commercial flights can still meet 95 percent of their flying needs."
Offering could prompt other airlines to follow
The plans, revealed in articles Thursday in the Wall Street Journal and Aviation Daily, sparked different reactions. Michael Miller, editor-in-chief of Aviation Daily, said he believes the move will force others to follow because it would otherwise give United such a competitive advantage.
"This is a watershed development in commercial aviation because it marks the first time an airline has totally bought into the business jet concept and market," said Miller. "Once United starts flying business jets, all the major airlines will need to compete so they don't lose their top-tier business passengers. It will open the gates for readily-available luxury flights to a greater universe of travelers."
But Jim Higgins, analyst with Credit Suisse First Boston, said he believes the plans are a bad idea for United for a number of reasons. He said it will skim revenue from the airline's most profitable business travel, cause labor unrest with the pilots at the employee-owned airline, and distract management at the airline at a time it should be focused on merger efforts and ending a flow of red ink.
Higgins said the offering also will hurt the arguments that commercial carriers have made to the Federal Aviation Administration about allocation of air space to private jets. And Higgins believes even if the offering is profitable, it will give United no operational advantage over its competitors.
"It's absolutely self-evident that if it looks like it is even starting to be successful, it will attract competition," he said. "So why bother?"
The United official wouldn't comment on what the company believes competitors' response will be to the offering, but said that it believes 20 months of work it has done on the effort already will give it an advantage no matter the response.
"Other carriers will do different things," he said. "We've had the vision to get out there first."
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Business jet flying has nearly doubled in the last decade, as executives try to bypass congestion and delays of commercial airlines and major airports.
The fractional jet market's leading company is Executive Jet, a unit of Berkshire Hathaway Inc. (BRK.A: up $300.00 to $66300.00, Research, Estimates) which has 265 jets on call already and has another 550 on order. Some corporate jet builders, such as Montreal-based jet builder Bombardier Inc., are also growing players in the field. 
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