Sales of new business jets are stagnant and could remain so for at least another four to five years unless the industry takes bold action. That's the message from Marco Tulio Pellegrini, CEO of Embraer Executive Jets. Under Pellegrini's direction, Embraer has launched an initiative designed to stimulate sales of its Phenom line by encouraging companies to move more key personnel off the airlines, using “premium transportation,” priced less than traditional charter.

Embraer's marketing department is identifying charter operators and leasing companies to support end users in the U.S. and Brazil who would benefit from regular use of dedicated aircraft on regular routes. The idea is to move key personnel on a virtually scheduled basis at a premium estimated to be anywhere from 50 to 85 percent above comparable commercial airfares.

Pellegrini is serious about this. “I see huge potential,” he explained. “I am devoting 25 percent of my time to collecting information and analyzing specific cases and specific operators that you can help use business jets in a different way. We think in late 2016 or in 2017 we will be able to announce some specific partnerships.”

Pellegrini was quick to point out that Embraer is not dedicating any resources to the project beyond marketing, research and playing match maker, which it thinks will be compelling enough to convince operators, leasing companies and end users to adopt the model and, implicitly, sell more airplanes. “We are going to help operators capture the markets that are not being served,” he said. “We are going to help them understand what to do.

“If you don't change the game, if you don't find another way to use the business jet, you will be fighting another three or four years of deliveries of 600 to 650 new jets per year and you are not helping anyone,” he said. “And people need the transportation.”

Total deliveries of business jets worldwide for the first half of this year amounted to a mere 288.  The connection between a country’s gross domestic product (GDP) growth and individual wealth creation and the growth of the business jet market has been disconnected, Pelligrini explained. “While the number of uber-high-net-worth individuals doubled in the last few years, the number of bizjets sold was reduced, so there is no connection between wealth and the utilization of bizjets.” He further noted that great sales hopes out of Asia have largely evaporated. “Those countries really are not buying,” despite relatively healthy GDP numbers.

Business aviation growth is hamstrung by infrastructure issues, particularly in China, he said. As a result, the U.S. and Europe, with relatively flat GDP growth of less than 2 percent, still account for 85 to 90 percent of the business jet market. The U.S. market accounted for 66 percent of total deliveries in 2015 and is predicted to take 65 to 70 percent in 2016.

Pellegrini blamed this situation in part on the negative political stigma attached to private jets and also to the continuing large inventory of used jets on the market. “Today there are 2,400 used jets on the market and 600 and 650 new jets are selling annually. A 10-year old-bizjet is still a fairly new plane, and about 700 to 800 of those on the market fall into this category. It’s a challenge to sell [new aircraft] into that market,” he said, noting the growing impact on depreciation. “Declining residual values present a challenge to CEOs to approach board members to justify new jet purchase decisions. How do you go to a board and ask for a new $50 million business jet flying 300 to 400 hours per year that will only be worth $20 million in a few years? It's another blocker, and it has been a challenge.”

Pellegrini noted that the “rich toy” label attached to private jets could be overcome largely by using them more efficiently. “We must overcome the stigma. Bizjets are a tool, a productive tool. We need to reinforce that message more and more. If companies are able to use a business jet, the life of the employees will be much better and more efficient.

“The total business jet world fleet is 20,000 flying an average of 300 hours or less per plane per year. There is a big gap between those who fly bizjets and commercial airliners. The question is, ‘how can we use the assets better?’ [The answer:] if I offer you faster transportation at a premium price. Corporations need to move soldiers: directors, vice presidents, managers. I think there is plenty of space here [for such a service], from millions of passengers to thousands of passengers. There is a big gap and no one is offering anything. And charter and fractional cards are very expensive.”

Pellegrini pointed out that there are several keys to making this model work, starting with the airframes selected. “The airplane needs to be designed for high utilization and low operating costs,” he said, holding up the Phenoms as prime examples that fall into that category, claiming that they could easily fly 1,500 hours per year. “Our airplanes are designed for high utilization, flying for five or six hours a day. I want to see our airplanes flying 1,500 hours a year, not 300. If you pay $15 million for an airplane and fly it 30 hours a month [that is very expensive].” This is essential to drive the cost structure down closer to the commercial airline equivalent, he said, noting that a Phenom 100’s direct operating cost is around $900 per hour.

Then the operator has to have a long-term agreement with the end-user. This makes the deal attractive to potential leasing companies and enables operators to secure fleet financing. “For me the key is leasing companies,” he said “The first commercial leasing company got involved with the airlines in 1974. Today the main buyers of commercial planes are leasing companies. But what is missing from our industry today is high utilization. Money is not the issue. There are lots of investors. Once you have the business case ready it is easy to bring the investors, the leasing companies. What has hurt the business jet companies, the industry, compared to commercial is the long term. If you don't establish a long-term [customer] agreement, no one wants to invest. It is too much risk.”  

Having even a small fleet is essential to ensure continuity of equipment and service. The routes must be point-to-point. “Otherwise the dead legs will kill you,” Pellegrini said. “The secret is identifying the city pairs and developing a system that provides mobility to the companies and other professionals such as lawyers and physicians; people who will pay a premium, but not too much.” For companies, several city pairs could be linked on the same flight on the same day. A typical profile would be flights of one-to-two hours consisting of people from same the company going to one or two destinations and then returning home the same day.

Pellegrini believes this approach will go a long way to changing the narrative and the way people think about business jets. “You have to remove the prejudice that the bizjet is very expensive to operate and very expensive to fly. It’s not. For too long business jets have only been associated with rich people, and that is the wrong message. We are talking about leaders who need to fly.”