Gulf private jet industry sees no turbulence

Nadine Hawa for CNBC, November 2008

Splurging $17,000 thousand dollars an hour to hire a private jet may sound pricey.

If put in today’s financial context, it may even sound excessive. Yet the private jet industry in the Middle East sees only blue skies ahead.

As many key sectors and industries worldwide tumble amidst the global economic meltdown, one Abu Dhabi private aviation company is still flying high.

Royal Jet is the largest private jet company in the Middle East headquartered in the capital of the UAE: Abu Dhabi. The company is jointly owned by Abu Dhabi Aviation, the largest commercial helicopter operator in the Middle East, and Amiri Flight, the government-owned exclusive air carrier of Abu Dhabi’s ruling family.

This private luxury flight company boasts a fleet of 10 jets, including the world’s largest number of Boeing Business Jets, which currently stands at 5.

The Boeing Business Jet is factory conversions of Boeing airliners for the corporate jet market, initially derived from the 737 series airliners. They usually seat between 25 and 50 passengers within a luxurious configuration.

When I asked Shane O’Hare, CEO of Royal Jet, how much it cost to rent a BBJ, he replied “around 17,000 USD per hour, depending on availability, to which the waiting time on ground component is added”.

Furthermore, one element that cannot be ignored is the cost of fuel. “The fuel in the private aviation industry is different. Of course you pay the same price for fuel as the airlines do, but the pricing structure within the private jet industry is based on a daily rate. So there is the core charter rate, to which a fuel surcharge is added depending on the fuel cost fluctuation, which is passed on directly to the customer” O’Hare added. In other words, the increase or decrease in the price of oil does not directly affect Royal Jet.

2008 witnessed high volatility in the price of oil, which averaged about $120 dollars in the first six month, compared to $60 dpb in the same period of last year. It peaked at $147 dollars a barrel this July, only to lose more than 60% of its value since then, floating around the $60 dollar mark today.

As we watch world economies crumble and the stock markets lose up to 70% of their value, year to date, which customer segment is still renting jets and going about their “business as usual“? That segment is the one composed of government officials, high net worth individuals, members of royal families and the like. In terms of market, it is the Middle East’s private jet industry which is showing resilience to global turmoil and an enormous growth potential. O’hare stated “the Middle East is our biggest market, with the UAE, our home market in particular, as well as Saudi Arabia being a very big market.”

This all sounds like clear blue skies ahead, but surely, there must be a cloud somewhere, and indeed there is one. That cloud is the drop in the private jet demand from the corporate end of the market. As the CEO of Royal Jet put it “corporations are cutting down expenses, reducing business travel, and in some cases even reducing their fleets“. The utilization of airlines by Corporations in this economic slowdown has affected the private jet segment of the business. That slowdown which has particularly hit the European and American corporate side of the private jet industry, has affected Royal Jet in the fact that outside the Middle East, Europe is their biggest market.

However, the enormous growth potential stemming out of this region is offsetting this decline in western demand. More proof, if proof were needed, is the recent announcement by the Abu Dhabi Airports Company (ADAC) to build an airport dedicated to the private jet industry in order to tap the growing demand for private jets in the Gulf region.

The new $ 55 million dollar airport, to be called City Airport, will accommodate up to 120 private jets.

In the mean time, Royal Jet will continue with its 5 year growth plan, aiming at doubling their fleet and improving the quality of in-flight service. O’Hare stated that one of the benefits of the 5 year plan is that it takes into consideration the various scenarios in this highly cyclical business. Even though they will continue their growth plan, they will do so in a more conservative fashion. They are very much aware that they must remain cautious, and after observing the way things unfolded over the past two years, one can never be too careful.