NetJets ® - reconstructing market boundaries

Consider NetJets, which created the blue ocean of fractional jet ownership. In just over twenty years NetJets has grown larger than many airlines, with over six hundred and ninety aircraft, operating more than three hundred and seventy thousand flights to more than one hundred fifty countries. Purchased by Berkshire Hathaway in 1998, today NetJets is a multibillion-dollar business. NetJets’ success has been attributed to its flexibility, shortened travel time, hassle-free travel experience, increased reliability, and strategic pricing. The reality is that NetJets reconstructed market boundaries to create this blue ocean by looking across alternative industries.

The most lucrative mass of customers in the aviation industry is corporate travelers. NetJets looked at the existing alternatives and found that when business travelers want to fly, they have two principal choices. On the one hand, a company’s executives can fly business class or first class on a commercial airline. On the other hand, a company can purchase its own aircraft to serve its corporate travel needs. The strategic question is, Why would corporations choose one alternative industry over another? By focusing on the key factors that lead corporations to trade across alternatives and eliminating or reducing everything else, NetJets created its blue ocean strategy.

Consider this: Why do corporations choose to use commercial airlines for their corporate travel? Surely it’s not because of the long check-in and security lines, hectic flight transfers, overnight stays, or congested airports. Rather, they choose commercial airlines for only one reason: costs. On the one hand, commercial travel avoids the high up-front, fixed-cost investment of a multimillion dollar jet aircraft. On the other hand, a company purchases only the number of corporate airline tickets needed per year, lowering variable costs and reducing the possibility of unused aviation travel time that often accompanies the ownership of corporate jets.

So NetJets offers its customers one-sixteenth ownership of an aircraft to be shared with fifteen other customers, each one entitled to fifty hours of flight time per year. Starting at $375,000 (plus pilot, maintenance, and other monthly costs), owners can purchase a share in a $6 million aircraft. Customers get the convenience of a private jet at the price of a commercial airline ticket. Comparing first-class travel with private aircraft, the National Business Aviation Association found that when direct and indirect costs—hotel, meals, travel time, expenses—were factored in, the cost of first-class commercial travel was significantly higher. In a cost-benefit analysis for four passengers on a theoretical trip from Newark to Austin, the real cost of the commercial trip was $19,400, compared with $10,100 in a private jet. As for NetJets, it avoids the enormous fixed costs that commercial airlines attempt to cover by filling larger and larger aircraft. NetJets’ smaller airplanes, the use of smaller regional airports, and limited staff keep costs to a minimum.

To understand the rest of the NetJets formula, consider the flip side: Why do people choose corporate jets over commercial travel? Certainly it is not to pay the multimillion-dollar price to purchase planes. Nor is it to set up a dedicated flight department to take care of scheduling and other administrative matters. Nor it is to pay so-called deadhead costs—the costs of flying the aircraft from its home base to where it is needed. Rather, corporations buy private jets to dramatically cut total travel time, to reduce the hassle of congested airports, to allow for point-to-point travel, and to gain the benefit of having more productive and energized executives who can hit the ground running upon arrival. So NetJets built on these distinctive strengths. Whereas 70 percent of commercial flights went to only thirty airports across the United States, Net-Jets offered access to more than five thousand five hundred airports across the country, in convenient locations near business centers. On international flights, your plane pulls directly up to the customs office.

With point-to-point service and the exponential increase in the number of airports to land in, there are no flight transfers; trips that would otherwise require overnight stays can be completed in a single day. The time from your car to takeoff is measured in minutes instead of hours. For example, whereas a flight from Washington, D.C., to Sacramento would take 10.5 hours on a commercial airline, it is only 5.2 hours on a NetJets aircraft; from Palm Springs to Cabo San Lucas takes 6 hours commercial, and only 2.1 hours via NetJets. NetJets offers substantial cost savings in total travel time.

Perhaps most appealing, your jet is always available with only four hours’ notice. If a jet is not available, NetJets will charter one for you. Last but not least, NetJets dramatically reduces issues related to security threats and offers clients customized in-flight service, such as having your favorite food and beverages ready for you when you board. By offering the best of commercial travel and private jets and eliminating and reducing everything else, NetJets opened up a multibillion-dollar blue ocean wherein customers get the convenience and speed of a private jet with a low fixed cost and the low variable cost of commercial airline travel.