The Great Private Jet Giveaway

Business aircraft could be sold at or below cost in the future.

What's the cheapest way of flying from A to B? Ryanair? Southwest? AirAsia?

You might want to look at getting a private jet instead.

Thanks to China's clampdown on luxury and the end of the commodities boom, there is a glut of business aircraft on the market and manufacturers appear to be giving up on the idea of making money from selling them.

Take Textron, which owns the Cessna and Beechcraft brands. It managed to keep raising list prices on key models right through the 2008 financial crisis, but in the past year, has cut them across the board.

Everything Must Go

Textron managed to raise or maintain its private jet prices through the financial crisis. Now it's offering discounts

Source: Company Fact Books

* Shows list price changes vs. previous year.

Bombardier, maker of the Learjet, hasn't posted an operating profit from its business aircraft unit in two years. Margins at Embraer's private jet division have been slashed from 6.4 percent to 3.2 percent over the past two fiscal years, Bloomberg data show, while Airbus just sold out of its stake in Falcon-maker Dassault.

Stuck on the Tarmac

Embraer's executive jet unit has seen booming revenue, but profit is going nowhere

Source: Bloomberg

One way to make a silk purse out of this sow's ear would be to embrace the absence of manufacturing profits, sell as many aircraft as you can at cost, and hope to make money from servicing them in the years ahead.

"A razor/razor blade model may be emerging in the business jet industry," Citigroup analyst Jason Gursky wrote in a note to clients after attending an airshow in Geneva last month.

That's a reference to King Camp Gillette and his competitors in the disposable razor business, who sold the handles at or below cost to guarantee a stream of revenue from the disposable blades on which they really made money.

It's not crazy to think the same model could apply to more costly things. Inkjet printers have used the razor-and-blade business model for years, and if you think it's still a leap from there to aviation, check out the jet engine industry.

A six-metric-ton commercial jet turbine can fetch its own weight in silver but most manufacturers sell them at or close to cost. After-market revenue -- servicing and repairing equipment once you've offloaded it -- is where the real money's made.

Customer Care

Rolls-Royce typically gets more revenue from servicing its jet engines than selling them

Source: Bloomberg

Private jet manufacturers have been pushing in the same direction. Textron's aviation division makes 71 percent of its revenue from sales and 29 percent from after-market, according to a June 9 presentation. Given the price weakness, companies "will do whatever they can to build in additional benefits, such as maintenance programs and even small features like interior fit out," according to Richard Koe, managing director of aviation consultancy WingX Advance.

Building out the service network needed to differentiate yourself from the competition is no easy task, so any shift toward that model will probably benefit firms such as Textron and Gulfstream-owner General Dynamics, which already have good webs of maintenance bases. Embraer, which closed its Chinese private-jet factory earlier this month, may come to regret reducing its presence in a country whose population of billionaires overtook the U.S. last year.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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