Fortune Magazine online
January 8, 2015
by Ben Geier             @ben_geier

Will big players like NetJets follow the lead of the smaller Magellan Jets and cut fuel costs for members?

Oil prices have tumbled over the past few months to levels not seen since more than five years ago. Drivers are pocketing big savings from gas prices falling to a national average of just $2.18, more than $1 a gallon cheaper than a year ago.

But the oil market’s downturn has failed to impact some fuel-intensive industries you’d expect. One those is private jet travel, the domain of corporate CEOs and the super wealthy.

Magellan Jets, a private jet company, is an exception. It has reduced fuel prices for new member contracts by 16%.

“While we cannot adjust prices with every fluctuation in the market, we could not watch such a significant swing in oil prices without taking action on behalf of our customers,” said Joshua Hebert, the company’s CEO.

Though Magellan Jets is not exactly a market leader, analysts expect other private jet companies to also cut prices — but it will take time.

James Occhipinti, CEO of ClipperJets, a Magellan rival, avoided saying whether his company had any short-term plans to cut fuel surcharges. Rather, he emphasized the more general benefits to his customers.

“Any time fuel prices fall, private jet travel becomes more defendable and attainable,” Occhipinti said in a statement. “Unlike in the commercial airline industry, when fuel prices fall ClipperJet members benefit.”

Netjets, another Magellan competitor, declined to comment.

The complication, said Kevin O’Leary, the CEO at Jet Advisors, an advisory firm that did research for Magellan, is that many private jet clients sign up for long-term contracts or subscriptions that have a set price for travel. Only when those contracts come up for renewal can clients put pressure on business jet companies to reduce their prices to reflect the lower cost of fuel.

“I don’t see any of the bigger players immediately saying ‘we’re wiping out our fuel surcharge,’” O’Leary said Instead, he said that companies will “chip away” at their prices over time.

On the spot market, jet fuel prices have fallen between 7% and 9.5% over the past year, according to O’Leary.

In some ways, cutting the prices for flights is a game of chicken. Once one of the big players in the industry like Flight Options or Berkshire Hathaway’s NetJets decides to reduce fuel charges, the rest of the industry will feel compelled to do so.

“Everyone has to stay competitive,” said Richard Aboulafia, an analyst at Teal Group. “If someone cuts, the rest has to cut too.”

In the commercial airline industry, long-term purchasing contracts and fuel hedges impact airlines’ ability to adjust prices with the oil market. Still, if the price of oil remains low, Aboulafia said some airlines will see a competitive advantage in cutting their fuel surcharge. After that, the rest of the industry will have to follow.

http://fortune.com/2015/01/08/fuel-prices-private-jets/