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Eurosky
Market Analysis

2.1 Market Description

The demand for fast and flexible business transportation services in Europe is constantly increasing. Key reasons for this development are the formation of the Common European Market and the opening of Eastern Europe. Moreover, corporations of all sizes shift towards an international network of multiple locations. In Germany, the growing importance of the travel intensive service-sector further increases the need for business people to communicate, interact and travel on both the national and international basis.

Corporations have a desire to move key personnel in a cost-efficient, highly flexible and safe manner. In addition, the consciousness for the value of executive time and the motivational aspects of convenient business travel is rising substantially in Europe.

Advanced communications technology, such as video-conferencing, offer a high level of flexibility and cost-efficiency for the interaction between business people. Still, the need for personal contacts - especially on top-management level - cannot be replaced by new communication techniques. Public transportation systems, such as railroad and commercial airlines, cannot provide time-efficient and cost-effective transportation for corporate executives with regard to the whole range of travel needs. Especially to remote locations or for triangular routes, individual transportation means offer a viable alternative. Chauffeur-driven automobiles or business aircraft represent such individual transportation means.

According to the Aircraft Owners and Pilots Association (AOPA), the segment of business aviation will grow by 4% p.a. in Germany in the upcoming years. This growth is twice as fast as that of the overall transportation sector. This fact is a strong indication of the growing need for flexible and time-efficient executive transportation.

2.2 Business Aviation Market

Within the segment of air transportation, business aviation offers corporate executives the most efficient way to travel. Key benefits of business aviation are time savings, outreach and flexibility. By using a business aircraft, corporate leaders are able to use their time more productively, both onboard and offboard. Moreover, they can reduce overnight stays and maximize flexibility. Exhibit 1 on the facing page compares commercial airlines with business aviation for a typical business trip. For this particular trip, a business aircraft will save 50% of the travel time plus an overnight stay. The safety record of business aircraft meets that of airliners. A widely published study by Arthur Andersen & Co. ("No plane. No gain.", 1993) has shown that companies using business aircraft are more profitable while experiencing higher growth than their peers relying on commercial airlines.

While there is a variety of piston-engined types, turbine aircraft (i.e. turboprops and jets) are the aircraft of choice for executive travel with respect to speed, reliability and cabin comfort. The German business aircraft fleet currently counts 686 units, 330 of which are turboprops and jets (see Exhibit 2 on the following page).

Traditionally, corporations could either charter business aircraft or purchase an own corporate aircraft. By using air charter, companies retain full flexibility of choosing the operator and aircraft type. However, they are heavily dependent on the charter aircraft's availability and cannot control quality effectively. This results in high transactions costs for selecting the right charter operator in each individual case. There are currently 68 companies offering charter services in Germany, operating a fleet of 157 aircraft. A third of these companies only operate one aircraft, and a mere eight air charter operators have a fleet of more than three units. The consequence is that the average aircraft availability is low and that customers frequently have to contact several operators to satisfy their flying need.

Full ownership of a business aircraft not only implies heavy capital investment, it also requires companies to set up a corporate flight department that has to attain certification, which is a time-consuming and costly process. The key advantage is that the aircraft operates at the full discretion of the owner. This advantage, though, comes at a high cost burden. In addition, most companies are unable to attain a sufficient level of capacity utilization to justify a wholly owned aircraft. Finally, business aircraft ownership substantially adds to the firm's complexity, far away from its area of competency.

Aircraft management contracts represent a hybrid of full ownership and air charter. In this case, the aircraft is owned by individuals or a corporation, but aircraft operations are sourced out to a certified operator. This eliminates the need for a corporate flight department. While aircraft management contracts substantially reduce the operating complexity of corporations, the heavy capital investment and running costs for the aircraft remain.

2.3 Fractional Ownership for Business Aircraft

Fractional Ownership represents a new and innovative way of operating a business aircraft. Fractional Ownership blends the benefits of full ownership with the cost advantages of charter.

Through Fractional Ownership, companies with moderate flying needs buy into a portion of a business aircraft. Based on the interest in the aircraft, the owner is entitled to a fixed number of flying hours. The company running the Fractional Ownership Program will manage the plane, including maintenance and provision of crews. The company guarantees the availability of the aircraft, and customers only pay for the actual flying time they use, i.e. not for the ferry time to deliver the airplane to the airport of departure.

Compared to air charter, Fractional Ownership does not entail the high transactions costs needed to find and select charter capacity for each individual trip. Compared to full ownership of a business aircraft, Fractional Ownership offers substantial cost savings due to lower capital investment and shared overhead costs. Additional benefits are permanent availability of the aircraft and a guaranteed liquidity of the investment. If the customer's aircraft is not available, the Fractional Ownership company will provide another aircraft from its common fleet or charter capacity at no additional cost to the share owner. In addition, Fractional Ownership does not entail any management and maintenance responsibilities, reducing overall operational complexity for the customer. The Fractional Ownership company will also buy back shares from customers, thus guaranteeing the liquidity of the investment. Therefore, a share in a Fractional Ownership Program provides all the flexibility of full aircraft ownership at a fraction of the cost.

Fractional Ownership targets a customer segment that makes frequent use of air charter operation, but cannot justify the cost of acquiring and operating an own aircraft. It offers lower initial investment and reduced running costs. In addition, Fractional Ownership has a higher inherent flexibility than full ownership, as shares can be traded back easily. For business aircraft manufacturers, Fractional Ownership widens their market and allows them to increase the volume of airplanes sold without cannibalizing the established market segments. This is the key reason many aircraft manufacturers directly or indirectly support Fractional Ownership companies.

The concept of Fractional Ownership was introduced to the US market in 1986, but has not taken off until 1994. With annual growth in the US exceeding 60%, similar programs in Europe, Asia and Africa are currently setting the stage for a similar development outside of North America.

2.4 Competitor Analysis

There are currently two significant competitors offering a Fractional Ownership Program for business aircraft in Europe. Both have entered the market in 1996 and operate from bases outside of Germany.

US-based Executive Jet Aviations (EJA) has pioneered the concept of Fractional Ownership in the US. EJA launched its NetJets program in Europe involving Swiss and Portuguese partners that are responsible for sales and operations. The partnership offers a Fractional Ownership Program to European customers and the possibility for EJA's US customers to use part of their flying time allotment on European flights. NetJets Europe was launched in June 1996 with three used Cessna Citation S/II jets registered in Portugal and flown by Portuguese crews. After almost one year of operation four shares were sold, but much of the flying activity is derived from US share owners.

Corpavia Club is the first truly European Fractional Ownership Program. It is run by Jet Aviation, a major Swiss business aircraft operator that has 28 facilities worldwide and operates 130 business aircraft. The Program is organized as a club where customers buy a 5 year membership in a one-sixth share denomination. In addition to the entry fee, club members pay an annual subscription fee and a fee charged for each occupied flying. Corpavia Club started operations in summer 1996 with two Beechjet 400As and sold 3 club memberships until now.

In summary, both competing Fractional Ownership Programs are backed by important partners, a feature Eurosky can match. However, none of these competitors is offering a product that is tailored to the needs of German corporate customers. Unlike Eurosky's product, both NetJets and Corpavia are relying on jet aircraft, which has proven to be the less cost-efficient choice for medium distances.

2.5 Customer Groups & Market Research

Eurosky's market research has identified two customer groups for its Fractional Ownership Program. The primary customer group consists of corporations located in Germany and adjacent European countries, such as The Netherlands and Austria. The secondary customer group is composed of the sports and entertainment industry, as well as high net worth individuals and government agencies.

Eurosky will focus its initial marketing and sales effort on the primary target group. Prospective customers to be targeted express a need for business aviation services that can be adequately satisfied by Eurosky's product. This includes a need of over 100 hours of top management flying time per year on short to medium distances (500-1500 km or 300-1000 miles). These potential customers operate multiple R&D, production and distribution facilities within Germany and Europe. Often, these sites have been optimized with regard to supplier or customer locations, instead of travel-time, travel convenience or travel-costs.

Through a clear segmentation and thorough market research, Eurosky will be able to efficiently focus its resources on the sales effort. A range of indicators will enable Eurosky to identify potential customers that meet the above selection criteria. These indicators include the size of the company (revenues, number of management employees) and the network of locations (number and distances).

The selection criteria for prospects within the primary target group are solely based on rational, quantifiable factors. In addition to these factors, potential customers in the secondary target group express a need for business aviation services based on qualitative factors, such as status considerations. In many entrepreneurial and privately owned businesses, there is a strong private interest in business aviation from the owners.

For the primary target group, Eurosky's market research has identified over 850 corporations that meet the selection criteria in terms of travel needs, size and ownership structure. A comprehensive database has been created that includes all important data of these prospective customer targets, such as contact persons, network of locations, and size. In the research process, Eurosky has conducted thorough interviews with top-executives from 15 companies to further define the needs of these corporate customers. The secondary target group will be tapped with a lower priority, depending on market research results and sales force capacity.

In the first two years of operation, Eurosky will focus its activities on customers that are located within a 300 krn (186 miles) radius from its base in Augsburg. Major cities in this radius include Munich, Stuttgart and Frankfurt (see Exhibit 3 on the facing page). For the first target region around Augsburg, the database comprises 300 prospects. Additional bases will allow Eurosky to cover the whole German market including the neighboring European countries.


Eurosky
Table of ContentsAppendices
1. Executive Summary
2. Market Analysis
3. Products
4. Company
5. Marketing and Sales
6. Operations
7. Financials
Pro-forma Financials
Resumes of the Founder Team
Board of Advisors
Key Advisors
The information and ideas herein are the confidential,
proprietary, sole, and exclusive property of Eurosky's founders.