Mr. Santo: We are a private aviation travel option. So we are very different than traditional airline industry companies out there. Just to give you a background on the private travel industry, there are basically five companies that are the major players. The reason there are only five is because of the huge cost to entry and you have to be licensed to be an air carrier in the U.S., which requires sizable investment in infrastructure - and that's just to get the licensing. Then you have to be able to raise the capital to operate so that you can start making money, which is where we are now. The good news is once you get there, it's somewhat like a cable company in that there are large margins from your subscriber base. That's where we are. As long as you can retain people and add new ones, you are in great shape. We have been fortunate because when we started six years ago, our whole concept was that we were going to be the value provider in private aviation, similar to Southwest Airlines. We applied the Southwest Airlines model, without the fuel hedge, to private aviation. We selected a great airplane; we decided to stick with our product and only fly that product because of all the efficiencies of having one type of aircraft. We stocked all the parts, including spare engines; we grew our ability to quick-turn them. We performed almost all of the aircraft maintenance and opened maintenance facilities. And then custom software optimization technology was created for the company to produce additional efficiencies. In the beginning, our customer base was more limited because the focus was not as much on value because the economy was really strong. People were making a lot of money. The value private traveler didn't exist, and so we got a lot of entrepreneurial people who bought from us initially and drove the company's growth. During that time, we realized some moderate growth, but not great growth.
When the economy took a turn for the worse, everything changed. A lot of people who were flying for exorbitant rates with our competitors started to take note of how much they were spending. However, they didn't want to resort to going back to the headaches associated with commercial flying, so they started gravitating to Avantair. For a while we lived off of market share - and we've had huge market share gains in the last year and a half, really staggering numbers. On top of that, over the last few quarters, a new market emerged. These are people new to private travel that are looking for a cost-effective way to make flying fast and easy, or looking for that ease of use for their family. What they are finding is that flying with Avantair is not that much more than a commercial ticket once you put five people on the airplane. So now not only are we benefiting from our strong return-customer base and gaining market share from our competitors, but we're gaining a whole new user base from people who are entirely new to private air travel.
Just to put this in perspective, our competitors - NetJets is our largest, and they are owned by Berkshire Hathaway - have many different types of airplanes, which creates a lot of inefficiencies. They were making money on the sale of the asset and not making money on the operations side. So when you stop selling, you don't make money. We went the opposite way. Being late to the game was very helpful to us because we were able to look at and examine everybody's model to see what worked and where we could improve. With a sales model in a down economy, the macroeconomic impact is very bad. As people are going to want to sell their pieces of the airplane, they are going to stop paying the fees on the other side. So it's going to drive down the values of those aircraft; it's going to be ugly.
To mitigate this risk from the get-go, we made two important strategic decisions. First, we have the North American exclusive on the airplane we use, the Piaggio, so nobody can sell it against us. The Piaggio has a great deal of advantages, both for us, as a sole North American provider of fractional shares and flight hour cards for this particular aircraft, and for the customer as well. Fuel burn is one of its main advantages. We travel the same speed as other jets in the light cabin category, and that's the area we compete in, but because of the airplane's technology, we are burning about half the amount of fuel, and that's our largest expense. This trickles down to the customer in what we're able to charge, so we can offer our services at a discount compared with our competition. Also due to technology, we have a much larger cabin than the planes that we compete against, so we have more seating area. We actually have a bathroom that is not an afterthought, like it is on our competitors' aircraft. Ours is 5-feet-10-inches high, compared to about 4.5 feet in the other airplanes we compete against. We are significantly taller and wider, and just larger.
Regarding the new buyer, 20% of our sales right now are to people who have flown privately less than five times. The customer who is new to private air travel is very in tune to the size of the cabin. They associate size with safety. Getting on a regional aircraft, they get in and think, "These seats are tight and somebody is sitting right on top of me." And just the size makes things feel less safe. By the way, that's not accurate statistically, but that's how it feels. But the reality is you get into a Piaggio, and it's big and you feel comfortable. Whereas you get into a Hawker 400 - that's what NetJets and others sell - and you are confined. You have to be a seasoned private traveler to like that airplane. People get into the Piaggio for the first time and they are in love. So the airplane itself has given us an advantage; we never would have gotten to this point if we didn't have the product. We were lucky enough to lock it up. It was a huge risk at the time because there was only one in the country when we did the deal.
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