Revelations that Jeff Immelt used to travel with not one, but two private jets, just in case he needed a spare, while CEO of General Electric (GE) threw the spotlight on wasteful corporate spending. That practice came to light as new GE supremo John Flannery seeks to cut costs.
And what costs. Perhaps nothing screams "success" louder than owning a private jet. But like most depreciating assets, buying your own jet doesn't make a lot of financial sense. When you throw in the massive operating costs, owning one can mean you end up a loser, not a winner.
The company VistaJet, which owns and operates a fleet of 72 private jets around the world, wants to solve that problem. How do we cut down those huge fixed costs for maintaining a private jet? It's surely something bothering all of us!
VistaJet runs a subscription leasing service, in which clients buy blocks of time that guarantee them access to a jet. The minimum plan starts at 50 hours per year over a three-year contract, which works out at around $850,000 per year. in return, clients get a promise that their choice of plane will be on hand, wherever in the world they are, and wherever they want to go.
The "average" client buys around 150 hours per year for their three-year deal. The flat rate for flying ranges from $16,000 to $18,000 per hour, depending on the choice of plane and the flight path.
The private-equity shop Rhone Capital recently invested $150 million in cash in VistaJet, which is attempting to expand in Asia, my part of the world. Through other investments, Rhone's total stake is $200 million for a 7.5% share, a price that values the company at $2.67 billion.
A lot of that comes in its physical assets. VistaJet says it is the world's largest customer of jets from Bombardier (BDRBF) . Airbus (EADSY) last month agreed to buy a controlling stake in the Canadian jet maker. Bombardier has invested $6.0 billion to make the most technologically advanced private jets, but can't sell enough of them.
Airbus brings marketing clout to take Bombardier's jets up against Boeing (BA) . U.S. President Donald Trump recently slapped Bombardier with 300% import duties, after Boeing complained its competitor sold 75 jets to Delta Air Lines (DAL) at "absurdly low prices."
Airbus plans to expand Bombardier's production, now in Canada but making the wings in Britain, with an extra line in Mobile, Ala., which may ultimately help reduce tariffs. Mainly, though, Airbus gets access to great manufacturing capability for smaller jets than it already makes. Asia is likely to be a major market -- Chinese investors including the state-owned Commercial Aircraft Corporation of China, or Comac, were reportedly also negotiating stakes in Bombardier.
Popular planes that are tough to afford, in other words. VistaJet offers access to mere mortals who can't afford one, or don't want to pay the crazy costs of running one -- and who have a spare $1 million or so in their back pocket.
The air operator has a "war room" in Malta staffed by 300 people overseeing the movement of the jets. The planes are ideally always on the move, rather than paying expensive parking fees in private-jet slots at airports.
It has also recently introduced an app that it hopes will make it the Uber of the skies. The Vista Direct service requires members to pay a $10,000 membership fee, after which they can check out which planes are flying where, and book the empty legs.
"Dead legs" in which a plane is flying for a pickup but with no passengers aboard are the bane of the private-jet industry. Private-jet brokers such as Jettly have provided that service in the past. But centralizing it in an easily used app, where the costs of a particular leg are clear to see, is a first.
The app may offer a taste of the luxury life. For full-fledged members, it's more about the math. And the numbers are simple.
A plane suffers a depreciation of at least 5% per year, meaning it's written off in 20 years. On the purchase of a $50 million mid-size jet, there's likely a 5% cost of capital on the borrowing -- assuming it is all bought with borrowed money.
That's 10%, or $5 million annually, up front. The average private jet is in the air for around 250 hours per year. That means fixed costs are $20,000 per hour. Then there's the operating cost of at least $6,500 per hour to keep it in the air. On top of that, there's expensive servicing, the need to retain a crew, landing fees, overflight permits, the use of the private-jet terminal you choose.
Add it all up, and you quickly get to a price of at least $30,000 per hour of flight. The cost of a plane simply sitting around, not being used -- losing value, running up interest and fees, and in need of perpetual TLC -- far outweighs the cost of flying it. Then, obviously, there's any utility you get out of it in going from A to B.
Of course, there are people who are so wealthy, they don't care about these costs. But for practical purposes, particularly if being used by a corporation, leasing likely makes more sense than ownership of an expensive asset.
"The underutilization of the business jet market is really the market opportunity to drive down costs for our clients, in the true sense of the shared economy," VistaJet founder Thomas Flohr says. "The goal is clearly that we continue to disrupt this market of owning airplanes."
There are practical reasons for heads of state and industry to fly private. In the United States, there are some 400 commercial airports and 4,000 private ones, Teterboro, in the New Jersey Meadowlands, 12 miles from midtown Manhattan, being the busiest. In Europe, there are 300 "public" airports, and 3,000 on the private side. Asia is just getting going, not to mention Africa.
Those private locations may be much closer to remote factories. With a private jet, it's possible to start your day in the Chinese tech-manufacturing hub of Shenzhen, hit the mainland's financial capital of Shanghai, China's actual capital Beijing, and finish the day in the South Korean capital, Seoul. Flying commercial, the same itinerary would take three or four days, particularly with the persistent delays common on flights in China.
VistaJet has the world's second-largest private-jet fleet behind NetJets, which Warren Buffet's Berkshire Hathaway (BRK.A) bought in 1998. NetJets mainly offers fractional ownership of jets, and has around 700 aircraft around the world, and a particularly large network in the United States.
VistaJet prides itself on operating a fleet of jets with the same livery and standards inside, wherever you are in the world. It was originally headquartered in Switzerland, the home nation of founder Flohr, who set the company up in 2004. But it switched to Malta, which is within the European Union and offers a lot more tax benefits, for its operations and the domicile of many of its planes.
Flohr was reportedly considering selling VistaJet in 2014 for up to $900 million, something the company denied.
VistaJet does say that two years ago it prepped itself to be in a position to launch an initial public offering -- although it never set that process in motion. Rather, it went through the motions of upgrading its accounts to meet New York Stock Exchange standards to be "IPO-ready."
"You always want to have access to capital markets," Flohr says. "You should always raise money when you don't need it."
When he met the Rhone Capital partners, who shared a similar "philosophy" for VistaJet, Flohr says the company was completing an "investment cycle." It has grown from around 20 planes to its current 72 in the last few years. Flohr says the next phase is to maximize hours flown in its existing planes.
The company expects to bill 55,000 hours of flight this year, giving it 3% global share of the private-jet market. That is generating revenue growth of 20% to 25%, although Flohr declines to give specifics. He believes the existing network of jets can double its paid-flight hours to 100,000 without adding new jets.
To do that, it wants to increase its customer base in Asia, to give it more geographic balance. Besides the Uber-like app, it has also introduced a Chinese-language booking service on WeChat, the Tencent (TCEHY) app that is used for virtually everything in China.
Asian usage is still dominated by the big boss, the "principal," the founding tycoon. That's no longer true in Europe or the United States, where you may have an entire merger & acquisition team on board. But that's likely to change as companies in Asia grow and mature.
The private-jet market is growing by around 5.5% per year in terms of hours flown, ahead of the rate of global growth. Throw in the opportunity to increase that 3% market share, and VistaJet sees room for plenty of expansion with its existing fleet.
Flying private jet may be glamorous. What the company plans to do now is not. Flohr talks about using "diverse geographic reach" to cut the "suboptimal" dead legs that "drive the ferry factor up."
"I think we have a long way to go and a lot of work ahead of us to capture that market share," Flohr says. "It might be very boring, but we're going to do more of the same."