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Learn to Fly Private

Welcome to the 27th edition of "Learn to Fly Private." Today is going to be a relevant article for those who are interested in on demand charter, fractional, or for those who own and have placed their jets on a charter certificate to offset the fixed costs. Whether you're flying a CJ3 for $1800 an hour or opting for a private jet membership, its important to understand how to spot the signs of a bad business operator, which will leave you holding the bag. Think of this as a deeper dive part 2 of a previous issue, "how companies in private aviation make money."

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Now let's dig in...

There's nothing new under the sun

Today, I recorded an episode for a new podcast series I'm hosting called "Flight Path," which is an industry focused podcast with stellar business aviation operators telling their stories and what makes their businesses unique. The release is slated for early June with an 8 part series. My first guest was Jessie Naor, former president of GrandView Aviation on how to operate a successful charter operator that had positive cash flows (not always common). They sold to a private equity firm for "north of 10x EBITDA."

GrandView diversified their revenue mix, with 1/3rd charter (through brokers or direct sold), 1/3rd fractional demand (when Flexjet didn't have enough Phenom 300s to fill demand, they would farm it out to them), and 1/3rd organ transport. A sign of a good operator is to reduce customer concentration.

At the end of the day, aircraft operators have a capacity constrained environment. How they optimize their business determines the staying power.

If someone claims a revolutionary business model in private aviation, its usually not a good sign. History is littered with examples of companies that didn't optimize their fleet or business model and eventually went under.

Most Recent Memory: Jet It

Jet It took delivery of its first HondaJet in January of 2019. The headline was a "unique business model" allowing owners to fly at $1600 per hour.

If its too good to be true, it usually is.

According to Conklin and DeDecker cost data, the Hondajet hourly costs are:

• $754 in fuel
• $517 in maintenance
• $291 in engine reserves
• $101 in miscellaneous reserves
• Total: $1,663 per hour

Something seem wrong? Even if you assumed that bulk buying power allowed you to drive the cost of Jet A down $1 a gallon, and you could eventually get to in house maintenance, you can't even pay pilots let alone support staff.

That's before repositioning fees, which wasn't billed to the customer. The customer only paid the occupied per-hour rate. That means the company had to eat the $1600 an hour on the repositioning flight.

How They Did Make Margin

There was a management fee of ~$10,000 per month per customer that went to pay insurance, hangar, maintenance, etc. for the airplane. Not enough to cover all the expenses associated with the aircraft.

They would make a margin by selling the aircraft at retail markup prices and buying at bulk discount from the manufacturer. Some percentage points, but not much.

The capacity that was leftover (20% on each aircraft), they would charter on the open market. This was assuming 100% utilization of every aircraft, not accounting for downtime for maintenance (and the HondaJet does have maintenance events).

The problem was that their business model relied significantly on growth of new members coming into the program, and they were unable to sell as much open market charter as they thought they could.

Compare this to the now publicly traded Volato, who released their operational KPI's this week.

Assuming numbers looked similar, Jet It was absolutely hemorrhaging cash. At the time of shutdown they managed 21 HondaJets, 10 of which were in maintenance shops and not producing revenue.

How To Spot It

The reality is, JetIt is not alone. There have been many private aviation companies that have failed to consistently produce free cash flow. There are many that exist today, and in a post-ZIRP era where charter demand is slipping off of its peaks in 2021-2022, I fear there may be more around the corner.

Let's compare JetIt to the darling of private aviation, NetJets. You won't find any Very Light Jets (VLJ's) like the HondaJet at NetJets because they feel there isn't enough demand in that market and the aircraft aren't really designed to be fleet airplanes and have 500-700 hours a year flown on them.

Netjets fractional owners fly around $4,000 per hour with fuel pricing being a variable. According to Conklin and DeDecker, the hourly variable cost of the Phenom 300 is $2,507 per hour. There is also a monthly management of ~$16,000. Their jet card clients fly ~ $11,000 per hour.

You're an intelligent business person, so you can spot that margin.

There are multiple ways that NetJets makes money, and they have so much scale that they've likely been able to negotiate discounts on new aircraft from Embraer, they have a vertically integrated training provider in Flight Safety (also owned by Warren), and probably get the cheapest Jet A of anyone because they buy so much of it. They can leverage their scale to drive margin in almost every part of their business.

So how can you spot whether your provider isn't going to make it? They aren't making enough margin to support ongoing business.

In a situation where you own your aircraft and are chartering it, the downside risk is you have to find another Part 135 to put your airplane on. It's a hassle, but you're not going to be out a significant amount of money.

Tough to spot: Jet Cards/Memberships

The one that is hard to spot is the Jet Card space. I wrote at length a few months ago about private jet memberships, and how they're more a convenience than a cost savings. It is important that you understand the mechanics of the membership, and that the administrator of the program isn't using customer cash deposits for activities outside of actually paying to fulfill your trip.

One anomaly, and I don't think we see this again. During Covid, some customers were promised $3500 an hour on an aircraft type and the jet card could only source at $5500 an hour. If there wasn't a market adjustment, the jet card company could be in trouble. The larger players have hedges built into their contracts, but during the crazy post-covid world, I heard stories of jet cards simply refunding their clients because there was no way for them to stay above water on the contracted price.

A Quick Note About Safety

There are a few safety certifications to be aware of: Argus and Wyvern. These are two voluntary certifications that an operator can undergo, and I wrote about it in depth here. One cool resource I've been using recently is Air Charter Guide. You can look up any operator based on location, but you can also do a name search. A good broker should tell you who the end operator is, and you can look them up to see what other aircraft they have on certificate and a quick glance if they have one of these two certifications. I think its quite handy.

Until next week,

Preston Holland