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Learn to Fly Private

Welcome to the 32nd edition of Learn to Fly Private. No one really talks about this unless they're with peers that also utilize private aviation. Its a taboo subject, because between shareholders, environmentalists, and jealousy, its easy to hate on.

"Eat the rich," right?

This is why this newsletter exists - to share the wisdom and insight from the collective, when the individual might not necessarily be eager to share. Today is a reflection of this: the history and business of NetJets. There are so many NetJets members, I bet you know a few or a few dozen. They are just probably not talking about it.

I'm going to give you a brief history of fractional, and explain why NetJets dominates in all of private aviation.

As a reminder! If you are deciding between a turboprop or a jet, you can get a free 15 minute call with me using this link. Totally free, and most people say they find it useful.

Now let's dig in...

Why NetJets is a "remarkable" business

Building a private aviation business at scale is near impossible to do. While last month we saw the S&P change their outlook Vista Global to "negative," NetJets continues executing and growing their fleet. This is a great example in patient capital, and I think we all could learn a lesson or two from that.

For those that don't know, NetJets has been owned by Berkshire Hathaway since 1998, and until 2003 was known as Executive Jet Aviation (EJA).

EJA was the very first charter service and pioneered the fractional ownership model that many offer today. Unlike MySpace and Friendster, the original has stayed dominant and has not been replaced.

NetJets dominates. And it's not even close.

The Father of Fractional

Executive Jet Aviation created the fractional aircraft ownership model in 1986. The concept was simple: own a part of an aircraft and have that equal allocated portion of the overhead and the flight time. Owners also didn't have to worry about finding the partners, hiring the pilots, paying benefits, etc. as it was all managed by a 3rd party.

Originally, the model was to sell a "quarter share," which is why every NetJets tail number ends in "QS" (although commonly misconceived that this means "Quality Service.") This also comes with a quarter of the overhead, a quarter of the pilot cost, and a quarter of the time in the airplane, with only sacrificing a bit on the speed to dispatch (how fast can you depart.)

The world's largest private aviation company that operates like an airline

NetJets is the largest private aviation operator, and it isn't even close. This is a snapshot of US Departures Year-over-year. In fact, they are larger than Flexjet, Wheels Up, Vista Global (XO Jet and Vista Jet), and flyExclusive.

Combined.

In many ways, NetJets operates more like an airline than a smaller charter operator. They have the complexity level of flight operations, training, and customer service that massive compared to smaller private jet charter operators at your local airport. Add in the variation that customers don't depart exactly on time (that's why you fly private) nor do they fly hub-and-spoke routes, and it throws the permutations for scheduling into the stratosphere.

I've identified 5 differentiators that make NetJets such a great business, and a great operator.

Secret Sauce 1: Deadhead Optimization

One secret to NetJet's success is they are hyper focused on optimizing the deadhead legs in their network. This has been a core focus since the founding, and they have built proprietary softwares to predict maintenance events, future legs, current legs, demand levels, etc. so that they have as few non-revenue generating legs as possible.

Although someone is always paying for the repositioning flight, in many ways, the dead head optimization gets easier, not harder, with scale. If you have more aircraft and there is a need for a recovery flight, the likelihood of an aircraft being nearby in the event of a maintenance event is higher. Operators like NetJets are also able to keep a "core fleet" which is aircraft owned by NetJets as opposed to owned by members, allowing uptime to continue and therefore, customer satisfaction to continue.

To get an idea, you can see this live map on FlightAware that tracks NetJets Planes.

Secret Sauce 2: Impeccable Safety Record

Safety is the number one concern, even more than on time arrival, dispatch reliability, or any other metric. Fractional operators, those who operate under Part 91K, have an exceptional safety record. In fact, in an NTSB study, from 2006 to 2021 there were only 13 accidents and serious incident, in which only two had serious injuries. One of which was someone falling while getting out of an aircraft, and the other when the operator experienced clear air turbulence.

NetJets checks the boxes of Argus Platinum since 2013, IS-BAO Stage 3 since 2015, and BARS Gold since 2013. They also have an integrated training partner with FlightSafety, also owned by Berkshire Hathaway, which allows them to have a high level of training for their pilots.

Secret Sauce 3: Scale Driving Margins

When fractional sales are made, the customers buy fractions at retail price. So, if you are buying 1/4th of an aircraft that would retail at $20m, you pay $5m. This is a fair deal for you, because it's better than having to spend the full $20m and have to deal with all the overhead, maintenance, dead legs, flight department, pilot training, insurance, etc.

With scale and large orders, comes purchasing power. NetJets then gets to keep that margin as a sales commission for delivering more planes from the manufacturer.

I broke it down for an easy visualization in this chart.

Every additional order, which is driven by customer demand, allows for the cost per aircraft to go down. Therefore, NetJets (or any scale fleet operator for that matter) gets to keep the additional margin. In addition, because the scale grows and customers are more delighted, they're able to charge a bit more per fractional share. Competitive forces keep this in check, though. Remember the subscriber who is selling their CJ3 and switching to NetJets? The FlexJet quote was almost exactly the same as NetJets for the Phenom 300.

Secret Sauce 4: Scale Driving Manufacturers

Fleet operators are at a distinct advantage to driving decisions at OEMs. For instance, NetJets will be the launch fleet customer for the Citation Ascend. You best believe that the manufacturing decisions made will be optimized for NetJets' business. As the launch customer, the fleet operator and the manufacturer work very closely to ensure that the business needs are met by the manufacturing decisions.

Secret Sauce 5: The Marketing Machine

The marketing machine for NetJets is very robust. If you watch any PGA tour event, you'll see NetJets on the shirts, towels, and bags of many pro golfers. You even see a few of the golfers on NetJets planes in the Netflix Series, Full Swing.

The marketing activities helps turns the flywheel to continue NetJets scale and growth, and they need it to continue to drive margins and to make it truly a "great business" as Charlie and Warren have both said.

The Complaint for NetJets

There is something to be said about quality, brand, reliability, and safety. All of these things are incredibly important. The number one complaint I get from subscribers who are NetJets customers is the pricing.

You're going to pay a premium. If you can accept that, then it's a great viable option for you.

If you need a fractional provider that is going to give you excellent service, have a very diverse fleet, and allows you to own a fraction of the aircraft, then NetJets is a great option. If you are more cost sensitive, don't need to own the fraction for tax purposes, or don't need the nation wide coverage, there are alternative options for you. Chartering or smaller fractional operators, or even getting a dry lease may be right for your mission.

That said, there are A LOT of clients that love what it has to offer. That's why NetJets is the biggest. You don't get there by not having a great business.

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Until next week,

Preston Holland