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The Economics of Private Jets

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09:49   |   Jul 16, 2019

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The Economics of Private Jets
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  • Private jets represent an inconceivable level of opulence.
  • If the average American were to spend their entire year’s salary to charter a Gulfstream
  • G550 from New York, they would just barely make it to Utah, and yet, there’s a class
  • of people who use these planes to fly not just from New York to Utah, but rather routes
  • like New York to Beijing.
  • There’s a class of people who will spend tens or hundreds of thousands of dollars on
  • just one single flight.
  • Now, there are a few reasons this is strange beyond just the sheer price of things.
  • Chartering that Gulfstream from London to Dubai, for example, you’d end up paying
  • about $55,000 at rack rate.
  • Meanwhile, if you were to fly Emirates First Class, which is just, if not more opulent,
  • you could fly between the cities twenty times for the same price.
  • What’s even stranger about this kind of expense is that businesses, which are intended
  • to maximize profits for their shareholders, are able to justify this enormous expense
  • as worthwhile.
  • So, when is it that paying $8,000 or more an hour to fly makes money?
  • There’s a pretty simple way of figuring this out.
  • Out of the 8,760 hours in a year, the average CEO works 2,716 of them.
  • For a CEO that’s paid $1 million a year, that makes an hour of their time worth $368.
  • Among America’s largest companies, though, the average CEO earns $15.6 million.
  • That makes their hour worth $5,750.
  • For the most part, though, private jets fly about the same speed as commercial planes
  • so when flying a route like London to Dubai, the time savings come at the airports on each
  • end.
  • It comes from being able to arrive, get on a plane, and fly—rather than having to navigate
  • one’s way through a busy terminal for a fixed flight time.
  • But still, flying private versus commercial from London to Dubai would save, at most,
  • about three hours in airport time.
  • With the cost of $55,000 for the flight, that would mean the CEO’s time would have to
  • be worth $18,300 per hour.
  • That wouldn’t be true until they earned $50 million a year—a salary earned only
  • by the upper echelon of CEO’s.
  • But the truth is that, for the most part, private jets do not make economic sense when
  • flying routes with plenty of commercial service like London to Dubai.
  • One of the larger corporate jet fleets out there belongs to Walmart.
  • Now, this might come as a surprise considering that this is a company so focused on keeping
  • costs low.
  • You see, Walmart is headquartered in Bentonville, AR—a relatively small city of 50,000.
  • Their airport does have a surprising amount of service for such a small city with flights
  • all the way to Los Angeles and New York, largely propped up the company’s traffic, but for
  • the higher ups, commercial doesn’t cut it.
  • That’s why the company has a fleet of 20 corporate jets—the largest of any American
  • company.
  • These are most frequently flown by the company’s Regional Vice Presidents who are in charge
  • of a specific area of the country and will have to make frequent store visits within
  • this region.
  • The company apparently has a goal that nobody spends a night away from Bentonville—they
  • want as many trips as possible to be day trips.
  • Now, let’s say that one of these executive vice presidents needs to take a trip to three
  • stores—one in Rock Springs, Wyoming; one in Spokane, Washington; and the last in Great
  • Falls, Montana.
  • Getting to Rock Springs requires a seven hour itinerary through Denver that would get this
  • executive in at 9:30 pm therefore already requiring an overnight stop.
  • Then, the next day, they would do their store visit in the morning and, as there are only
  • two flights a day from Rock Springs, they would have to wait until 4:50 pm to catch
  • a flight back to Denver then another one to Spokane, getting in at 8:30 pm local time,
  • therefore requiring another overnight stop.
  • The next morning they would do their site visit, but once again, flight schedules dictate
  • that the first itinerary to Great Falls would leave at 5:05 pm through Salt Lake City, getting
  • in at 10:04 pm local time, thereby requiring another overnight stop.
  • Following the next morning’s store visit, this executive would catch a noon flight to
  • Denver and, after a three hour layover, another to finally get into Bentonville at 8pm.
  • These three store visits would therefore take up four whole working days, but what if this
  • executive flew private?
  • Leaving at 9am, the first flight direct to Rock Springs would take an hour and 45 minutes
  • getting in, with the hour’s time change, at 9:45 am local time.
  • After a two hour store visit, the plane would take off again at 11:45 am, flying an hour
  • and 15 minutes to Spokane, getting in at noon local time.
  • After another two hour store visit, the plane would take off at 2 pm for a quick 45 minute
  • flight to Great Falls, getting in at 3:45 pm local time.
  • After a final two hours at this store, the plane would take off its final time at 5:45
  • pm bound for Bentonville.
  • 2 hours and 15 minutes of flight time later, it would land at 9 pm local time, exactly
  • 12 hours after leaving.
  • What was a four day trip on commercial flights becomes a day trip on private, and that’s
  • why Walmart decided private jets are worth it for them.
  • It’s all about valuing the time of their employees and they’ve determined that, even
  • for the relatively low level vice presidents, their time is valuable enough that it’s
  • worth flying them private.
  • For example, one of the aircraft Walmart owns and operates is the Learjet 45.
  • It costs the company about $4 per mile to operate this aircraft including crew, fuel,
  • insurance, maintenance, and all other variable costs.
  • Therefore, the 2,900 miles flown on that day-trip to the north-east would cost them about $11,600.
  • Saving three days, that places a value of $3,900 per day which means that, assuming
  • the executive onboard works every single one of the 260 workdays per year, they would have
  • to make almost exactly $1 million per year for this private jet ride to be worth it to
  • Walmart—an amount within the realm of possibility for upper management at such a large company.
  • Of course, that’s not factoring in the alternative option’s hotel, food, and airline transport
  • costs which would likely sum in the thousands and it’s also assuming there’s just one
  • passenger.
  • If the plane were to be filled to its maximum capacity of nine, each passenger would only
  • need to be paid $111,000 per year for the expense to be worth it to the company which
  • is less than an average Walmart store manager makes.
  • Now, there’s one other case where private jets can make economic sense over flying commercial.
  • Let’s say Walmart was looking to expand into the Philippines.
  • Flying business class, it would cost a minimum of $5,000 roundtrip per person, require three
  • stops, and take over 26 hours to get from Bentonville to Manila.
  • Flying private, though, a long range jet like the Bombardier Global 7500 could make it there
  • non-stop, in just 15 hours, carrying 19 of the company’s top executives.
  • Since the company does not own this type of jet, it would likely charter one at a cost
  • of about $10,000 an hour, or $150,000 for the trip.
  • While the cost of commercial airfare is less than this, assuming the CEO, who makes $24
  • million a year, is onboard, the value of the eleven hours of his time saved is worth $97,000—clearly
  • tilting the math in favor of the private jet.
  • The general phenomenon of globalization has been great for the private jet market as businesses
  • need to travel to far off places like this.
  • Especially as companies outsource manufacturing and other operations into developing countries,
  • which don't necessary have much air service, many companies have determined that private
  • jets are the best way to get where they need to go.
  • But despite this, the private aviation industry was hit hard but the global financial crisis
  • and still has not fully recovered.
  • While part of it was genuine cost cutting, businesses also wanted to show that they were
  • doubling down on luxuries by getting rid of their jets, even if they could make economic
  • sense in some cases.
  • It was all about optics and nowadays, these jets are coming with poorer and poorer optics,
  • for good reason.
  • Private jets are truly horrendous for the environment.
  • If one were to fly that Bombardier Global 7500, the one that could make it from Bentonville
  • to Manila, with just one passenger onboard, the jet would make it only to South Dakota
  • before that passenger’s carbon footprint exceeded that of the average person in one
  • year.
  • Increasingly, these jets are even being used for purposes that cannot be justified economically.
  • Since 2013, there has been about a 10% increase among Fortune 100 executives of using their
  • company’s corporate jets for personal, leisure purposes.
  • They apparently justify this by saying that, in case of a work emergency, they might need
  • to get back to the office quickly and commercial air travel could hinder that.
  • Firms that include this as a perk for their executives, according to one set of research,
  • under-perform against the market average in terms of shareholder returns by about 4% each
  • year.
  • Of course, the real reason some companies might have private jets is not because it
  • makes economic sense, because it quite often doesn’t.
  • It’s because the people who decide whether the firm will use these are the very people
  • that will use them.
  • In many instances, the explanation is not economic, it’s societal.
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References:
[1] https://www.census.gov/quickfacts/fact/table/US/SEX255218; http://newflightcharters.com/private_jet_charter_flight_pricing.htm; https://www.charterhub.com/listings/aircraft/for-charter/list/?Mdltxt=G550&Manu=GULFSTREAM&mdlx=exact; https://www.privatefly.com/us/private-jets/longrange-jet-hire/Gulfstream-G550
[2] https://hbr.org/2018/07/the-leaders-calendar#what-do-ceos-actually-do
[3] https://www.epi.org/files/pdf/130354.pdf
[4] https://www.bloomberg.com/opinion/articles/2017-10-31/in-defense-of-corporate-aircraft-no-really
[5] https://www.linkedin.com/pulse/tesco-wal-mart-private-jets-fabrizio-poli/
[6] https://uk.flightaware.com/resources/registration/N455DG
[7] http://www.corporatejetsolutions.com/PDF/Aircraft%20Comparisons/Citation%20VII%20vs.%20Hawker%20700%20vs.%20Lear%2045.pdf; https://awin.aviationweek.com/portals/awin/pdfs/BCAOpPlanningGuide/2012_Production.pdf; https://www.aopa.org/news-and-media/all-news/2015/november/16/hourly-operating-costs-of-45-jets-compared
[8] https://www.symmetry.com/resources/payroll-news/2017/11/13/how-many-working-days-are-in-a-year
[9] https://corporate.walmart.com/media-library/document/2019-environmental-social-governance-report/_proxyDocument?id=0000016a-9485-d766-abfb-fd8d84300000&mod=article_inline
[10] https://www.stratosjets.com/private-jets/bombardier-7500/; https://www.trilogyaviationgroup.com/jet/Global-7500; https://www.privatefly.com/us/private-jets/longrange-jet-hire/bombardier-global-7500
[11] https://www.economist.com/business/2012/04/14/winging-it
[12] https://www.eia.gov/environment/emissions/co2_vol_mass.php; https://data.worldbank.org/indicator/en.atm.co2e.pc
[13] https://www.economist.com/business/2017/02/16/why-bosses-are-flying-more-for-play-not-work
[14] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=529822