Welcome to the 19th edition of "Learn to Fly Private".
Over the weekend, the operator Set Jet, which sold by-the-seat aircraft charter with a similar model to JSX, suddenly shut its door and essentially told every customer "tough luck." This made me think about business models in private aviation, and if you understand where people are making money and creating value, you will know better what you're paying for. I'm teaching you the ways of private aviation, and if you want to read the past issues to see what I mean, you can find all of them cataloged nicely for you here.
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This isn't really a "news" newsletter, but over the weekend Private Jet Card Comparison's founder Doug Gollan broke the news that Set Jet suddenly shut down. After a few failed SPAC attempts (why companies are still trying that is besides me), the operator ceased operations altogether after failing to secure any more funding to continue operations.
Interior of a Set Jet [Credit: Business Insider]
They operated a similar business model to JSX, which is a retrofitted first-class only scheduled service on Challenger 850's (the private jet version of the airliner CRJ200) that seat 13-15 passengers from Scottsdale to many desirable locations. If you want to see what the experience was like, check out this article from Business Insider.
Tickets went for $750 to $1550 and the monthly membership for access was $99 per month. They didn't own any aircraft, but instead acted as a charter broker. They had around 2900 members during the IPO filing last summer. They flew to Los Angeles (including LAX, Van Nuys, and Burbank), Orange County, California, San Diego, Cabo San Lucas, Mexico, Scottsdale, Arizona, Las Vegas, and Salt Lake City. We can assume most of those trips were 1-2 hours in length based on those distances.
By the numbers
$287,100 in MRR from memberships
$9,750 to $23,250 per flight, assuming fully booked
Cost: $3,674 per hour and $894k per year (Data: Aircraft Cost Calculator)
So we are left asking: how did they run out of money? My guess is this is another ZIRP era victim. You have two key factors at play: rising costs across the board to operate the flights. This includes maintenance (and the staff associated), pilots, hangars and insurance. The Challenger 850 is not exactly fuel efficient and is getting up there in age, so these factors are significant. In contrast, these customers are much more sensitive to the economy and there isn't as much free money floating around. They were competing against Comfort+ as opposed to other charter operators. These factors combined for a perfect storm for this by-the-seat operator.
Other indicators that this might be the case is looking at competitors. JSX halted service into Nashville (BNA) shortly after opening it. They noticed they were flying too many unprofitable legs and instead of take the "build it and they will come" mentality, they shut down the route.
What about future flights?
Tough luck. That's pretty much what their website says now in nice corporate speak. Those who had pre-booked flights are unable to receive a refund, and the membership fees are now useless. The membership fees less so, but the pre booked revenue could be significant I would imagine.
Lessons Learned
For you who read this newsletter, you're smarter than the average bear and can learn a lesson from this. While those poor Set Jetters are only paying for a single seat, imagine if they were on the hook for an entire charter flight pushing $30-50k. If the proper stopgaps aren't in place, like having a Jet Card in an Escrow account, that could be the reality if an operator decides to go out of business over a weekend.
There were signs, though.
Set Jet tried to SPAC 2-3 times last year, but every time it sputtered out. The company was clearly needing to raise money from investors to keep operations going, but when the investors didn't step up to the plate, the company stopped operation. It is worth keeping an eye on the financial strength of the operator if you have any significant deposit on file with them, because you are an unsecured creditor in the event of a closure.
How Everyone Makes Money in Private Aviation
After reflecting for the past few days on Set Jet and their business model, I think it is prudent of us to understand how different companies in this ecosystem make money. If you own a company or are in any level of management, you're probably like me and ask of every business you interact with: "how do you make money?" Let's break it down. I'll go through the charter/membership universe first and then through the transactional side.
Charter Brokers/Memberships/Jet Cards
Overview:
Who pays them: end consumer
How much they charge: 3-10% of the trip and/or recurring fees
These companies all make money relatively the same way, just with slightly adjusted economics to the consumer. They will charge a 3-10% markup (industry standard numbers, some charge upwards of 15%) above the actual cost of a charter. Here's what you get:
Shop your trip and find you a safe operator, with the right aircraft for the mission, and within reasonable distance from where you are.
Handle the nightmare that can be dealing with local operators (they're not salespeople or customer service oriented),
Set up the logistics, catering. You simply tell them where and when you want to go and give them your credit card information or send a wire.
Handle any hiccups that come up along the way like AOG (aircraft on ground, a fancy way of saying maintenance problem), aircraft replacement, etc.
Where Memberships and Jet Cards differ is that you will pay some sort of access fee to either cap your rates or to use their proprietary technology. This is where they may play some marketing stunts with the rate i.e. you buy a card for $100,000 for 100 hours but you lock your rate $500 per hour below what's considered "market." See how they made a little extra margin? You would expect to get a higher level of service out of these offerings. From the feedback I've gathered from subscribers, this is a hit-or-miss experience.
Charter Operators/Management Companies
Overview:
Who pays them: Aircraft Owner
How much they charge: 10-20% of retail revenue + flat monthly management fee
These are the companies that manage aircraft(s) on a Part 135 charter certificate. They do a lot of heavy lifting for an aircraft that is on a charter certificate. Some of the tasks they do is:
Managing maintenance intervals, inspection compliance, hangar space, Part 135 compliance, etc.
Hiring and benefits the pilots and flight attendants (often times the aircraft owner will pay for training costs)
Fielding, negotiating and scheduling inbound charter requests
Acting as a dispatcher and customer service for the owner when they want to fly the aircraft
Hangar management, aircraft movement, and cleaning
Basically, the local operator is doing a lot of the behind the scenes work for the actual aircraft. Think of this company as your outsourced corporate flight department, and they act like a property manager. In the same way you pay a revenue share to the company that manages a short term rental, they operate the same. They'll get a revenue share of the retail charter operations as an incentive to keep your rates up as an aircraft owner and to put more charter demand into the aircraft. You'll also pay them a flat fee for the services that they provide to you. Each contract is unique, and this sometimes includes pilot salaries and sometimes does not.
Fractional Programs
Overview:
Who pays them: fractional owners and charter end clients
How much they charge: Flat fee + charter revenue
The fractional model is an interesting one, because the asset is owned by the people who own the portion of the jet (the fractional owners) and those owners pay the operator (Netjets, Volato, Flexjet, etc.) a management fee similar to what you would see in a charter operator role. There is some premium compared to outright ownership, but there is zero headache.
The other place where fractional operators make their money is in open market charter, where they get to keep 100% of the margin on those flights. Based on how the programs are set up, there is capacity built in to the schedules. These operators will put this supply into the open market and allow for that to be purchased on 135 charter. Hint hint, this is why NetJets has a fractional program and a Jet Card. The Jet Card is designed to fill that extra supply on the fleet so that NetJets can maximize the utilization of the fleet. They make more margin per-hour and per-passenger on the chartered flights, but then put all the capital strain on the owners of the fractional program. This is why Berkshire Hathaway says it's a "wonderful business."
Bonus: The Aircraft Owner
After all of those premiums and revenue shares are taken out, the aircraft owner makes money last. This is why the math doesn't make sense from a lot of these Tik Tok influencers that claim that they make money chartering out their jet. They still have to pay the insurance, hangar rent, pilot salaries, maintenance, and the aircraft management fee. Net of fuel, the aircraft owner doesn't make that much per hour when the asset they own is being chartered out. Only on the most fuel efficient and in-demand models does the cash flow look pretty. Remember how we talked about how to fly free chartering your jet? We do a deep dive there.
The Aircraft Broker
Overview:
Who pays them: The Buyer or Seller depending on who they're representing
How much they charge: 2-5% of the transaction or some charge a flat fee
Now we'll move over to the transactional side of the business. The aircraft broker is similar to a commercial real estate broker, in which the selling agent takes the aircraft to market and is responsible for advertising the aircraft and soliciting/fielding inbound inquiries. Closed-network transactions are not uncommon in this industry, as many aircraft transact off market. A good buy-side or sell-side broker will have access to these off market deals or off market buyers.
A good buy-side broker will run a market analysis for you, and many brokers have full time staff responsible for creating these reports. I met with a larger broker last week and they had 4 dedicated staff to doing this research for clients based on whats happening in the market. They will also have the wherewithal to ask the hard questions during negotiations, and often times will save you multiples of what they're charging on the transaction. On the sell side, you may think you can handle the inbound requests but vetting the potential buyers, negotiating a price, and understanding the market will provide a lot of value to you as a seller.
Other Transaction Players
Overview:
Who pays them: usually the buyer
How much they charge: $800 to 2%
There are a variety of other service businesses that exist in the transaction of an aircraft, and they will often bring multiples of value to the transaction. I work in aviation finance, and we will charge our clients an origination fee to take their loan to market to solicit term sheets to ensure the best possible terms for their aircraft purchase. It depends on the loan size, but a general rule of thumb is a 1-2% origination fee. We provide a competitive market for aircraft financing, and we are often able to save clients multiples of that over the term of their loan.
Escrow/Title is anywhere from $800 to $4000 depending on complexity, and aviation attorney's will draft documents. They charge standard attorney fees depending on the market.
Now, you're ready...
Now you are more educated on where people provide value in these transactions. Remember, its not always about finding the cheapest options and often times in private aviation you get what you pay for. It is not an inexpensive activity by any means, and be sure to choose reputable players. As always, I'm here to help
Until next week,
Preston Holland
p.s. A lot of my subscribers are commercial real estate folks (I've had phone calls with many of you). You might like the dive deep in a newsletter my friend Hiten writes called The Promote. He does fantastic (and sometime comical) breakdowns of everything that's happening in the world of commercial real estate. I think you might like it.