Learn to Fly Private
Welcome to the 23rd edition of "Learn to Fly Private". Today's issue of the newsletter is inspired by a question I get often. I'll paraphrase it, but something along the lines of "Pre-covid, I could charter [insert make/model here] for $x,xxx an hour, but now it's 40% more. Why?" There is a market answer to this question. I am of the belief that we are going to get closer to normal as we enter the "busy season" of jet charters, based on a few anecdotal conversations and looking at historical data. We'll also get in to what this means for prospective buyers looking to offset their cost in what has been a frothy market.
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Now let's dig in...
Market conditions are setting up for consumer leverage
My Macroeconomics professor in college, Dr. Hermilo Jasso, would jump up and down at the front of the classroom and yell in his hispanic accent "price is only influenced by supply and demand!" Of course, there are other factors including demand elasticity, substitute goods, and others, but the basic law of supply and demand states that if a product has high demand and low supply, the price will go up.
Insert: the pandemic.
Looking to avoid Covid and large tubes filled with other humans, many took to private aviation as a substitute to commercial air travel. This was the tailwinds that propelled Wheels Up into SPAC territory, and, when those fliers went back to first class or Comfort+, the demand dried up. Wheels Up had to rapidly rework their business model towards profitability and get a $500m shot in the arm from uncle Delta.
The rest of the charter ecosystem also profited from the new found demand. Many of those fliers have stuck around. Some even bought their own aircraft and put it into the charter supply pool, being promised that the charter revenue would help offset their fixed operating costs and "fly free" chartering out their airplane.
All of this increase in demand matched with a finite inventory of aircraft for sale and charter aircraft caused prices to inflate to the tune of 30-40%. Across the industry, charter operators would charge the highest premium they could get and the demand was so robust that fliers were forced to pay the higher cost (often times, not knowing any better.) This meant for those that had chartered before were now being forced to pay that higher rate, and when questioned the answer was "because we can."
Check out this chart that compares January 1-March 3rd from the Wing X bulletin which measures total flights.
Here, we're going to scrutinize the "vs. 5Y ago" because that is comparing us with this year vs. the 2019 levels. You can see almost a 40% increase in Business Aviation flights compared to the same period in 2019. Remember, as demand increases (and supply, in this case, can only come online so quickly because of capacity constraints from manufacturers) prices increase. And increase they have.
There's hope for consumer leverage
It appears there is hope for charter rates to come off their meteoric post-pandemic tear. I was having a conversation with Tommy Nelson, the CEO of Trilogy Aviation Group, in preparation for this newsletter. He estimates that the fleet utilization today is around 80-85% of the total available charter fleet compared to 2020-2023 of 90-95%. There isn't a strong data science to track this utilization rate, but being in contact with nationwide operators on a daily basis, his team has an anecdotal feel for how things are looking today. Charter brokers exist to fill the gap between supply and demand.
The lower utilization rate has finally given a bit more leverage to the consumer of charter flights. Another word for utilization rate: supply and demand.
Where are signals most obvious?
In the charter world, there are clear signals in a few areas.
1. The Mechanical Recovery Flight
If you've had an AOG (aircraft on ground) in the last 4 years, you are very familiar. You need to fly somewhere, but there has been a mechanical issue and you need to find another aircraft to fly you. In '20-'23, this has meant paying upwards of $30k more for the same trip because you need a last minute flight. The capacity wasn't there, and you are forced to pay up.
Today, the mechanical recoveries are relatively at parity with the original booked flights. This sometimes comes from leverage with operators based on future bookings, but the fact that they exist is a sign of a healthier market for consumers.
2. Future Availability Limitations
Over the past few years, demand was so high for flights on-fleet (meaning the company owns their own airplanes) that charter brokers were only able to book flights 5-10 days in advance of the trip.
In a normal environment, future bookings aren't an issue because the predicable revenue was welcomed from the operators, often booking out 3-5 weeks in advance. This is beginning to come back, and flights are able to be booked in the future.
3. Operators Stating They're Slower
This is an anecdotal statement, but there are operators saying that they are slower than they have been in the past few years. This means they are willing to cut deals to keep demand in their fleet, which is good for the consumer of on-demand charter.
What this means for aircraft owners who charter their airplanes
There are many uninformed buyers that have purchased aircraft in the past few years that bought a lie told on social media that they can offset all their costs from owning a jet by chartering it out. I went on the show "Inside Aviation" last week and talked about why it's not possible. You can see me debunking TikTok videos here if you want a good laugh.
Those that were promised that they could offset those costs because charter has been absolutely ripping the past 3 years may find themselves having to foot the bill for a larger portion of those expenses. Add in a softening sales market (for instance, Falcon 2000's are sitting on the market for 130+ days) because of many of the same factors that charters are getting less expensive, and you could find yourself holding a real depreciation cost of millions of dollars, and a monthly burn of tens of thousands of dollars per month before they even utilize the aircraft.
What I always advise my clients financing jets and turboprops with a plan to put it on charter is always underwrite as if you have little to no charter revenue to offset, determine what budget you can afford at that level, and then use the supplemental charter income as a bonus. You don't want to take on the market risks of charter demand and be stuck with debt service and fixed monthly expenses that are going to make a significant impact on your operating business or personal cash flows.
No amount of bonus depreciation will make that not hurt.
Until next week,
Preston Holland