If you’ve ever chartered a private jet on a regular basis, you will certainly understand why the Jet Cards promise of fixed pricing and consistent service are so attractive to clients. Chartering a private jet can be a frustrating process to some. Simply obtaining competitive quotes for a charter flight can take hours or even days and when there is a mechanical or the aircraft you booked is no longer available, you are forced to go through the process again which may cost you more than what you originally agreed to.
The explosion of Jet Card memberships has actually been going on for 20 years now and it has taken many steps and turns to get to where they are today. I think the best way to describe the differences between the programs is to explain their history of how they got here.
When I started working in the Private Jet industry back in the mid-1990’s there were just three options to fly in a private jet; you could own one outright, charter one or purchase a fraction of a jet. Jet Membership options were not available until 1997 and I happened to work out of the same office where the first Jet Card was created.
Jet Cards got their start by a company once called Executive Jet Worldwide (not to be confused with Executive Jet Management which is owned by NetJets, but more on that later.) I met Jeff Creed, the founder of Executive Jet Worldwide while learning to fly at Marshfield Airport which is located in a suburb of Boston when he was starting out. We both had the same flight instructors and my father once purchased a jet from Jeff. His original intention was to sell some charter in the jet he owned with a partner. An aggressive gorilla marketer Jeff worked the Yellow pages like brokers today work Search Engine Optimization by picking up all of the telephone calls from people looking for Executive Jet Management. Jeff began getting calls throughout the day for people looking to purchase a fractional share from NetJets. At first I remember Jeff telling me he was referring clients to Executive Jet Management and receiving a commission for doing so, but at some point that ended and Jeff had to find another product to sell to people who were looking for a fractional ownership product.
Most Fractional Owners understand they are paying more for private jet travel than charter and they are willing to pay the premium for consistency in pricing and service. Customers were not willing to hear a pitch about chartering a jet so Jeff began pitching a fixed hourly price with a $100k purchase. Jeff priced the hourly rates below what someone would pay for a fractional share, but higher than he could purchase from the charter market. Members would call him to book their flights at a predetermined rate and Jeff would purchase a charter at a lower price and keep the difference. The first Jet Card was born.
Through Jeff’s aggressive marketing tactics and unique product offering, Executive Jet Worldwide grew quickly and ultimately took it’s first investment from CSFB who ultimately changed the name to Sentient. Jeff Creed moved on and the last I heard from him, he was flying himself around in his own private jet so I’m sure he made out pretty well and he certainly changed the industry.
Sentient went through several owners between 2007 and 2014 including TH Lee and is now owned by Directional Aviation who is also the owner of FlexJet, Flight Options and SkyJet.
In 2001 Kenny Dichter and Bill Allard (who just happens to reside in the town of Cohasset, MA which is right next to Marshfield, MA) founded Marquis Jet which offered the first Jet Card for a defined fleet of jets. Unlike Sentient who relied on the inconsistent charter fleet, Marquis Jet would buy fractions of jets from NetJets and resell the time in 25 hour increments. Customers would get all the benefits of owning a fractional share, but would not have the 2 to 5 year commitments or hundreds of pages of documents necessary to buy one.
Where Sentient solved the pricing inconsistency issue, Marquis Jet solved the quality of service inconsistency and lowered the cost of entry to the highest quality fleet in the country. All jets were 10 years old or newer with similar interior configurations.
Kenny Dichter and Bill Allard were both accomplished at marketing and building sales teams and grew Marquis Jet dramatically over the next few years. NetJets eventually purchased Marquis Jet in 2010 and Kenny and Bill moved on a few years later to start Wheels Up.
It wasn’t too long after Marquis Jet’s rocket growth that virtually everyone came up with a Jet Card program; FlexJet and Flight Options, both of which are competing Fractional Ownership programs to NetJets came out with their Marquis Jet style cards and most charter brokers began selling Jet Cards fulfilled from the various portions of the charter fleet.
The first time I met with XO Jet in 2007 when they were just getting started. They were very smart, data driven and wanted to make fundamental changes to the industry and they believed they could solve many inefficiencies in the industry through the use of technology. XO Jet was founded in 2006 by Paul Touw who was a successful software entrepreneur and owner of Ariba, Inc. and from what I was told, Paul’s intent was to bring technology solutions to the private jet industry which had been very slow to change.
XO Jet initially purchased a few Citation X jets and began offering highly competitive charter prices between popular and once profitable routes such as New York to Los Angeles, New York to Florida and Boston to San Francisco. These routes were commonly flown by clients which made them easier to optimize by reduce repositioning costs and were longer in duration which reduces the number of cycles on the engines and airframe and also reduces costs. The rates were easily 20% lower than charter competitors, 50% cheaper than fractional programs and the jets were all brand new.
Initially, Brokers were the largest clients of XO Jet and quickly purchased flights for their clients at below market rates and competitive to NetJets quality. The Broker market flourished with new Jet Cards which were backed by the XO Jet fleet. Thousands of mostly independent Brokers were out in the marketplace pitching these Jet Cards and between 2008 and 2015 the market exploded.
How did they offer such a low price point at that level of quality? I am always skeptical of businesses strategies which involve owning jets and chartering them out to make money. Most owners of jets charter them out to offset some of the fixed overhead, keep their pilots current and receive accelerated tax depreciation, but very, very few make any money at it and the vast majority lose their shirts because aircraft values typically drop about 50% every 5 years. In order to make money, you not only have to compete with people willing to offer a price below costs, but you also have to deal with tremendous asset depreciation. In XO Jets case, they purchased multiple $20 million jets which lose on average $2 million per year in value. This is why I believe XO Jet continued to roll back their wholesale efforts and instead invested heavily in building direct retail clients through their own Jet Card to improve margins and get closer to a more sustainable pricing strategy.
XO Jet received a few rounds of financing over the years and is now majority owned by private equity firm TPG. TPG also acquired TMC in 2016 who had a similar business model to XO Jet but with smaller jets such as the Hawker 400XP and 800XP. Paul Touw left XO Jet to start Stellar in 2015 which is a logistics software concept to help Operators of private jets optimize their fleets.
There are only so many ways to reduce the cost of flying in a private jet and scaling can be very expensive with new jets selling for between $4 million to upwards of $100 million. The fundamental issue with trying to get the price point to something that is not obscenely expensive to the average person is: The private jet has one airframe, two engines, typically two pilots and between 4 and 14 seats while a commercial plane also has one airframe, two engines and two pilots but can hold upwards of 200 people and if you’ve flown on a commercial jet recently you know that nearly every seat is sold these days. The commercial carriers will therefore always have economies of scale that private jets will never have. The second issue is the logistics where commercial carriers fly into and out of 50 major airports with flight schedules which minimize or eliminate most empty flight segments while private jets can and do fly into over 5,000 different airports. What are the odds that you want to travel from Topeka Kansas to Pittsfield Ma on the exact date and time that someone else wants to go in the reverse direction? On Demand private jets will never be as efficiently flown as commercial carriers. The third hurdle is the number of jets available in the charter fleet. Most charter flights are subsidized by the aircraft owners who are simply looking to offset some of their expenses, obtain an accelerated tax depreciation advantage and keep their pilots current during slow seasons which is why charter prices are typically about 80% of the true cost to fly if you owned the jet. Unless someone is willing to purchase a bunch of jets and lose 20% on every flight, there will not be a tremendous increase in the number of jets available at the current charter prices anytime soon.
As reported above, Kenny Dichter founded Wheels Up in 2013 with an initial investment of $55.7 million from Jeffries and an order for 105 new King Air 350i Turboprops which are typically less expensive to operate, especially for shorter flights, than the jets offered by the major fractional ownership companies such as NetJets, Flight Options and FlexJet. Wheels Up intended to offer a lower price point in the hopes of opening up a new and larger market with its less expensive Turboprops.
The initial program required an initial fee of $15,750 with annual dues of $10,000 plus the fixed hourly rate for each flight. Clients had guaranteed pricing and a new defined fleet which would be operated by GAMA Aviation, a well-respected Operator with International experience. The price point is a little more expensive than chartering a Turboprop but with a higher quality defined fleet.
In the first few years Wheels Up was able to attract two more rounds of financing bringing the total raised to $408.9 million and a valuation of $700 million by late 2017.
In 2012 another startup named JetSmarter was founded by Sergey Petrossov who also claimed to be lowering the cost to fly and thereby opening up a new and larger market but with a very different business model. JetSmarter approached many of the leading Operators in the industry and began buying up their future empty leg flight segments, writing very large checks for anticipated supply. They would then take a real-time data feed from these Operators and display them on their app where members could book at a low or no additional cost to their members. By 2016 JetSmarter had added a shuttle service where they would charter a jet for a certain route and sell individual seats to its paying members.
Since 2012 JetSmarter raised a total of $130 million with a valuation of $1.5 billion by December 2016. To put these valuations in perspective, The entire charter market is estimated to be around $13 billion. If JetSmarter is to be successful, it will have to grow the market considerably over the next few years or become a very dominant player.
In 2016 Wheels Up in partnership with Broker Apollo Jets, launched 8760 which is a competing app to JetSmarter with both empty leg flights and shuttles.
Which of these models are sustainable? I believe that the JetSmarter concept of pre-purchasing empty leg flights and some shuttle flights make a lot of sense. Where I believe it falls apart is the projections on growth since the supply of discounted flights is subsidized by customers who pay full fair to fly in the reverse direction and the aircraft owners who are charging less than the true cost. To scale this model, it will ultimately require a Defined Fleet which will certainly raise prices and defeat the purpose of growing the market. This supply problem is not easily overcome and although the people using the App today, both operators and customers can benefit greatly from this model.
Defined fleets are also a great solution as long as the price point is set properly. NetJets and their Marquis Jet product are by far the largest player in the industry: they are mildly profitable; have the most sophisticated logistics technology; are the largest buyer of private jets so they are getting the lowest possible prices and have negotiated the lowest expenses including fuel, training and maintenance in the industry. Therefore, the price for a defined and owned fleet should be above the price to fly on NetJets which is currently the most expensive option. I would therefore anticipate that defined fleets will grow, but there has to be higher and more sustainable pricing at some point.