The Economics of Private Jets

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This video was made possible by CuriosityStream. Watch over 2,400 documentaries for free fora month at CuriosityStream.com/Wendover. Private jets represent an inconceivable levelof opulence. If the average American were to spend theirentire year’s salary to charter a Gulfstream G550 from New York, they would just barelymake it to Utah, and yet, there’s a class of people who use these planes to fly notjust from New York to Utah, but rather routes like New York to Beijing. There’s a class of people who will spendtens or hundreds of thousands of dollars on just one single flight. Now, there are a few reasons this is strangebeyond just the sheer price of things. Chartering that Gulfstream from London toDubai, for example, you’d end up paying about $55,000 at rack rate. Meanwhile, if you were to fly Emirates FirstClass, which is just, if not more opulent, you could fly between the cities twenty timesfor the same price.

What’s even stranger about this kind ofexpense 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 morean hour to fly makes money? There’s a pretty simple way of figuringthis out. Out of the 8,760 hours in a year, the averageCEO 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 flyabout 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 ona plane, and fly—rather than having to navigate one’s way through a busy terminal for afixed flight time. But still, flying private versus commercialfrom London to Dubai would save, at most, about three hours in airport time. With the cost of $55,000 for the flight, thatwould 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 servicelike London to Dubai. One of the larger corporate jet fleets outthere belongs to Walmart. Now, this might come as a surprise consideringthat 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 amountof service for such a small city with flights all the way to Los Angeles and New York, largelypropped up the company’s traffic, but for the higher ups, commercial doesn’t cut it. That’s why the company has a fleet of 20corporate jets—the largest of any American company. These are most frequently flown by the company’sRegional Vice Presidents who are in charge of a specific area of the country and willhave to make frequent store visits within this region.

The company apparently has a goal that nobodyspends a night away from Bentonville—they want as many trips as possible to be day trips. Now, let’s say that one of these executivevice presidents needs to take a trip to three stores—one in Rock Springs, Wyoming; onein Spokane, Washington; and the last in Great Falls, Montana. Getting to Rock Springs requires a seven houritinerary through Denver that would get this executive in at 9:30 pm therefore alreadyrequiring an overnight stop. Then, the next day, they would do their storevisit in the morning and, as there are only two flights a day from Rock Springs, theywould have to wait until 4:50 pm to catch a flight back to Denver then another one toSpokane, getting in at 8:30 pm local time, therefore requiring another overnight stop. The next morning they would do their sitevisit, but once again, flight schedules dictate that the first itinerary to Great Falls wouldleave at 5:05 pm through Salt Lake City, getting in at 10:04 pm local time, thereby requiringanother overnight stop. Following the next morning’s store visit,this executive would catch a noon flight to Denver and, after a three hour layover, anotherto finally get into Bentonville at 8pm.

These three store visits would therefore takeup four whole working days, but what if this executive flew private? Leaving at 9am, the first flight direct toRock 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 wouldtake off again at 11:45 am, flying an hour and 15 minutes to Spokane, getting in at noonlocal time. After another two hour store visit, the planewould take off at 2 pm for a quick 45 minute flight to Great Falls, getting in at 3:45pm local time. After a final two hours at this store, theplane 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 flightsbecomes a day trip on private, and that’s why Walmart decided private jets are worthit for them.

It’s all about valuing the time of theiremployees 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 ownsand operates is the Learjet 45. It costs the company about $4 per mile tooperate this aircraft including crew, fuel, insurance, maintenance, and all other variablecosts. Therefore, the 2,900 miles flown on that day-tripto 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 oneof the 260 workdays per year, they would have to make almost exactly $1 million per yearfor this private jet ride to be worth it to Walmart—an amount within the realm of possibilityfor upper management at such a large company. Of course, that’s not factoring in the alternativeoption’s hotel, food, and airline transport costs which would likely sum in the thousandsand it’s also assuming there’s just one passenger. If the plane were to be filled to its maximumcapacity of nine, each passenger would only need to be paid $111,000 per year for theexpense to be worth it to the company which is less than an average Walmart store managermakes.

Now, there’s one other case where privatejets can make economic sense over flying commercial. Let’s say Walmart was looking to expandinto the Philippines. Flying business class, it would cost a minimumof $5,000 roundtrip per person, require three stops, and take over 26 hours to get fromBentonville to Manila. Flying private, though, a long range jet likethe Bombardier Global 7500 could make it there non-stop, in just 15 hours, carrying 19 ofthe company’s top executives. Since the company does not own this type ofjet, it would likely charter one at a cost of about $10,000 an hour, or $150,000 forthe trip. While the cost of commercial airfare is lessthan this, assuming the CEO, who makes $24 million a year, is onboard, the value of theeleven hours of his time saved is worth $97,000—clearly tilting the math in favor of the private jet. The general phenomenon of globalization hasbeen great for the private jet market as businesses need to travel to far off places like this. Especially as companies outsource manufacturingand 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 needto go. But despite this, the private aviation industrywas 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 oftheir jets, even if they could make economic sense in some cases.

It was all about optics and nowadays, thesejets are coming with poorer and poorer optics, for good reason. Private jets are truly horrendous for theenvironment. If one were to fly that Bombardier Global7500, 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 footprintexceeded that of the average person in one year. Increasingly, these jets are even being usedfor purposes that cannot be justified economically. Since 2013, there has been about a 10% increaseamong Fortune 100 executives of using their company’s corporate jets for personal, leisurepurposes. They apparently justify this by saying that,in case of a work emergency, they might need to get back to the office quickly and commercialair travel could hinder that. Firms that include this as a perk for theirexecutives, according to one set of research, under-perform against the market average interms of shareholder returns by about 4% each year. Of course, the real reason some companiesmight have private jets is not because it makes economic sense, because it quite oftendoesn’t. It’s because the people who decide whetherthe firm will use these are the very people that will use them. In many instances, the explanation is noteconomic, it’s societal. Now, many Wendover Productions viewers arealso probably the type of person who watches a lot of documentaries.

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