The Economics of Private Jets

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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100 thoughts on “The Economics of Private Jets”

  1. If you missed all the different announcements, I started a new podcast called Extremities about a month ago. It's all about how and why the world's most isolated human settlements exist, with the first season being on Pitcairn–the 50 person British territory in the South Pacific.
    You can listen to the podcast here: http://ExtremitiesPodcast.com

  2. There is a law that requires CEOs of publicly traded companies to use private jets. The reason is security. If the CEO were lost due to a security problem it would affect the stock price adversely. If you are the CEO of a publicly traded company you have no choice but to use a private jet.

  3. Overpaid waste of time and money. The manager got to three or four stores in a day, for a two-hour visit, and that's reasonable? This could be accomplished by telephone and if needed a trip to sort out a management problem or change, which is why you have a "store manager". Total idiot waste and I'm happy not to spend a dime in a dump run by trash.

  4. I smell of death
    I reek of hate
    I will live forever
    Lost child pay the dead. Quoted from slayer buklshit parole

  5. I think what I got out of this is that the only reason that private jets make economic sense is that CEOs and company higher-ups are criminally overpaid.

  6. There are some rather glaring omissions in some of your assumptions. It would be rare for an executive to travel alone. They would almost always be accompanied by their assistant(s), as well as other staff, when traveling. So flying commercial would mean purchasing multiple tickets, whereas chartering a private jet would be more of a fixed cost, independent of the number of passengers.

    The other major advantage of flying private is the ability to utilize smaller regional airports. This can be extremely beneficial even in big cities like Los Angeles. Being able to fly into Burbank or Santa Monica is far more convenient than flying into LAX, and then having to drive further in traffic to arrive at your destination. It also allows you to fly a more direct route, which can save time.

    Private planes are also pressurized to a higher level, so people don’t feel the effects of the altitude, and the accompanying jet lag as acutely.

    And lastly, an executive can conduct business on another level while flying private, without having to worry about who might overhear their conversations, or see what is on their laptop screen. This is especially important in a world where corporate espionage is an increasing concern. Executives are free to hold meetings, or conduct conference calls, and there is never the fear of being interrupted by a crying child or an unruly passenger. Further more, you cannot become trapped on the runway, which we have seen happen ever more frequently in recent years, where airlines will not allow passengers to disembark a plane that is grounded.

    And remember, it isn’t only your time, it is the time of those who are waiting on you, that is valuable.

  7. If AOC has her way with the Green New Deal, all of this would be moot, and the CEO's can charter a private train. Welcome to the 19th century.

  8. Just FYI, Bill Gates and Micro$oft Employees flew commercial until one event where Bill was speaking when a woman came up on stage and threw a pie in his face.
    After that he bought a private jet.
    You forgot the biggest reason for a Private Jet, it's called Personal Security. Your security team can fly with you while being lawfully armed.
    And I flew these types of people and planes for 26 years, the expense for private security is worth every penny spent and them some.
    After all how much is your life and the lives of your family worth, that is why you have security and fly private.

  9. I'm surprised the video did not touch on the value of the work that could be done while flying private. Much easier to write/review reports, prepare presentations and have team meetings while flying private than at airports or on planes with the public listening in. Obviously not easy to calculate but worth a mention all the same.

  10. My family owns a private jet company in the virgin islands and we charge about 20000 a hour but most of our passengers are either musicians, actors, or billionaires so it is made for the top paygradr no doubt.

  11. Seems like today every good video (and this one is definitely good) must be ruined by carbon footprint and climate change mantras… Pity.

  12. I was growing tired of your videos but I think this is your best video yet. Really caught my attention back to yiour channel

  13. Aaaand don't forget that getting the best candidates for management may include the possible use of a private jet for his or her family… Carbon footprint is not really a thing

  14. Well, CEO's rarely fly on their own. Usually A bunch of 5 CXO with 2 PAs. It is worth adding that if you fly commercial you have to wait for the scheduled flight as oppose full flexibility of a private jet. Don't forget that a small private jet can land on smaller airport that are often located much closer to the city centre saving the transit time.

  15. CO2 footprint is meaningless as there is no such issue. As to use of teh jets, it's called convenience. There is no dollar amount for that. If I could afford it, I would never fly commercial again.

  16. Thanks a million for such an interesting topic. Good to see a small cut from the Kyiv International Airport (Ukraine)

  17. You are missing the main factor. Corporate jets provide companies with huge tax write-offs. They are very expensive to operate but they make sense when applied against the company's income.

  18. Corporate jet is great. Just park in the hanger and take off when ready. Fly back earlier or later depends on how meetings went.

  19. This big companies need to operate efficiently and get their people where they need to be on time and ready to work not tired and stressed.

  20. Hey @Wendover Productions, given the world talks about climate change and many people point fingers to air traffic pollution – wouldn't that be an interesting and controversial topic to explore? In virtually all discussions I had with people, none knew any numbers or comparisons between air, sea, train, road private, road public. You frequently argue in $ and time, but never ever mention externalised costs. Time to fix that for added credibility. 😉
    PS: okay, you talk about carbon footprint exactly once and very briefly in this video. so technically you've mentioned it, but a more comprehensive comparison across various modes of transportation would be interesting and worthwhile.

  21. Thank you for giving me apt reasons why not buy a private plane.

    Other than the most obvious one being I'm broke.

  22. OH PLEASE "Bendover" Productions tell us mere dim witts how a simple condom will solve the planets problems, or why so many cruise Ships are built/being despite them pumping out the equivalent to "1x Million" car exhausts "PER DAY" are'nt exposed too!!!
    or how much fuel is used in military training days, or why Generals/etc. being flown around the planet in planes/choppers for a simple LUNCHEON???

  23. Hi Wendover!! I want to request a video about how airline alliances work. (Star Alliance, SkyTeam and Oneworld)

  24. You left out a few more important considerations, for example, the amount of time that it takes in either alternative to resolve a problem and make a decision, which might be much more valuable.

  25. The cost of all these luxury jets are likely paid for by the sweat and tears of sweatshops around the world, and at the expense of small upstarts companies trying to sell their products in WallyMarts below they cost. Yep, it's all true.

  26. Hay dumbass you forgot Tax wright offs that's why I fly and have a private you get taxed up the ass unless your cpa finds the loopholes

  27. Overall this is a good video, but some assumptions need to be revisited. For example, private jets often CAN fly faster than commercial jets. This is in part because they are often less restricted in fuel utilization. This then changes the calculus quite significantly for the rest of the video.

  28. There is a flaw in this analysis. This video attempts to justify the cost of a private jet vs the salary that an executive earns and how many hours is saved vs the hourly cost of the executive. The truth in companies is the value of an executive is how much he can increase the income of the company per hour he works and not what the salary is. An executive is typically worth 10 times or higher than the salary he is paid. This means that saving the executive time with a private jet allows that executive to do other things to greatly increase the income of the company well beyond the cost of the jet or the salary he is paid. The analysis in this video equates the executive's time value to his salary assumes that the company is only breaking even (the money the company pays the executive = the value of the executive's time to the company) and this analysis grossly undervalues the contribution of executives.

  29. This is just wrong. They do it because they can. Made 800m in revenue this year? You can easily write off 80m in business expenses related to travel cost.

  30. Corporations take private jets due to the ease of mobility. In case of an emergency, you can’t wait for the 7:30 am flight to New York when you have to be there at 8:00 pm the day before. To be honest, I think you’re looking at it wrong. Taking a years salary of a CEO and dividing it by the number of hours is kind of absurd. Many CEOs actually receive compensation in the form of stock. They cannot liquidate mass amounts of stock either. I think a lot of people don’t know that. You should however be looking at how much the company makes every year. Then this price could be fully justified.

  31. You ignore a fair number of factors regarding the tax implications of ownership as well. The Walmart example is great and all – but companies buy business aircraft even when this type of situation doesn't occur. Take for example the NE Patriots. Quite frankly, EVERY NFL team should have a biz av jet… versus chartering and the like. Kraft was just the first guy to figure it out. When you look at the amount of time the team flies, the cost of the flights, the time lost, etc., your calculus would fall short. Charter or commercial would be the way to go… which is why most NFL teams go that way.

    What Kraft realized, and what many businesses that are in the 500M to 5B range are realizing is – the government heavily subsidizes plane ownership and operation through the incentives of depreciation and tax offsets available to plane buyers. Maintenance of the plane is fully deductable. Training of the crew and staffing the crew is fully deductable. Private aircraft owners pay significantly lower costs in terms of transportation taxes. And in 2017 through I believe 2020 – the price of the aircraft is 100% deductable and fully depreciated in the year you take possession regardless of the terms of underlying financials of the aircraft.

    Essentially… when you look at what the NE Patriots did – they effectively monetized all their travel, got massive tax incentives to fly, and recaptured probably 300 hours a year of wasted time dinking around with charters and nonnsense.

    Is that worth a lot of money? You bet. So you don't need to be Walmart to cover that – you need to be able to justify, realistically, about $3M or more a year on travel expenses before this all begins to make financial sense.

    This is why the fractionals are finally getting traction. They can satisfy a part of the market that Gulf and Bombardier haven't been able to – the guy who has a million dollars a year in travel expenses… can't afford a jet… a turboprop is too slow… he wastes time at the airport… but he can't make the money work to buy a light jet (although that's changing… given planes like the TBM940 and potentially these new round of ultra light jets under $10m). People like WheelsUp fit the need for the time savings of travel… but for people who aren't spending enough to fully monetize all the costs associated with owning something like a Phenom 100 or bigger…

    Thus, the people who really own these aircraft typically have at least 100M or more in wealth (in the case of families) and are businesses typically with at least 500M in revenues. That's because your typical business plane is going to cost the business or family about $3M a year… payment, hangar, crew, training, maint, fuel, etc., etc., etc., etc. I'm talking your G500 or Challenger 600 aircraft… two man crew, flight attendant, proper maint, proper storage, Jet A, 300 hours a year of flight.

    If you fly lots… the savings go up because you amortize your costs over a greater number of hours… and your marginal costs on things like fuel typically go DOWN if you're buying long term contracts on fueling because you're flying 1000 or more hours…

    That's a pretty big chunk of change- $3M. But understand nearly all of it is a straight up deductable expense… on TOP of all the time that is saved. So not only do people save time… which for those who are valued at $100M/year their net hourly rates are 20K or more… the vast majority of the plane's operations are fully tax free… (since it's tax deductable). By contrast… boats… or cars… do not offer a similar level of tax diffusion…

    Your Marxism bullshit aside… whining about "carbon footprints"… jets make tons of economic sense. If you want to bitch about the Environment… make a video on China. One second of that country's operation has to be equal to every jet in America being in the sky at once.

  32. No surprise! Rich CEO decided that the company needs a privilege private jet to travel around the world for personal vacations!

  33. Why don’t you know that the words “a” and “the” have short vowels when preceding words beginning with consonants?! (That is, except in cases in which those words are being used to emphasize the uniqueness of an object.) If you don’t even know that, how am I supposed to believe that you know anything about the economics of private aircraft?

  34. Another unseen benefit to using private jets is the greatly reduced risk of being a victim of terrorism or a hijacking. If that $24 million/year CEO gets abducted or blown up that's going to be a huge setback for the company which can largely be negated by just flying private aircraft.

  35. Do your Research Punk !!!! The new Boeing bbj has a Operating under 1000 $ per hour. Your Channel su*KS !!!!

  36. While you have your opinion and have slated your spin to that, I enjoy Private jet travel for other reasons. It is convenient, saves a great deal of time; is very comfortable, especially on long flights. I also enjoy bringing my grandkids and other family members with me. You can’t go from Baltimore to West Palm and back in a single day on commercial travel and still have time to see my family members. In addition, once you’ve tried private jet travel you will not want to fly commercial again. Have a nice day and happy safe travels.

  37. It's a thing because people are willing to pay for it. Call it need, exclusivity, status symbol, etc. It doesn't matter. As long as someone is willing to pay for it then private jets are going always be a thing. Create something different that destroys the industry like what happened with train travel and then we can talk costs and logistics of the business.

  38. What's the biggest plane ever commercially flown? What's the biggest military plane? What's the biggest planes can get with current technology? How big could they theoretically get before physics just says "enough."? It's obviously not something commercially viable, so nobody's trying to improve passenger capacity anymore, but I still think it could make a cool video.

  39. This is silly. VERY few companies charter these things. They buy them and keep a pilot on the payroll. That is what our firm does. Generally we don't fly one person alone. It enables several stops and stops at non-standard locations. Remote locations like Puerto Monte or Caldera or even local places like Greenfield. A jet costs maybe $12,000,000 for a top end corporate. But something like an Encore+ you can get for about $4 million with a op expense of about $2,000 an hour. Total yearly maintenance $200-300,000, so it can be justified, especially if you have a great number of people to fly at non-standard hours.

  40. For large companies, they may consider the value of others’ time, not only the person flying. Commercial flights are unreliable. A delayed or cancelled flight can ruin an expensive corporate event, waste the time of hundreds of people waiting for the speaker to arrive at a convention, delay scheduled training, or damage professional relationships with valuable clients.

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