Can Cheap Planes Make a Business Out of Charter?
The world of private jet charter is a complex beast. We reckon the recent attempts at innovation are a good thing (Stellar Labs, JetSmarter, Stratajet, etc.) and we are big supporters of anything that makes markets more efficient. But these concepts are mostly aimed at the distribution side of the equation- matching derriere’s with available charter seats.
None of this addresses what, from our standpoint, is the most glaring problem with charter: it’s not actually a real business. At least not from the standpoint of the guy who writes the check to purchase the aircraft.
Please let us explain. A hotel is a real business. At some point the cash flow from room rates, mini bar charges and morning pancakes delivered to your door will not only pay to run the hotel every day, but also pay back the folks who built or bought the property- and hopefully with a nice return.
By contrast, the private jet owner is really renting out his spare bedroom to wayward travelers. He’s thrilled with some extra spending money. Pizza night at Shakey’s for the kids is now paid for. But the mortgage … not so much.
Simply put, charter prices have historically been too low to justify owning an aircraft strictly for the sake of a charter business. The market is dominated, and pricing is ultimately determined, by the spare bedroom owners. And it’s a great deal for charter users.
However, with asset values, interest rates, and Jet A all at historical lows, does acquiring a business jet, only to generate charter revenue, finally make sense?
Before you get too far out over your skis, it’s not going work with a $40M, $30M, or $20M asset. The cost of capital is suffocating. But with asset values for certain charterable, not that old (and that crazy expensive to maintain), large-cabin aircraft now below the $10M threshold, maybe it can make sense. Just a bit??
Factoring in a reasonable rate of interest and depreciation, a $5,000,000 Bombardier Challenger CL604 would imply a capital cost of less than $50,000 per month. At 50 hours of charter per month (600 per year), that’s $1,000 per hour.
According to Conklin & de Decker, Fixed Costs for a CL604 are approximately $1,250 per hour. Fuel and apportioned maintenance (using a $4 per gallon national average here in the US) would equal approximately $2,300 per hour. All up, that’s $4,550 per hour. What’s an hourly charter rate for a CL604 these days … $5,000 per? Wait, I’m not only covering my costs, but also making a little money when I charter my aircraft out? Well, a little more analysis would be required to make that claim, but the numbers sure look a lot better than they did a few years ago with more expensive assets. And anything north of 50 hours per month / 600 per year could get interesting.
The point is, based on low asset prices, there is opportunity in the market today for innovation. Developing a more reliable and dependable charter system (in theory) will build the base of private jet users. We know there aren’t enough full aircraft owners in the market now to absorb the excess inventory for sale. But maybe there is enough demand to put some of these assets to work if we can sell more capacity one hour at a time.
Wishful thinking? Maybe. But we’ve sold aircraft to buyers who are trying to implement this exact business model. Will it work? Who knows.
Our bet is that we are in the midst of a structural change governing the economics of private jet ownership that will persist for some time to come. Therefore, maybe it’s time to start taking advantage of what the defense will give us?