Power Laws and Private Jets
One of my favorite podcasts right now is BG2 Podcast with Bill Gurley and Brad Gerstner. I am not a venture capitalist or a public equities investor, but the way they talk about markets and trends helps me think of things in novel ways.
If you're a Silicon Valley person, these two names are familiar to you. A recurring theme on their podcast is the idea of "Power Laws." The core idea is that a small number of entities account for a disproportionately large share of outcomes, driven primarily from economies of scale and network effects.
This creates a growth-at-all-costs environment, because once a company gets big enough, the economies of scale create a juggernaut. You've seen this play out with software companies like Facebook and Amazon AWS, tech-backed services like Uber, and hardware plays like Nvidia.
The results speak for themselves. Software has created some of the wealthiest companies (and individuals who buy private jets, often times G550's and G650's) that have grown faster than any others in history. The power law has been proven right a time or two.
At some point, someone decided this same rule would apply to private jets. And so far...
Charter Operators: A Hyper-Scaler in Disguise?
For those just joining us, in the world of aircraft charter there are two distinct profiles: charter brokers and charter operators. The brokers help connect demand (private fliers) to a disparate supply (aircraft) and take a commission of 5-15%+. The operators are the companies that actually fly the jets, hire the pilots, abide by the FAA rules, and wash and put away the aircraft.
There are two distinct ways in which charter operators assemble their supply of fleets.
First, is managed fleets. These aircraft are owned by UHNWI or corporations, and the management company charters the aircraft. In commercial real estate, this would be your property manager. They handle the sales and marketing, operations, and light maintenance. In exchange, these companies charge a fixed monthly fee to the owner (scales up with aircraft size) and a percentage of charter revenue (anywhere from 15-25% of wholesale charter value).
The other is owned-and-operated fleets. In this scenario, the company who manages, markets, and operates the aircraft is also the owner or lessee of the aircraft, showing it on their balance sheet. This is done via debt facilities or lease agreements, but they are the exclusive operator of that aircraft.
A company doesn't have to operate only in one mode. For instance, Wheels Up had a very large managed fleet until they sold that business unit to Airshare. Other companies like Vista Global Holdings have their managed fleet under a separate brand from the flagship owned-and-operated brand.
Unicorn Private Jet Companies
At some point during the ZIRP-era, yield-hungry capitalists saw private jets as an opportunity to create the next trillion dollar company. They were convinced that power-laws would create the next unicorn in private aviation. Wheels UP became the poster child for this movement, claiming to democratize private aviation and create TAM-shattering technology that allowed for true "network effects."
And Wheels UP wasn't alone. Others like Fly Exclusive, Blade Air Mobility, Surf Air, now-combined VistaJet/XO Jet/JetSmarter, believed they could power-law their way into the "magnificent seven."
These companies had capital, and a charge to scale as quick as possible. The only way to do this is with an owned-and-operated fleet.
The problem? They all forgot about how f-ing expensive everything in private aviation is.
Owned-and-Operated is Hard
Uber owns no cars, AirBNB owns no real estate.
Yet, Wheels UP owns or leases a lot of King Air 350's, just bought 17 Phenom 300's from GrandView Aviation, and is replacing their 13 Citation X's with Challenger 300's and 350's.
VistaJet has a vast fleet of Challenger 350/605/850's and Global 5000/6000/7500's.
FlyExclusive has a smattering of Citation Excels, CJ3's, Encore's, Sovereigns, X's, and just picked up Hondajets with Volato and JetAI joining the fold.
The fleets are constantly evolving, but being leased or owned, there is cost of capital. This can range from SOFR +3% to a lease-rate factor of 2% (I'll do a deep dive on this topic later). Great when the cost of money is free.
Margins are incredibly thin in charter businesses. By the time you pay for fuel, maintenance, hangars, insurance, and pilots, there's not a lot left over. This requires proper fleet planning optimized for high dispatch reliability and the ability to eek out some extra margin. That, and ensuring that your other costs don't spiral out of control (shoutout to our sponsor Ramp).
Sales, General, and Administrative and marketing expenses are what get people in trouble. I love the College Gameday appearances and the lavish Masters parties as much as anyone, but those costs are from the hyper-scale days, and when the power laws don't kick in like everyone expected them to, you realize that its just really hard to make money as a scaling charter operator.
How You Can Actually Make Money
The more that I see the public "darlings" of private aviation play out, the more I believe that the only way to make money in this business is through controlled, organic, profitable growth until you scale large enough to grow inorganically. Remember, Kenn Ricci started Corporate Wings in 1981, Flight Options in 1998, and didn't buy Flexjet until 2013. I wouldn't call that a hyper-scaler, but they're now the second largest provider in the world.
I learned from a post-acquisition company some core strategies to generate positive cash flows:
- Controlled Growth: It can be really tempting to grow-at-all-costs. In aviation, it looks like only buying another aircraft when demand outstrips current aircraft count.
- Manage Depreciation: Ensuring that aircraft are on engine programs, are kept clean and nice, and there are systems around keeping aircraft in good shape.
- Hyper Efficient: Southwest only flew one variant of aircraft, and that kept things simple and made them profitable. Charter operators can take a lesson from that. Training, maintenance, and customer experience all take a benefit from that.
Is there a chance at power law?
Here's my take, and this is not investment advice and this is only my opinion.
I think power laws aren't the right framework in private aviation. I did a deep dive into Flexjet, but that is traditional scale as opposed to venture-backed "hyperscale." Here's where I see the biggest challenges:
Economies of Scale (Power Law Part 1)
- Gross Margins are Thin Regardless of Scale: the beautiful part about traditional power-law businesses is that gross margins are scalable. The gross margin will increase significantly as revenue grows. Fuel and maintenance, the main COGS, can only decrease marginally with scale. Add in 2 highly paid professional pilots as a Cost of Goods. You don't get a discount on pilots when you hire a lot of them. You see the point.
- Overhead Scales Proportionately: Hangar space scales with the aircraft, whether you own it or you are renting it during an overnight. Unless you own a hangar at every airport (impossible), you're always going to be renting space. Wing-tip to wing-tip scales up linearly. Same with insurance.
- Even cutting out the middle man, CAC is high: Wheels Up proved that you can build a customer acquisition machine. Its keeping the customer happy that is the hard part. These scale operators go direct and increase top line revenue, but they move the expense down a few lines on the P&L to Marketing.
Network Effect (Power Law Part 2)
Network effect means it gets better the more people that are involved. Example, one telephone is useless but a lot of telephones are great so you can call your friend. The problem is network effects in private aviation adds complexity and actually increases cost. If you only have clients in Tampa, Atlanta, and New York it's easy. Add one client in Aspen and it becomes hard. This is a weird anti-power law that doesn't exist in other non-logistics businesses.
Conclusion
I really wish someone could build a hyper-scaler that made everyone super rich. I haven't seen it in the public markets, and there aren't any players I see waiting in the wings to eat everyone's lunch. I don't think democratizing aviation or disrupting it in any way is the answer. I think steady, cash-positive growth is the way to do it. That's just the way I see it from where I sit.
Until next week,
Preston Holland
P.s. Send this to a friend who has flown private at least once before. You can tell them you're thinking about becoming a VC and starting a fund to disrupt the private aviation space. Then, tell them "just kidding" and ask the next time you're flying private to go skiing or play golf.
