Stall Alert – The Business Case for Corporate Use of Private Jets

 The Business Case for Corporate Use of Private Jets

StuWiley

Private air travel leaves several different impressions on the public and business travelers, depending on their respective uses and roles. The public has bought into the PR negativity regarding the Big 3 automakers traveling to Washington via private jets to testify at congressional hearings – coupled to massive government bailouts of these firms.  This is understandable, however may actually be a red herring.  The focus should be on executive compensations and less on the travel mode. 

Still, the animosity provoked led to a quick exodus of many businesses from the private travel world altogether, as flight departments could no longer justify the ROI in failing economy.  Yep, when the world falters – many people end up walking or taking the bus, or otherwise downgrading their modes of travel to something that fits a more affordable model.   

This includes the Jet Set.  Ever read Grapes of Wrath?   ”Sorry, they aren’t worth what you are asking.  Not right now. ”

The Playboy imagery that stems from movies has not helped. Have some executives likely abused the privilege of flying on the company jet?  Absolutely.   Sending wives or girlfriends off to a shopping trip in Paris isn’t exactly a cost effective corporate plan, nor can it be justified by any stretch of the imagination for a publically held firm.  AGAIN – it’s the perks packaging vs. legitimate travel that should be scrutinized. 

Be a good example and don’t let the jet get photographed sitting in the Bahamas.  Gossip and perceptions can hurt you.  That said -

Business cases aren’t built on hearsay, but on strategic analysis and fundamental mathematics. 

It’s one thing for Bill Gates to use his own money and jet, quite another for a bankrupt company to continue such ludicrous financing for executives who actually created the bankruptcy.   At Microsoft, if you screwed up after having been rewarded heavily – stock vesting was taken away.

GM are you listening? How about you Bankers ? 

The same shift in philosophy occurred when the Seattle Supersonics pro basketball team attempted to hold the city hostage for a new stadium. Overwhelmingly the public told them to pound sand, requiring the players to put their own millions of dollars into building and running their own house. “Then if we decide you are any good- we might actually come pay to see you play”.  Put up your own collateral and earn the business, just like every other venture. Earn it.   Prove the value by performing. 

Even the Sonics weren’t stupid enough to incur public rath by using multiple jets when one Boeing Heavy does the job for the annual schedule.  Did the players suffer through consolidation? No.

Is this a legitimate use of private aircraft? YES.   

When it comes to business travel, the case for flying privately vs. commercial is a strong one. 

CAVEAT:   DEPENDING on the business case supports and the financial variables.  There are no absolutes.  Can solid business cases be constructed? YES. 

This is simple Cost Benefit and Alternative Spend Analysis.  Private air travel can be done at a breakeven (it’s not a revenue source) as long as the costs of the flight department and uses are strictly monitored and managed, just like any Cost Center on the balance sheet.   

Do you have a legitimate use case? Can you PROVE it? 

OK, let me play devils advocate against some typically heard arguments.  I want to make a few points and assign actions.   

Just-in-time or on call flights and flying to locations not otherwise served by commercial carriers can save time, and reduce general logistics costs for all employees required to travel – not just the executives.  This is The Nimbleness argument.  Is it valid?  

If you intend to use “Nimbleness” as your business case, you’d better get your facts straight. If any portion of this travel segment could have been handled by using electronic meeting methods – you just blew a huge hole in your logic. There are many things that are faster and more flexible than aircraft.  The online and electronic world increasingly relegates face to face meetings to critical events only, and is a far faster and more cost effective alternative. Be solid with your policies and definitions, and your argument will withstand acid tests.   

Then there is The Prestige Argument.  Bi-coastal Hollywood has been trying to use this argument for years, but for anyone other than a mega star with global commitments, what percentage of trips really keep a studio in the black?  Yeah, Bentleys are cool too.  But are they profit building corporate assets?

Does brand imagery require and justify the expenditures?  If so, you’d better be prepared to prove it.  

What about The Increased Executive Productivity Argument?  That depends.      

The argument that private flying increases the “productivity” of senior executives is highly challengeable, and can only be made into a solid business case by using highly tracked activity accounting.  There is simply no possible way that this kind of generalization can be made otherwise. There are too many variables to consider. It simply depends on how the time and energy is used and what the alternative costs and benefits might be.  I’ve been all around the world with executives who used the time to get hammered as much as they did to get actual work done.  Work : Play Analysis. 

The argument that private jet flights COULD be used to increase efficiency gets this business case argument off the ground. The proof is in tracking of dollar cost to ACTUAL gains, not perceived benefits.  Convenience has a valuation, and there are numerous formulas. Run the numbers, don’t assume.

Ground time, open seats and deadheads to base can kill an otherwise breakeven budget. Face it, jets are only financially viable when they are in the air and utilized at optimum capacity. Talk to an experienced financial modeling firm.

Many business travelers will tell you that they’re more productive on the aircraft than they are in the office. So, make them prove it.  Run tests.  For some, the travel time might be “office” time, for others – rest and recharge.  Measure the benefit.  Sometimes a simple commercial upgrade is enough to streamline ground logistics, and flight clubs actually offer decent amenities at a cost effective rate.

The Security Argument. Granted there are times when the single issue of security justifies a private aircraft plan, however you should avoid this as the main pillar for building a business case. Security has many forms, ranging from privacy to protection – and should be applied on a case by case basis.  

Simply avoiding commercial lines and screening lines isn’t good enough for an investment case. 

(I can beat a flight time any day of the year by simply using electronic meeting methods, which are far more secure and cost effective than ANY aircraft and lack all of the insurance liability posed by physical travel.  If you plan on using Security as a business case and basing it on a commercial airport security screening argument <hassle factor and time waste>, you are mounting a paper tiger. ANY executive security company will tell you that stationary is far more secure than travel exposure.)  

The Market Reponsiveness Argument.  In what is now an incredibly fast paced business world, the ability to react and move quickly is essential. This is why I’ve spent the past 2 decades empowering businesses and individuals with computer, mobile, and internet capabilities.  Forget the hyperbole put forth within the industry and do your homework.   In my world responsiveness is measured in minutes, yours may be in hours or days.  Create policy criteria to fit the situation, but be realistic.  Unless you are in the critical health care business, it is unlikely your kidney needs to be someplace immediately.   

ALWAYS question presuppositions offered by pundits in their arguments.  Your business case depends on avoidance of hyperbole or rhetoric.

“Even the most novice traveler knows that flying on the commercial airlines is a nightmare. Do we really expect that we’ll be better off forcing senior executives of troubled companies to spend ten hours flying commercially, sitting in airports waiting out long delays, missing connections, etc. to take a trip that can be accomplished in two hours flying privately?”    The Let Them Eat Cake Argument.

The presumption that commercial flying is a “nightmare” is ludicrous. Likewise, there is no coercion factor for “troubled company executives”.  They are not being water boarded  when they travel like the rest of the populace.  If anything, this may give them an opportunity to see how the other half lives and get into some dialogue with real customers.  Get real and stop claiming “victimhood” or “privilege” at the expense of others.   There may be a reason for these executives being out of touch.   

As for managing a troubled company, that is their own doing.  The market owes them nothing.

If the flight is a two hour hop, and execs are running a negative balance sheet overall, perhaps they should use the telephone instead.   If Execs are running a company into the ground, perhaps travel is the least of their concerns and they should be seeking revenue gains and cost efficiencies elsewhere. On the other hand, I firmly believe that profitable companies should do everything possible to increase time and work efficiencies using every means available – as long as they can afford them.   

Earn private jet use by making revenues, don’t expect it when you aren’t profitable.  

I’m sure you’ve heard aviation insider hyperbole that flies in the face of supply and demand economics.

“Pressuring companies into divesting their aircraft at this time will only hurt them. The market for private aircraft, like other markets, is down. With many sellers and buyers waiting for prices to fall further, forced sales no doubt will mean substantial losses for these companies. From a market perspective, this is exactly the wrong time to force companies to sell their aircraft.” 

Sorry -It’s called over supply.  Perhaps someone was too opportunistic with forecasts or expected a permanent boom market.  I can tell you from experience, even DotCom and Real Estate bubbles pop.

What makes aviation exempt? The high cost of the capital asset?  The Plantation Owners Argument

When the entire world is unloading assets at bargain basement rates because the market valuation has fallen and they need the cash for survival – why should the corporations referenced or the suppliers of travel related services be any different?  Wrong time for whom?  Why should my profitable company be forced to subsidize a company going bankrupt, by purchasing a devaluated asset at a fictitiously inflated rate?  Yes, a lower price received is part of the deal. If a company cannot afford an asset, they need to sell it at the prevailing market rate.  Or they need to find an alternative use case.   Period. 

The accountability lies with the management executives, not the public or the possible buyer. There is no reason we as the public need to foot the bill for GM when our lives that have been equally inconvenienced by their poor product planning and management practices – contributing to a global economic slide.  While not all risks can be forecast – the automotive industry has been in denial for half a century and we all know it.  Producing products that are energy inefficient or otherwise not something the public wants to purchase is THEIR FAULT alone. Thankfully, the center of the world is not Detroit. 

The Value Argument

Understanding and appreciating that there is a lot of resentment and anger in the country, the private aviation industry must make the case for business aircraft use on the merits that private aviation works to the benefit of corporations.  That business aircraft are justified because they add to the bottom line in clear and demonstrable ways.  This is the ONLY viable business case available.  Add value or be gone.

HOW?  By producing business cases with numbers and usage metrics as PROOF.   

NOBODY on the outside understands the Value Proposition or the supportive business case metrics and measurements.   Had you been doing this, the business cases and use cases would already be widely known and publically supported as efficiency enhancements. 

The industry and these companies must demonstrate that these aircraft are REVENUE GENERATING assets, not toys for spoiled executives.  Not one of the big 3 auto firms has a publically transparent travel and travel asset policy, and very few public corporations do.  The problem is owned by the Aviation industry.  WHERE HAVE YOU BEEN?  Apparently on autopilot.

There is very little public information relative to business case development for private aircraft. The NBAA has no whitepapers, and there are very few resources for the public to draw from.  Until the industry starts changing public perception – private jet travel will be perceived as a luxury item and boondoggle enablement.  Less than serious business assets. 

What can be done? 

Instead of taking a protectionist position and trying to defend the status quo we help aviation clients think outside the box.  It is incumbent on the aviation industry to take on the challenges of education to change public and private perception. It can’t just be an Arnold Palmer or famous celebrity campaign either, but a true business balance sheet expose.

We can help you avoid the boneyard.  Give us a call and we’ll help you understand how.

 Frankly, you should be doing everything possible to support the value of aircraft and aircraft use perceived value and price. 

What’s your strategy?