The Economics of Private Jets - YouTube

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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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