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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 flyrather 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 jetsthe 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 Bentonvillethey

  • 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

  • storesone 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

  • Walmartan 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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The Economics of Private Jets

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    joey joey posted on 2021/06/10
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