A number of private aviation operators have set out to consolidate private aviation including WheelsUp, VistaJet, Directional, and Jet Edge. Of these, perhaps no one has a more complete approach than Kenny Dichter, the Founder and CEO of WheelsUp, with his vision for democratizing private aviation via increased scale, a modern (and Uber-like) customer experience, advanced technology, and an open network. In a remarkable series of acquisitions, WheelsUp purchased three of the top 10 U.S. operators in the last year: Travel Management Company (TMC), Delta Private Jets, and Gama Aviation. These acquisitions made WheelsUp the largest Part 135 charter operator in the U.S. with 160,161 flight hours in 2019, almost three times as large as Executive Jet Management, a wholly owned subsidiary of NetJets, and more than three times as large as XOJET, Jet Linx, Solairus, and Jet Edge, according to data from ARGUS International.
Can these consolidation strategies succeed? What could a consolidated industry look like? How will the Covid-19 crisis change the odds for success?
Private Aviation’s Value and Its Challenges
Less than 150 of the 19,000 U.S. airports service about 95% of all commercial passengers. Regional air service has declined for years and many airport locations can be reached only by private aviation. For these reasons, private aviation services remain critical to connecting large parts of the country which would otherwise remain accessible only via long, inconvenient car trips.
Yet, private aviation lags behind the commercial aviation industry operationally and in terms of passenger growth. Critically, private aviation often costs more than 10-30X as much for a commercial trip on a seat-mile basis. The industry’s technology lags behind sophisticated technology platforms like Uber and Airbnb or advanced aviation booking platforms like Priceline or Expedia. In the world of Uber-like interfaces, potential private aviation customers dislike the need to make multiple phone calls, emails, and other interactions to price and book trips. Finally, the industry has few well-known brands to create customer confidence around delivery and safety. Collectively, these factors depress demand and inhibit switching from commercial to private aviation.
A Dassault Falcon 2000 jet sits on the tarmac at the private Delta Jet Center of Cincinnati Northern © 2015 BLOOMBERG FINANCE LP
Improving the Customer Experience
Faster and more transparent booking will require operators to acquire new technologies and change their operations. Customers need easy to use mobile interfaces that show multiple options (including commercial), transparent pricing, and click-to-book. Ideally, these front-end applications would also provide comparisons of total travel time vs. alternative transportation modes which would highlight one of private aviation’s biggest advantages. The way forward could resemble the kind of technology Uber has developed for its helicopter service from John F. Kennedy airport with its sophisticated presentation of the entire trip’s timeline (including car transportation) and smart logic that automatically eliminates costly, time-inefficient alternatives. (The author’s company, DiamondStream Partners, has made investments in several technology companies that assist private aviation companies with scheduling, reporting and marketplace technologies.)
If these types of front-end applications remain in the early stages of development today, the back-end to support that slick front-end technology represents the key to creating an interface that customers value. Unlike commercial aviation, private aviation operators often don’t fully control their fleets. Many charter operators rely on other charter operators to fly some of their customers when they don’t have an aircraft available, an aircraft mismatched for the mission or an aircraft in the wrong place.
In addition, private aviation operators often fly aircraft owned by private individuals. Booking these aircraft in the charter market may require the owner of the aircraft to approve the charter. (Would you rather have the CEO of a Fortune 100 company flying in your $30MM jet for a business trip to New York, or bachelor party group heading to Las Vegas?) Few operators connect via an automated platform with owners or with other operators that would enable them to create options in real-time or generate real-time bookings. As a result, they typically cannot offer customers automated booking except for owned aircraft within their own fleet.
To build a great customer experience, they will need to build or buy the right front-end technology and link it to the back-end operations. This includes automating, or at least streamlining, owner approval and the wholesale bookings process. Even with new technology, streamlining these processes represents a major change to the collective culture of the owners and operators in the ecosystem. Building these capabilities will demand substantial investment to build-out and implement at scale.
Highlighting these changes to consumers and to the ecosystem will require stronger brands to give customers confidence in the new capabilities, safety and availability. In this respect, the large equity stake Delta took in WheelsUp as part of the Delta Private Jets acquisition could help WheelsUp build share and capture some price premium. However, it is worth keeping in mind that Delta never figured out how to effectively convert its commercial aviation customers into private aviation customers while it owned Delta Private Jets.
The fundamentals, not branding, will drive the real changes to market dynamics. At the end of the day, most market stimulation in aviation depends on time savings and cost. The customer experience changes will help the consolidators gain share at the expense of other players, but in order to truly stimulate demand, the consolidators will need to work costs out of the system.
Fixing the Industry’s Network and Cost Position
The International Air Transport Association and many academics have shown that travel time and especially the cost of travel drive total demand for flying. JetSmarter’s rise and eventual sale showed that dropping the price of private aviation stimulates substantial demand, but that investor capital can’t replace a low-cost position for more than a short time.
Creating a lower cost position for the industry represents a much more difficult challenge in private aviation than in commercial aviation due to the thin and spotty demand for private aviation. Based on 2019 FAA U.S. domestic flight data, 139 airports generate 95% of commercial departure seats, whereas 1136 airports generate 95% of private aviation departure seats. As a result, commercial aviation routes have passenger density over sixty times higher than private aviation routes.
A low density network means private aviation often doesn’t have enough demand to create cost efficient schedules with high asset utilization. Aircraft often have to wait on the tarmac for hours or days or reposition. Crew sometimes sit in place for several days because there is no easy way to get them home. In addition, the imbalance of demand on many routes means the outbound leg may need a different type or size of aircraft than the return flight. If these challenges were not enough, most aircraft utilized by private aviation operators were not designed for high utilization operations. Not surprisingly, private aviation averages less than one flight hour per day with over 40% of flights flying empty, whereas commercial narrow body aircraft averaged closer to nine flight hours per day and almost no dead-heads.
All of this creates a challenging feedback loop. Low demand leads to poor asset utilization and high costs. This leads to relatively high pricing and pushes customers to select less direct modes of travel like commercial aviation or driving, thus limiting private aviation demand. Lower demand reduces the frequency of flights, making it more difficult to schedule aircraft at convenient times with attractive prices, further reducing demand.
Can supply aggregation reverse this low demand feedback loop? Theoretically, operating a larger fleet should reduce the number of flights with no passengers, create a better fit between aircraft and mission, and create opportunities for individual seat sales. However, doubling or tripling capacity may result in only marginal improvement in asset utilization because the huge numbers of potential routes still leaves only small numbers of passengers on each city pair. Supply aggregation therefore only constitutes one piece of a growth strategy — it costs a lot and creates a lot of operating leverage for uncertain benefits. In addition, it makes operators more vulnerable to sudden dips in demand. The consolidators have two other complementary strategies they can pursue, both of which have their own challenges.
The Constrained Network Strategy. XO Jet built a strategy with a relatively homogenous fleet of similar aircraft and ‘floated’ them so any aircraft could fly any trip. They then constrained their network to higher volume routes and drove aircraft utilization to around three hours a day vs. an industry average of closer to one hour. They also balanced destinations with strong inbound and weak outbound traffic via price stimulation through third party brokers to lower costs and drive incremental revenue. The company’s low operating costs and other strategic initiatives helped the company make good money on an EBITDA basis. However, in a market where the owners of managed aircraft regularly accept returns well below the cost of capital for their assets, competing by purchasing new assets can become very challenging. XO struggled to pay off the debt it took on to build its fleet and the equity owners eventually got very little for their original investment. Although ‘floating’ fleet models have grown in popularity and some operators have successfully executed similar strategies with low-cost, used aircraft, customer travel needs, not operator networks, determine where they need to fly.
The Extended Network Strategy. Instead of buying additional assets, consolidators could use the assets of other operators to extend their networks and keep costs low. Operators have done this manually for years via processes that the industry could automate with back-end marketplace technology. WheelsUp and Vista both plan to develop a network of this type to supplement their own scale.
WheelsUp will integrate this network into an electronic marketplace via Avianis, the second largest scheduling software company in the U.S, which it acquired last year. With an automated marketplace, WheelsUp will have better visibility into the overall market’s need for and availability of aircraft. It can then match the aircraft to missions they perform most effectively, eliminate dead-heads and increase flight hours per day.
An extended network could also enable WheelsUp to take advantage of cheap aircraft in the market without necessarily having to put money into assets. Finally, a fully automated network could also make individual seat sales a reality, creating a new source of revenue on each flight and lowering cost per passenger flown. As the Avianis operator pool will be too small to realize the full network benefits WheelsUp seeks and competitive issues will probably limit Avianis’s market share over time, look for WheelsUp to integrate with other marketplaces in parallel to further extend the network.
Responding to WheelsUp’s and Vista’s extended network strategies will require many operators to face some difficult strategic choices. They will need to upgrade distribution capabilities and operational practices that will create a consistent customer experience that keeps pace with WheelsUp. These upgrades will require higher levels of investment in software and other business process infrastructure.
They will also need to find ways to extend their networks cheaply, possibly through third party software providers, as most operators don’t have the financial muscle to aggregate supply and build back-end electronic marketplaces themselves along the lines WheelsUp has pursued.
For its part, WheelsUp will surely want to offer these services to the industry as even with the Avianis customers the marketplace will not have enough scale to reap the full benefit of the concept.
Will the industry accept those services as retailers have done with Amazon in many cases and by doing so leave WheelsUp with significant control of the industry’s technology stack? Or, will the industry see more risk in signing up with WheelsUp and look for other extended marketplace alternatives with third party software providers?
Covid-19 and Possible Outcomes
As with everything else in travel, Covid-19 could disrupt these strategies. On the one hand, the crisis has led to a significant drop in demand for all aviation services and this drop is expected to persist for years. This will exacerbate the thin network challenges the industry faces and make consolidation strategies less effective in the short-term. In addition, the financial pressure that high-fixed costs businesses face in a falling demand crisis could slow investment in the technology development necessary to enable the strategy. Along with conflict of interest issues, this could push the back-end marketplaces away from proprietary models and towards independent software developers. Much will depend on the availability of funding to help manage through the interim financial challenges in pursuit of the longer-term goals.
On the other hand, the crisis offers private aviation a number of positive tailwinds. First, volume may see a permanent bump if customers see private aviation as a safer mode of travel than the traditional commercial aviation alternatives. Although much remains unclear about how demand will evolve, so far private aviation demand has fallen less and is recovering more quickly than commercial aviation demand– a good sign for the industry. In Europe, some operators have reported that nearly 50% of passengers booking private aviation travel today are new to private aviation. McKinsey & Company believes that only about 10% of customers that could fly via private aviation do so, so the opportunity for stimulation exists. In addition, the crisis may make it easier for the consolidators to effect changes in behavior of the various industry participants. For example, owners may relax their requirements for approval, making it easier to schedule aircraft due to financial pressure.
Overall, these consolidation strategies should be the starting point to remaking the private aviation industry. On the front end, better customer experience and branding should help WheelsUp and other consolidators gain share and control customer relationships. The back end, however, represents the heart of the economic case for consolidation.
The extended network strategy should make the entire industry more cost efficient, stimulating demand from the large number of customers who could fly private aviation but don’t. The back end also enables the real-time booking engine that will help large operators transform the customer experience.
In the future, we could see an industry with a few large, well-branded, customer-facing operators running extended networks on third party software platforms with many smaller operators running primarily wholesale operations via those networks.
To achieve that vision, the consolidators will need to overcome daunting execution and financial challenges. They will require new technology platforms, changes to customer behavior, owner behavior, partner operator behavior and new operational practices that will enable the charter business to operate in an entirely new way from front to back.
Scale alone won’t resolve these long-term challenges for the industry, but it will be hard to justify the capital investment required to drive these changes without much larger scale organizations than exist in the industry today.
Original article in Forbes on May 22, 2020
