Why buy milk when the cow’s so cheap?
Let’s start out by stating that you’re probably a lot better off than me. I’m just a SaaS sales executive covering NYC for Zuora, pulling down low six figures. I tell you that because if I can do this, chances are you can too.
My last company ubair was a private jet booking app that was a bit ahead of its time, but because of a flashy name, cool algorithms, and self-funding, I was able to take a (small) exit which gave me the ability to get a $1M interest-only note to cover all the entire purchase price of my bird.
My bird just wrapped up its biggest month ever (December, 2016) 82.3 hours, over $300k in top-line revenue against $215k in expenses, a cool $85k profit.
Pictured: Map of my December 2016 charter footprint – over 80 hours!
I can share with you that the uber-ization of private air travel is upon us, but the smart money is in supplying the jets.
Here’s how this is working out for me
Why I decided to buy a jet
I’m the master of balling on a budget, and naturally, love aviation having spent 10 years serving people as private jet charter broker extraordinaire. More importantly, I need to provide an enduring legacy for my four kids, and always look at this first as a business opportunity (i.e. I need to make money).
So it’s through that (cash flow-oriented) lens that I honed in on this specific plane, and business plan. Believe me, I know plenty of the world’s most successful people who can look at what I am doing simply to subsidize their own private jet usage, but that’s not my bag – just yet.
At it’s most basic level, this is a story about finding an asset that is underperforming, and writing a business plan to turn its performance around, on steroids.
I bought a big, beefy, 9-seat Falcon 50. It flies nonstop coast to coast, with wifi and a huge luggage compartment. In the last six months my jet has served foreign heads of state, some of the coolest rock bands, media personalities and hundreds of high net worth individuals.
This plane had an asking price of $1.65m, and had sat on the market for over a year. The owner had sold his business and it had low utilization. I knew this Boston-area owner personally, and over the course of our relationship it became clear that he really wanted to use the plane a few times a year to get to West Palm Beach.
So we came to an arrangement where the owner dropped the price a bit more than he wanted to, but after the purchase, is able to use the jet up to 25 hours a year, never on peak days, for $2,000/hour (slightly more than direct operating costs), as a tax exempt wet lease.
With the great intangible of giving priceless access, we were able to come to terms at $950,000, which for my business plan represents a fantastic buy:
· It already had WiFi ($135k savings)
· The interior is already a solid “8 out of 10” ($40k – $200k savings)
· The engines were on an MSP program with only a few hundred hours until next overhaul (a huge $500k windfall in engine value over the next four years)
Most, if not all, of these factors are pretty irrelevant for most buyers. Many are indifferent about wifi (yet it is essential to charter), or want to choose their own interior (I might when the next overhaul is due), and most people wouldn’t DREAM of flying without an MSP (I wouldn’t DREAM of doing MSP with TFE engines…another discussion), but that’s exactly allowed me to buy low and operate to a really nice business plan.
In addition to the $950k cost for the jet, I needed to cover $100k in startup expenses. These were rolled together ($1.05m) with 100% interest only financing, at 2%, secured by real estate (my house) and a brokerage account. Whole financing process took 10 days – because the financing is asset backed, underwriting was a breeze! The asset is owned by a Delaware LLC and I took delivery in Delaware (saving state taxes).
The Business Plan
I partner with a FAR Part 135 operator who manages my jet (think of a timeshare management company). They manage the jet, pilots, maintenance, scheduling, and charter. It’s absolutely essential to have the right partner here, and in my case, I couldn’t be happier. My jet is part of a fleet of other Falcon 50’s creating a strong network effect along high density corridors (look at December’s charter footprint) fueling the “uber of private jet” apps and broader charter market, which is robust.
Financially this is how my jet models out over this nine-year business plan. The assumptions are based on 50 hours per month of charter demand (in my experience, conservative especially since the owner –me- hardly ever uses it).
You’ll notice I am saving up for a big C check, and an FAA mandated ADSB upgrade in 2020, which are funded out of operating profits.
A great element of my investment is the predictable exit strategy. Classic “buy and hold” I plan to operate this jet through Year 7, and then part it out, receiving checks for the next 3 years as the critical components (avionics, landing gear) are sold off. As part of this exit strategy, I will have realized a full depreciation benefit (35% tax bracket, straight line depreciate over 7 years), and because the jet is going out to salvage, there is no recapture of that depreciation.
Right now is the “winter time” of the business plan, where I am banking my engine and maintenance reserves (in a tax-deferred, interest-bearing insurance account) and profits to save up for the C-Check and ADSB in 2-3 years. After that, the business plan is to part it out in six years, and it’s modeled to contribute over $500k a year with the savings of overhaul reserves.
Why This Works So Well
A $2M profit ($3m in the model but I still have to pay for the plane) for putting no money down is a pretty sweet outcome. Why do I deserve such generosity?
· Low Acquisition Cost
· Low Operating Cost
· High Asset Monetization
The market for 80’s and 90’s private jets is very soft right now, most of the money is chasing the latest and greatest G450, Citation Latitude, CJ4’s, and that’s left a glut of inventory with jets like my Falcon, and I got a LOT of bang for the buck….a brand new supermid like a Challenger 300 or Gulfstream G200 would cost over $19m, compared to my $950k (granted a Falcon 50 isn’t a Challenger 300, so let’s compare it to $7m for a brand new King Air turboprop)
Pictured: Falcon 50 Cockpit
But at the same time, the charter market is as frothy as ever. Huge companies like XOJet, NetJets and JetSmarter have created a captive market for the super midsize category, which represents the sweet spot for the most profitable charter trips, and the Falcon 50 is the perfect charter animal. It has the unique performance capabilities to land in mountainous airports like Aspen, Eagle, Telluride during all four seasons, as well as short runways like Beef Island Tortola (BVI), East Hampton (NY), so it’s often the ONLY viable solution for some of the most sought after destinations. Also its coast-to-coast range opens up the country’s most profitable routing (quick rule of thumb: the most expensive hour to fly in terms of DOC is the first, the least expensive is the last…on a 5.5 hour flight TEB – VNY, our DOC are only $1,500/hr on a charter rate of $4,400/hr)
(A cool little 50-Ditty: every month my Falcon 50 charters 50 hours and earns $50k.)
My aircraft plugs right into a network of other Falcon 50’s that float on charter trips across the country, and the parts and maintenance are integrated with a Falcon 50 part-out business, so not only do I get the best rates on parts and maintenance, but I am able to self-insure the TFE engines on the Falcon 50 – given the proliferation of these engines in the marketplace, I map to a $100/hr engine reserve (1/3 the MSP cost) – over the 8 years of my investment, that single engine factor will save me over one million dollars.
(Ben Franklin would say that one million dollars saved is one million dollars earned).
I see several opportunities for investors who are focused either on lifestyle upgrade, or an income-producing asset like my Falcon 50. There are currently two Falcon 50’s (1981, and 1996) that are near-perfect for this system, and it works well on heavy business jets like the Gulfstream IV, and Gulfstream V. A nice G-IV can be purchased for under $4m and operate to $100k a month in profits.
There is a lot of upside to grow this model, but it starts with someone interested in owning a jet for less than they are paying for charters. If you would like to learn more about my business model, please email me: email@example.com