Wild West: How private jet brokers make millions from inefficiency
As far as industries go, the private jet market was one of the world's most opaque for decades. Recently, tech and startups have, however, started to open up the sector, shedding a light on its profit margins and diminishing them drastically.
Prior to the financial crisis of 2008, the internet was nascent in luxury with prices only disclosed on request, leading to strong variations based on the identity of the inquirer. During this era, which saw some of the highest spending both in private jets and yachts, brokers acted as gatekeepers to the market thanks to their superior knowledge of the industry compared to clients.
As a reward for their work in calling up operators and identifying good options across thousands of private jets, it was commonly accepted that they would be compensated through some sort of commission. Instead of including a percentage fee, it became, instead common for brokers to sub-contract the jet from its operator and for the client to pay the broker.
Whilst guaranteeing anonymity on both sides, this structure also allowed for some uncontrolled price differences. Clients never knew the actual price of chartering the aircraft and operators how much the client actually paid. At a time of information shortage, this model thrived.
On a typical request for a flight from London to Nice, brokers would find suitable options then send them to their client with a markup the amount of which the client never knew. On midsize jets, this could sometimes amount to nearly a third of the total, with markups nearing €10,000 on flights worth around €20,000.
The primary place for these exchanges remains Avinode, a marketplace with access restricted to brokers and opearotrs. Through it brokers can request quotes from all available operators in under a minute, and send them to their clients at a markup later. Launched in 2002, it now sees over 200,000 charter requests go through the platform according to its founders with access costing near $10,000 per year.
The Swedish based startup was acquired in December 2014 by Multi Service Technology Solutions, a large aviation management software company for an undisclosed amount. At the time, the service claimed near 7,000 active daily users across industry professionals.
Avinode helped shed the first light of transparency to the market by allowing all operators to compete for flights and lowering the barrier of entry for brokers. Ultimately this started to bring down prices. After the sector took its first steps into the digital age, more startups rushed in to fill the void of a $34 billion market.
One of the largest startups to contribute to the shakeup of this model became Victor. Launched in 2011 by Clive Jackson, at its core, the startup built a marketplace like Avinode but open to users, which pay a commission to Victor on top of the operator's fees. Leveraging tech to lower its costs and offer lower markups to clients, Victor was able to land $38 million in funding during its latest round in January 2018.
"In this industry there are a lot of players who are very good at banging the drum hard. But often it is a hollow drum." Jackson said in an interview in 2017. In 2016, the company did $40 million in gross private jet charter sales, double the amount it had registered in 2015.
Thanks to the digitalisation of the sector, larger operators are now also keen to distance themselves from brokers all together and start getting clients direct for their charters. VistaJet, one of the world's largest private jet operators, launched a direct digital membership platform in August 2017.
"The whole world is turning into a now world. People don’t have time to wait an hour for their PAs to book flights, this app allows them to book and confirm in minutes." said VistaJet's founder, Thomas Flohr. "Customers can now book a flight and access the full array of our services no matter where in the world they are, at a time to suit them."
Operators have an advantage of brokers in that they either manage, or in VistaJet's case, own the aircrafts they fly. Hence, by booking directly from operators, clients don't pay any markup and are often left with better prices. Scanning the fleets of many operators, however, requires much legwork that some clients are unwilling to do, particularly on shorter, less expensive flights.
Despite brokers' profits rapidly shrinking due to the reduction of information asymmetry, operator's profits are on the rise thanks to increased efficiency in operations. AirX, a Maltese company that owns 18 aircrafts posted earnings before interest of over €7 million last year. VistaJet, which owns over 70 aircrafts, saw profits rise 32% year over year and raised $150 million from investment banks.
The improved financial position of operators sees them be increasingly ambitious in securing their own client basis and increase branding efforts to differentiate themselves from smaller aircraft lines.
Eager to expand, private jet operators are actively growing their fleets. "The aircraft I go for have been repossessed - the bank doesn't know what to do with them. I'm usually the only buyer." said AirX's chairman, John Matthews in an interview. "I'm like an ambulance-chasing lawyer in America, but the equivalent for aircraft. If there's a repossession, we're on the hunt."
Prior to striving to go direct for on-demand bookings, the trend was to try and sell fractional, private jet operations or subscriptions for operators. By far, this method's pioneer was NetJets. Launched in 1964, the company was eventually acquired by Warren Buffett's Berkshire Hathaway in 1998. The company now operates close to 700 aircrafts in its program. Some say on-demand is now more price efficient in more cases due to a growing fleet of aircrafts.
Still startups continue to try and crack the membership-based private jet airline concept. Recently, the most successful has become JetSmarter, a membership-based app that lets its users buy seats on private jet shuttles. Having raised $105 million in December 2016 at a $1.6 billion valuation, the company is rumoured to now be approaching an IPO.
"We created a marketplace by tapping those underutilized hours and turning them into different product lines." JetSmarter's CEO, Sergey Petrossov said in an interview. By providing a mix of guaranteed money to plane operators worldwide and taking the excess seats they sell as profits, JetSmarter was able to integrate close to 3,000 airplanes on its platform. A number similar to Avinode and Victor, yet with a different cost structure. "We've already lowered the entry-level price significantly. It used to be for the .1 percent, not the 1 percent."