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Private Equity

The Luxury Air Travel Industry Is Ready for Takeoff

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Luxury air travel is waiting for a disruption — think cell phones before the iPhone or car transport services before Uber. With a little private equity juice and the right company concept, there may be a pent-up industry revolution.

There is a lot of energy on the periphery. For an extreme example, consider XTI Aircraft Company, a jet/helicopter hybrid luxury transport concept backed by a crowdfunding mechanism (made possible thanks to the SEC’s Title III adjustments).

By April of this year, the Denver-based company had sourced $1 million in equity and $20 million in expressed interest to develop “the world’s first commercial vertical takeoff airplane” — relatively small potatoes, but XTI officials say they have interests from venture capital and private equity as well.

What’s telling is that XTI is generating any interest at all. The company is a relatively unknown and unproven proposal; it represents just a tip of the privately financed luxury airline market. As Bloomberg reported last December, spending on luxury jets between 2016 and 2025 is expected to approach $270 billion. It is a wealthy market with attractive dynamics and infant competition.

Private Equity Jet & Aerospace Interests

Blackstone Group LP jumped into the luxury jet space in October 2014. According to early projections, Blackstone’s fund, Global Jet Capital, would target $2.5 billion in airplanes and center around the largest models. Just one of those large planes can hit the market for $50+ million.

Fund partners include Carlyle Group LP, Franklin Square Capital Partners, and AE Industrial Partners. One year later, Bloomberg revealed an agreement between Global Jet Capital and General Electric, through which GE would send the fund its loans, leases, and some 300 planes. Virtually every major investment bank in the United States and Europe advised on the deal.

Commercial airlines have historically been a larger target for PE. Prior to the Blackstone/Global Jet activity, various PwC reports listed Cinven, CVC, Oak Hill and other private equity backers of Av0lon, an aircraft leasing and management services company. Carlyle Group made a commitment to AerCap, the world’s largest aircraft leasing firm. And Terra Firma spent the first part of 2016 rejecting $2.2 billion offers for aerospace leasing group AWAS.

Leasing Models Present Opportunities

Commercial aircraft financing has been gradually shifting towards an operating lease model for decades. Airplanes are leased for five, ten, or 12 years and the leasing party is responsible for all operating expenses during the period. When the lease concludes, the aircraft is either returned or the lease is extended.

Leasing options provide fleet flexibility and, when performed with fixed terms, reduce asset risk for the lessee. Industry financiers now generally accept that leases improve cash flow because pre-delivery payments are borne by the lessor. As Global Jet’s website points out, “Operating leases help our customers more accurately predict the cost of private aircraft use.”

Thanks to huge required CapEx for aircraft development and maintenance, however, leasing companies might only provide attractive exits on a levered basis. This should not be a major hurdle for private equity funds, and might even represent a competitive advantage over other entrants who might be unfamiliar with leveraging options.

Operating lessors have already proven a winning opportunity for some private equity firms. Consider Cerberus Capital Management, which jumped into AerCap in 2006 and successfully exited in 2013. In the process, AerCap transformed from a regional player into an international powerhouse.

The benefits of leasing are a little more complicated in the private or business jet area. The economics still work out the same way, but many businesses and business owners enjoy the status of jet ownership. On a larger scale, however, there are reasons to believe that demand for leased luxury jet travel should be strong.

Attractive Supply & Demand Characteristics

Air traffic historically doubles every 15 years, so a 50% increase in traffic is a reasonable expectation for a six or seven year platform window. There are significant demand dynamics at play in the market. Growth for Indian and Chinese middle classes slowed between mid-2014 and early 2016, but few expect those gains to stall for long. Increased urbanization and international economic activity only encourage air travel.

The major commercial aircraft are primarily supplied through two companies: Airbus and Boeing. Competition is limited from regulations, problems with scale, and enormous capital costs. Luxury and corporate jets face less headwind in all three areas.

Future demand characteristics could explode if some visionary is able to bring luxury jet travel to the masses.

Future demand characteristics could explode if some visionary is able to bring luxury jet travel to the masses. Some optimistic insiders believe the industry isn’t far away from regularly servicing the top 20-25% of income earners in the United States and Europe.  

Expanding the Luxury Jet Market

In November 2015, MarketWatch ran an excellent article on unfilled capacity in the private jet market. Upwards of 40% of all private flights included no passengers. Uber and AirBnB have shown how powerful it can be to deploy idle capital, so it is not hard to imagine a similar player in the private or business jet market.

One of the holy grails of luxury airline technologies is online, near-instant booking. Until very recently, the dominant process used was actually pretty antiquated: operators communicate with brokers, brokers communicate with the assistants and agents of luxury travelers, who communicate with executives or high net worth individuals, etc. The parties at either end don’t know each other and don’t know who their competitors are.

It is an inefficient system, and also an unnecessary one, according to SILVERWING CEO Devyn Silverstein. “I worked as a private jet broker,” Silverstein says. “It’s a lot of emails, phone calls, and waiting for responses. And I wondered why a service so expensive to use has such an inconvenient purchase process UX.”

Silverstein had the idea to automate the booking process in 2012, drawing from Expedia as a potential model. He encourages all luxury jet owners to list their airplanes for service as a form of passive income. “Owners can rent out their planes when they’re not using them and make money. A private jet can cost upwards of $1 million per year in maintenance, registration, crew, and fuel costs.”

Other industry entrepreneurs have had similar ideas. Other early entrants include Victor, Ubair, and JetSmarter, all app-driven, on-demand web brokerages. Silverstein sees the market changing already. “For some,” he points out, the new technology “is just as commonplace as hailing an Uber or buying something off of Amazon.”

Channeling Disruption Through Private Equity

The private equity landscape in 2016 is full of pitfalls. A recent E&Y Global Private Equity Fund and Investor Survey indicated, regulatory risk and market volatility are high. Fund managers have to focus on what they can control — costs, staff, operating systems.

It would be a mistake, however, to ignore opportunities and enter a conservative shell. Sticking to the old ways is a recipe for stagnation in the 21st century. (Indeed, the E&Y report highlights “data” and technology as the number one obstacle for fund managers.)

The luxury airline industry finds itself at a similar crossroads between regulatory and technology challenges on one side, and the potential for disruptive outburst on the other. Backing innovators and disruptors requires a psychological shift, but it is probably a necessary one if a firm wants to adapt and survive.

As investment firm QIC writes, “Identifying and partnering with companies that can become part of the new mainstream is in the DNA of private equity. Patient, tough-minded private investors helped to drive commercial success for once embryonic businesses.” Think Apple, Google, Facebook, Uber, Amazon, or that yet-to-be-unleashed private luxury airliner.

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