Discounting, Debt, Deficits Plague Select Private Jet Programs

Important parts of the COVID-fueled business aviation bounce have begun to fade. What began as a triple-play of bad news for three industry operators—Wheels Up, VistaJet, and Jet It—during 10 consecutive days in May might be a harbinger of things to come, according to industry analyst Brian Foley. “The common theme that I've seen is they [distressed fractional, membership, and subscription-model companies] are all losing money to begin with and never made a dime,” he told BJT. 

Nick Copley, president of the SherpaReport, added, “Overall, the industry has just been through a record-breaking boom in demand over the last couple of years, and it looks like we are on the other side of that now. So, as Warren Buffett said, ‘Only when the tide goes out do you discover who's been swimming naked.’ It’s certainly a time to do more due diligence in selecting providers, and ask them harder questions, especially if you are spending hundreds of thousands or potentially millions of dollars with them.”

Foley pointed out that charter activity is down 25 percent since its COVID apex and that many new customers who feel soured by industry actors who underpriced, overpromised, and under-delivered are likely to retreat to flying “economy plus."

“I’m sure there are some naïve users who are new to aviation and don’t know what the correct price [of service] is. But I put most of the blame on the investors who got onto this train either without doing their due diligence or after being pushed onto it by investment banks,” he said. 

The size of that investment has been staggering, likely surpassing the amount of capital that poured into the very light jet space before it became a “dot com with wings,” in the words of long-time aviation analyst Richard Aboulafia. For Wheels Up, VistaJet, and Jet It alone, the combined investment is approaching $8 billion when you factor in the $2.1 billion Wheels Up raised via a stock public offering in 2021, the value of which had shrunk to $60 million by early June. But rather than generating profits, that investment has fueled a financial pyre not seen in this industry since very light jet maker Eclipse made a $1 billion investment hole in the New Mexico desert and was forced into bankruptcy in 2008. 

During the last nine quarters, Wheels Up has lost a staggering $853 million, and it's on track to lose around another $100 million in the quarter ending June 30, leading to the exit of founder and CEO Kenny Dichter on May 9. Even as Wheels Up was losing hundreds of millions of dollars, Dichter’s compensation package was valued by the company in its proxy statements, filed with the Securities and Exchange Commission, at $9.5 million in 2021 and $8.6 million in 2022—more than the salaries of major airline CEOs in 2021 at companies including American (Doug Parker $7.24, million) and Southwest (Gary Kelly, $5.8 million). Dichter’s supersized bonuses were tied in large part to the company’s revenue and customer growth—metrics that he achieved spectacularly. During COVID, the company’s customer base grew by 31 percent, to more than 12,600 members, and revenues jumped from $385 million in 2019 to $1.58 billion in 2022. But the more money Wheels Up took in, the more it lost, culminating with losses of $555 million last year. 

Wheels Up has lost hundreds of millions of dollars while expanding rapidly by buying a series of charter, management, aviation service, and technology companies. (Photo: David McIntosh)

But even as Wheels Up was losing money, it spent its new-found cash from its public stock offering—via a merger with a special purpose acquisition company—on acquisitions, which helped drive the revenue numbers. Foley compared the behavior to that of an over-leveraged residential real estate investor who buys a single rental and then drains it of equity to purchase six more on credit. Wheels Up acquired a string of charter, charter management, aviation services, and technology companies, presenting the challenge of integrating five Federal Aviation Administration Part 135 certificates into one and integrating disparate aircraft types into its once-streamlined fleet of King Air 350s and Cessna Citation XLs. And as losses continued to mount, Wheels Up mortgaged a good part of its owned fleet, 134 aircraft in all, for net proceeds of $259 million at 12 percent interest in October 2022. Dichter characterized the move to BJT as “buying some runway.” But the interest rate raised eyebrows and began to fulminate concern among investors that private aviation was no longer a safe bet due to its customers’ historic inelastic price tolerance. 

Foley warned that history could be replicating the financial fallout that emanated from the very light jet bust of nearly two decades prior. “It could be 10, 20 years or more before investors forget about this and stick their big toe back [in the water],” he said, adding that this has implications for the emerging and capital-intensive electric space as well. His caution seemed to be borne out when in April, Flexjet abruptly shelved its plan to go public via a merger with a special purpose acquisition company (SPAC). Officially, the company said its decision came about because it was in its best interests.  But Foley thinks “the handwriting is already on the wall as far as the lack of capital that will come into the business [meaning the business aviation industry taken as a whole] as a result of this [recent contagion] and that a lot of people are going to get hurt.”

A week after Dichter departed the C-suite (he remains on the Wheels Up board), the Financial Times performed an examination of subscription jet service provider VistaJet's finances, charging that the company’s auditor had issued a “going concern” warning, its debt had doubled to $4.4 billion, cumulative net losses over the last four years had been $436 million, and cash on hand had dwindled to $134 million against $831 million in prepaid flights. A ”going concern” opinion is not necessarily a harbinger of bankruptcy, but it can adversely impact credit ratings and increase the cost of borrowing, according to a 2022 study in the Accounting Research Journal. VistaJet’s unsecured debt rating from Fitch earlier this year was “BB-,” defined as “debt instruments that are generally considered speculative in nature,” according to Investopedia. The new debt was assigned a recovery rating of RR3 by Fitch, meaning it has “characteristics consistent with securities historically recovering 51 to 70 percent of current principal and related interest.” 

Over the last two years, Vista issued another $1.5 billion of unsecured debt—$1 billion at 6.375 percent interest last year and a five-year, $500 million bond offering at 9.5 percent this year (against a current prime rate of 8.25 percent). In a news release, parent company Vista Global Holdings said the latest debt offering was “two times oversubscribed” and “attracted overwhelming interest from leading institutional investors and pension funds.”

Cumulative debt was driven by VistaJet’s rapid expansion via a string of acquisitions between 2018 and 2022, including charter operators XOJet, Jet Edge, Talon Air, Red Wing Aviation, and Air Hamburg; charter broker Apollo Jet; and charter platforms Camber Technologies and JetSmarter. However, those acquisitions also fueled the company’s rapid growth. Chairman Thomas Flohr laid out his vision for not only his company but the industry earlier this year in an interview with business consultancy McKinsey. “One thing on my mind a lot is that we have a massive consolidation process happening right now in this industry," he said. "There are thousands of small operators around the world. If you look at the history of any industry over time, there is generally consolidation because it helps with buying power, with reach, with infrastructure, with efficiencies, with technology investments, and so forth,” he said.

Foley noted that Vista recently formed a brokerage subsidiary that could be used to dispose of its aircraft. Too much of that at any given time could spell not just trouble for the used aircraft market but for new aircraft sales from manufacturers. Honda Aircraft seemed to realize this when Jet It shut down its fractional program with HondaJets. 

While just 21 aircraft were enrolled in that program, Honda produced only 17 new aircraft in all of 2022 and the potential for those orphaned aircraft to find their way onto the market could not merely have depressed prices of used aircraft, it could have dampened demands for new ones. So when Jet It shut down its Honda program and left its fractional owners to fend for themselves, within days the manufacturer moved in to offer those owners assistance via a special support team at no charge. Honda said it was taking the action to help owners with “seamless transitions to alternative aircraft management options.” As part of the available assistance, fractional owners will be provided with pilot services to move aircraft to Honda’s Greensboro, North Carolina headquarters with up to 90 days of free parking.

Two companies are leading contenders to provide “alternative aircraft management options”—Volato in Atlanta and JetToken based out of Las Vegas. Volato CEO Matt Liotta told BJT that Jet It’s main problem was that it dramatically underpriced hourly operating and management costs. While Jet It charged $1,600 an hour, Volato charges $3,425 plus fuel, and JetToken bills up to $5,800 an hour for straight charter.

Despite Honda’s assistance, Jet It fractional owners could still be left with a mess as several aircraft are fractionally owned by Jet It itself, which as of early June, had yet to file bankruptcy. JetToken chairman Mike Winston told BJT that he thought it could take up to three years to untangle those aircraft. 

Foley fears the contrails left by failed or failing operators could sour first-time users of private aviation who “get in one of those programs and get hurt, creating an adverse, lasting [negative] image of private charter that is unfair to other programs that are stable and profitable. It’s sad.” 

Volato's Matt Liotta urges consumers to do their due diligence and examine whether what they are being charged “makes sense” in the context of being able to sustain the program and the company administering it. “When something is too good to be true, it probably is.”