Is private aviation Overweight or Underweight? Recent stories related to the losses over at Wheels Up has made me ponder this question. Wheels Up, intended to be the next success story following Kenny Dichter’s triumphs in the private aircraft charter industry, the company took an unexpected turn as he steps down amidst mounting losses and a plummeting stock value. The company has struggled to overcome its substantial losses, which amounted to an astonishing $555 million last year. While the company has expressed its ability to mitigate these losses next year, Wall Street has already rendered its opinion and the stock, listed on the New York Stock Exchange, dropped from its initial offering price of approximately $10 in July 2021 to about 25 cents at the most recent evaluations. To prevent delisting from the Exchange, a proposal for a reverse stock split has been put forth – a clear warning sign of failure. Forced to leverage the planes it owns, Wheels Up managed to accumulate a substantial cash reserve of $585 million by the end of 2022, but this amount diminished to $363 million by the end of March, and at the current burn rate of expenditure, the remaining cash reserves might only last until the end of this summer. Also keep in mind those losses include over $76 million taken in PPP loans!
Wall Street and Private Aviation
In aviation, nothing causes more disasters or problems than an “overweight” plane. Weight and balance is a core training term for anyone flying planes, but doesn’t seem to extend to upper level aviation management when it comes to spending money. On Wall Street, analyst actually use a term that is the opposite of overweight to warn investors to be wary of a poor performing company or industry. They use the term, “underweight” which refers to a recommendation or opinion provided by financial analysts regarding a specific stock or asset. When a stock is labeled as “underweight,” it suggests that the analyst believes the investor should allocate a smaller portion of their portfolio to that particular stock or asset compared to its weight in a benchmark index or relative to other investments. In other words, it indicates that the stock or asset is expected to underperform its peers or the broader market. This recommendation is typically based on negative expectations for the company’s financial performance, industry trends, or other relevant factors. So on Wall Street, is private aviation Overweight or Underweight, no matter what the term, Houston We Have A Problem.
Pre-Owned Private Aviation Plane Market
The options for Wheels Up to consider include seeking additional investment from their partner Delta Airlines, exploring a return to the private sector and fundraising, or considering a strategic partnership. Please note that if private equity or another acquiring entity were to become involved, a prerequisite may be to reorganize through bankruptcy. Given their significant fleet of private business aircraft, the potential divestment of some or all of these planes and their entry into the used plane market would destroy the pre-owned plane market. Many of these aircrafts were manufactured by Textron’s Aircraft Division, which produces the Cessna and Beechcraft line of planes predominantly used by Wheels Up. The sudden availability of a large selection of King Air and Citation models in the pre-owned market could adversely affect the demand for newer and more expensive aircraft in this segment.
Taking a Private Jet Company Public, in the First Place, can be Challenging for Several Reasons:
- Limited market size: The private jet industry caters to a niche market of high-net-worth individuals, corporations, and governments. Compared to commercial aviation, the customer base is relatively small. This limited market size can make it difficult for a private jet company to attract the attention of public investors who often seek opportunities with larger addressable markets.
- High capital requirements: Private jets are expensive to purchase and maintain, and operating costs can be significant. Going public typically requires substantial capital to support growth initiatives, expand the fleet, invest in infrastructure, and fuel market expansion. Raising enough capital through an initial public offering (IPO) may be challenging if the company’s financials or growth prospects do not meet investor expectations.
- Market volatility and economic conditions: The private jet industry is susceptible to economic fluctuations and market volatility. During economic downturns or uncertain times, demand for private jet services can decline, leading to financial challenges for companies in the sector. Such conditions may deter potential investors, making it harder to go public or achieve favorable valuation.
- Regulatory and compliance complexities: Publicly traded companies are subject to extensive regulatory and compliance requirements, including financial reporting, transparency, governance standards, and shareholder relations. Adhering to these regulations requires additional resources, expertise, and ongoing costs. Private jet companies may find it challenging to meet these requirements if they lack the necessary infrastructure or experience in managing public company obligations.
- Competitive landscape: The private jet industry is competitive, with several established players and newer entrants vying for market share. When going public, the company’s ability to differentiate itself from competitors and demonstrate a sustainable competitive advantage becomes crucial. Investors need to be convinced that the company can outperform its competitors and deliver consistent growth and profitability.
- Limited public company comparables: Private jet companies may struggle to find suitable public company comparables that can help investors assess their value and potential. Without a clear benchmark, it can be challenging to establish an appropriate valuation, leading to uncertainty and potentially impacting the company’s ability to attract public investors.
Not The First To Fail, There Have Been Others
While there have been several private jet companies that have faced challenges or undergone changes in their public company status, it is important to note that the private jet industry has a diverse landscape, and the success or failure of a company as a public entity can be influenced by various factors beyond their business model. Here are a few examples of private jet companies that have faced difficulties or experienced changes in their public company status:
- Flexjet: Flexjet, a luxury private jet fractional ownership company, was once a public company. In 2003, it went public under the name Flight Options but later faced financial struggles. In 2008, it filed for bankruptcy protection and was subsequently acquired by Directional Aviation Capital, a private investment firm.
- JetSuite: JetSuite, a private jet charter and membership company, initially operated as a public company. In 2009, it went public as JetSuiteX Air and traded under the ticker symbol JXSN. However, in 2018, JetSuite underwent significant ownership and operational changes when it received a major investment from JetBlue Airways. The company eventually restructured, and its assets were acquired by Superior Air Charter LLC in 2020.
- NextJet: NextJet, a Swedish private jet and regional airline company, experienced financial difficulties and ceased operations in 2018. NextJet had briefly been a publicly listed company on the Nordic Growth Market (NGM) stock exchange but was eventually delisted.
High Interest Rates Also A Big Factor:
High interest rates can indeed have an adverse impact on private jet companies, as they increase borrowing costs and potentially affect the overall financial health of the company. Here are a few ways high interest rates can hurt private jet companies:
- Financing costs: Private jet companies often rely on loans or lease financing to purchase or lease aircraft. When interest rates are high, the cost of borrowing increases, leading to higher monthly loan or lease payments. This can strain the company’s cash flow and profitability, potentially limiting its ability to invest in expansion, maintenance, or other operational needs.
- Investment decisions: High interest rates can influence the investment decisions of private jet companies. When borrowing costs rise, companies may become more cautious about investing in new aircraft or expanding their fleet. This conservative approach may limit the company’s ability to meet customer demands, maintain competitiveness, or take advantage of growth opportunities.
- Economic impact: High interest rates are often a response to tightening monetary policy by central banks to control inflation or stabilize the economy. These measures can sometimes lead to an economic slowdown or contraction. During such periods, demand for private jet services may decline as corporations and high-net-worth individuals reduce discretionary spending. This can adversely affect private jet companies’ revenue and profitability.
It’s worth noting that the impact of high interest rates on private jet companies can vary depending on factors such as their financial position, customer base, and market conditions. Additionally, interest rates are influenced by numerous factors, and their effect on private jet companies is just one aspect to consider among broader economic and industry dynamics.
SPACs and IPOs
Regarding private jet companies going public, it can be a challenging process, and recent trends such as the rise of SPACs (Special Purpose Acquisition Companies) have introduced additional complexities to the IPO market. While some companies may seek quick gains through SPACs, it can lead to volatility and potential losses for individual stock investors. However, it’s important to note that each company’s circumstances are unique, and there is potential for private jet companies, like Wheels Up, to find a way to reorganize and become profitable without relying heavily on Wall Street.
Private Jet Charter Business Model is Flawed
In the private jet industry, careful attention to factors such as weight and balance is crucial for safe operations. Additionally, the business model of private air charter can have its flaws, and it is important for clients to be aware of potential pitfalls and misleading offers. Emptylegs.net aims to assist clients in navigating these challenges and stands out by combining knowledge and a strong moral compass. Remember to prioritize safety, socialize responsibly, and enjoy the benefits of flying private, and that’s why our motto is to Be Social, Fly Private!