The Private-Jet Money Club

Last year we noted a WSJ article about how the super-rich signal their wealth to each other and to the merely rich. Owning items such as watches and art are only the first step; talking about them with casual insouciance is a practiced skill.

Flying private makes it easier to bring Fifi (Citrin-Safadi/WSJ)

Another item discussed in that article--flying on a private jet--has become the number one marker of real wealth.

Flying private has become the ultimate luxury splurge for many wealthy individuals, surpassing Ferraris, Hermès Birkin bags topping $14,000 or even waterfront Hamptons homes. For many of those aspiring to join the ranks of the truly rich, having “private-jet money” is the new goal, dividing the 1% from the 0.1%.

The pandemic unleashed a burst of demand, but providers say popular culture has turbocharged enthusiasm and envy for the fly-private lifestyle. Social media has given younger people a glimpse into the lives of jet-setters, whether it is a model flying with friends to a bachelorette party in Los Cabos, Mexico, or a hedge-fund manager hopping a plane to a birthday weekend in St. Barts.

...The club of ultrahigh net worth individuals with more than $30 million in assets hit a record in 2024, according to estimates from the wealth-intelligence provider Altrata. The U.S. added more than 1,000 millionaires every day last year on average, according to UBS. The billionaire club grew more than 50% between 2015 and 2024.

Thee are surely sub-categories within the private-jet club, ranging from those who lease the planes occasionally to those who own the plane outright and pay their crews as full-time employees (much like the difference between owning a time-share versus the entire property).

Note: Grok describes the difference between the 1% and the 0.1%.

As of Q2 2024, the average wealth of households in the top 1% in the U.S. is about $35.5 million, while the top 0.1% have an average wealth of over $158.6 million. This means the top 0.1% hold roughly 4.5 times more wealth per household than the top 1%. The top 1% collectively hold 30.3% of total U.S. wealth ($43.45 trillion), while the top 0.1% own 13.5% of it. The wealth gap reflects the concentration of assets like corporate equities and business income among the ultra-wealthy.

Strictly Business is Becoming Nicer

Grand Hyatt at SFO suite: ready for a business meet

In my working days I would sometimes stay at airport hotels. Reasons were specific: only one or two business meetings, no time to tour the host city and/or dine at a nice restaurant, and a tight calendar that necessitated going to the next destination after meetings were over. (Keeping costs down was a factor but not as important as the others.)

One may think that the popularity of video conferencing would have damaged the airport-hotel business model, but one would be wrong:

The Grand Hyatt SFO was charging nearly $500 for a one-night weekday stay in late May.

Luxury hotels inside airports, not to be confused with those clusters of budget-friendly chain hotels a free shuttle ride away, are having a moment. Affluent vacationers and business travelers are splurging before or after a flight in the same way they are paying up for cushier plane seats with more perks.

Hoteliers say they are selling convenience, service and amenities you won’t find in that airport SpringHill Suites or Hampton Inn—bathrobes, craft cocktails and fine dining. And guests are buying.

The 351-room Grand Hyatt SFO, which opened in late 2019, posted its highest monthly occupancy rate (84%) and average daily rate ($362) last fall. It finished the year with significantly better metrics than the overall San Francisco hotel market, according to reports by the airport commission. The hotel and airport are owned by the city.

At the Westin Denver International Airport, also a city-owned hotel, the average daily rate last year rose to $337.39, up 5.3% from 2023 and 15% from 2022, according to the city. Officials say rates have held up through the first five months of this year despite economic uncertainty.

At Dallas Fort Worth International Airport, the 20-year-old Grand Hyatt DFW in July will begin a $34 million makeover that includes new rooms, room renovations and a restaurant and fitness-center overhaul.

One of the joys of non-business travel is the opportunity to walk around the host city. Staying in Waikiki or Union Square for me is vastly preferable to lodging in HNL or SFO, respectively, so the improving economics of airport hotels is likely due to business travel. It does make some logical sense--business people fly less frequently, but when they do everything is first class. However, more analysis is definitely called for.

Of Bullwhips and White Tails

B-School Professor Hau Lee with teaching aid

Stanford Business School Professor Hau Lee's paper on the bullwhip effect was "voted one of the 10 most influential papers in the history of Management Science":

When you are a cowboy and you crack the whip, you move the handle 60 degrees and the tip will move more than 360 degrees. Sometimes, a signal can move a little bit from consumer to retailer to distributor to wholesaler to manufacturer to supplier. Everyone adds something to the signal, and it results in a big surge, up and down.

The pandemic is a great illustration of this. Even the media used the term “bullwhip”: bullwhip of toilet paper, bullwhip of hand sanitizers, bullwhip of everything. We were relying on short-term data and then we produced a whole lot more. Consumers panicked, too. They didn’t realize there was ample supply coming in. Some students told me they’re still using the toilet paper that they bought in 2020.

Small imbalances in supply and demand can manifest in upstream surges and shortages. Every link in the supply chain "adds something."

Your humble blogger saw this boom-bust phenomenon when he worked in commercial aviation, when an uptick in summer travel, reinforced by low interest rates and an economy coming out of a recession, resulted in a surge of aircraft orders.

Aircraft require at least two years between order and delivery, and later new airplanes came off the line when the economy was softening. If the glut was bad, buyers even preferred to lose their deposits by canceling orders, and new airplanes were "white-tailed" (painted without an airline's logo).

Boom and bust cycles have been studied for over a hundred years, and Prof. Lee's vivid metaphor helps to bring the concept home.

Commercial Aviation: It's Worse Than You Think

The Kinsley Gaffe--defined as politicians saying a truth that they had not intended to reveal (for example, what they really thought about some of their supporters)--is a political term, but it can apply equally to business leaders. For example, here's Boeing CEO David Calhoun: [bold added]

Now he smiles rarely (Chicago Trib)

Boeing’s report came as Chief Executive David Calhoun painted a dire near-term outlook for the airline industry, saying growth wouldn’t likely return to 2019 levels for three to five years.

Mr. Calhoun told NBC’s “Today” show that passenger traffic won’t be up to 25% of pre-pandemic levels by September, possibly approaching 50% by the end of the year.

He predicted the collapse of air-travel demand would “most likely” force a major U.S. carrier to go out of business.

Mr. Calhoun and Boeing have been trying to walk back his statement that United, American, or Delta will go out of business, but that's what many analysts within the industry are already saying.

From an aviation webinar: how many companies will survive until 2023?

In "normal" aviation downturns, there are always some bright spots in the industry. For example carriers may postpone new deliveries but keep operating older airplanes intended for the scrap heap, and the MRO (maintenance, repair, and overhaul) sector of commercial aviation does well.

This time demand has fallen so drastically that old and new airplanes are being put in storage, which means that airplanes requiring multi-million dollar overhauls per FAA regulations are themselves parked and a new one pulled out of inventory. There's much lower demand for MRO in the next two years.

To an industry that operates on thin margins and high fixed costs and debt, conditions are the worst that anyone can recall (9/11 was a blip compared to COVID-19). The number of players who have cash and credit resources to survive until 2023 is minuscule.

I'm glad to be retired.

The Results Were Foreseeable

Economists Alex Tabarrok and Eric Helland looked at whether generous liability laws encouraged dangerous behavior by general aviation (small airplane) operators. This classic test of moral hazard examined the effect of the General Aviation Revitalization Act of 1994 which "said that small airplane manufacturers could not be held liable for accidents involving aircraft more than 18 years old." Prior to GARA's enactment, small airplane manufacturers "found that they could be sued for any aircraft that they had ever produced" (production had begun in the 1920's and 1930's) and the spate of lawsuits halted production in the entire industry.

The study's findings:

Our estimates show that the end of manufacturers’ liability for aircraft was associated with a significant (on the order of 13.6 percent) reduction in the probability of an accident....After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.

GARA thus appears to be a win-win because it revitalized the industry and increased safety.

There's a broad societal consensus that manufacturers bear primary responsibility for product safety. However, if that responsibility extends much longer than the original parties had a reasonable right to expect, then the result may be unsafe behavior and even the demise of an industry.

Successful businesses control their costs. When they're prevented from doing so by force of law, the results are predictable. When the laws are relaxed in business' favor, the results, as Tabarrok and Helland showed, are also foreseeable.

That's Why He's Warren Buffett

The Wall Street Journal waxes indignant because a private-jet company owned by Warren "Raise-My-Taxes" Buffett was able to get its fees lowered:

NetJets Inc., the private-jet company owned by Mr. Buffett's Berkshire Hathaway Inc., spent more than $1 million over the past three years to lobby Congress to cut a user fee, benefiting the company's well-heeled customers, who buy or lease shares in planes. The reduced fee, part of the recent Federal Aviation Administration bill that took effect earlier this month, will save customers of NetJets and other similar companies roughly $83 million over about four years, according to congressional estimates.

As customers of commercial airlines you and I pay a 7.5% tax on our tickets. Private planes owned by Mr. Buffett are now classified as "non-commercial" and pay a lower tax based on fuel consumption. Opponents of Mr. Buffett will undoubtedly call this another example of double standards by limousine liberals / private-jet plutocrats.

Me, I'm just filled with admiration. $1 million in lobbying fees produces $83 million of tax savings. That's why he's Warren Buffett and I still clip coupons.

A380 Over the Bay

Airbus' new four-engine giant, the A380, spent a day in San Francisco before continuing its American tour. It circled the bay on Friday afternoon, and we took a break from our tasks to look out the window.

It's A Snap

Re the making of Boeing’s new 787 Dreamliner:

"Basically ... we're snapping it together," said Tom Wroblewski, president of the union representing Boeing production workers in the Seattle area. "This is a whole new way of assembling an aircraft."

No, it’s not. These guys thought of it first.