Reverse Takeover

Bankruptcy, Unicorns, Millions In Investments And No Commission Private Jet Charters

Source: Forbes
Date: Sep 20, 2017


Opinions expressed by Forbes Contributors are their own.

I am more and more convinced that just as starting a commercial airline attracted alpha entrepreneurs during the 1980s and ‘90s, private aviation today is now luring the rich, famous and infamous who see it as both an opportunity and a lifestyle, sometimes both. The headline this month is the tawdry Chapter 11 filing in California of two-year-old Zetta Jet, a Singapore based charter operator that focuses on long-haul luxury jets that can fly nonstop across the Pacific. The website promises Asian accented white glove service with in-flight butlers and gourmet cuisine.

When I first broke the news of the bankruptcy filing over the weekend, I received several emails from industry executives critical of Zetta Jet’s business model. The assertions were margins are not big enough to support the debt service on expensive luxury jets and their powerful engines. The two biggest creditors are in fact Bombardier, the aircraft manufacturer, and Rolls Royce, the engine maker. Following the bankruptcy of Zetta and other start-ups such as Black Jet, Beacon and Gotham Air, plus the acquisitions of Asia Jet by Hong Kong Jet and Rise by Surf Air, there has certainly been a lot of activity in the market.

Add that to all the money being raised. JetSmarter, which last December announced it raised $100 million, over the summer announced it had raised more money, although this time around it didn’t disclose how much money was added to its coffers. In July, Wheels Up announced it had secured $90 million from KKR. Last year, JetBlue invested an undisclosed amount of money in JetSuiteX. At the end of August, VistaJet said it had raised $150 million from Rhone Capital and claimed a valuation of $2.5 billion on “a post-money basis.” JetSmarter has also claimed Unicorn status, meaning a privately held business worth more than $1 billion.

Just this week, another start-up, Victor, an online-focused charter broker, reported it had secured $10 million from BP Investments, which also sells fuel for private jets, as part of a $20 million round of fundraising. Ricky Sitomer, who rose to notoriety with the charter flight broker and jet card seller Blue Star Jets, a name taken from the movie Wall Street, quietly engineered a reverse takeover using his current Star Jets International to serve as the Private Jet Charter Flight platform for acquisitions as he hopes to build over $100 million in revenues.

Clearly, getting to profitability and having a presence in the private aviation business, whether one actually owns and operates jets, or is brokering them is not easy. Private jet related searches on Google are thick with paid listings and companies have to spend a considerable amount of money chasing those needles in the haystack, which means not only finding people who can afford their various private aviation solutions, but reaching them when they are in a shopping mode. There's very little in the media world that has a high concentration of private jet users, so what’s the point of building brand awareness with people who can’t afford to fly privately?

The list of unsecured creditors from the Zetta Jet bankruptcy is littered with fuelers, private jet terminals, caterers, media companies, maintenance providers as well as companies that provide training for pilots, not to mention the tax coffers of various state and national governments from Croatia to California. It also highlighted that not all private jet card programs offer customers escrow options. With prepaid consumer jet travel programs ranging into the hundreds of thousands of dollars, even for the very rich, the amounts of money aren’t small. What’s more, players in the jet card market range from large publicly traded companies such as General Dynamics (Jet Aviation) and Berkshire Hathaway (NetJets) to boutique brokers with less than 10 employees.

“What happens to your funds on account if the jet card company goes out of business? This question is not at all fanciful or useless nitpicking, recall Avantair (and) FractionAir,” says James D. Butler, CEO of Share Craft Solutions, LLC, a consultancy that advises buyers of fractional shares and jet cards.

However, right when the Zetta Jet story seemed like it would be one of Private Jet Finance 101, a scandal broke out. It turns out that Geoffrey Cassidy, the firm’s high-profile managing director, was tossed after an August board meeting in Hong Kong. In a lawsuit filed by two principal shareholders and board members a week before taking Zetta Jet into Chapter 11, it is alleged Cassidy committed fraud and racketeering, including misrepresenting his own net worth.

Cassidy is alleged to have used company funds to buy luxury homes and yachts, as well as using company jets for some 300 hours of personal flights and spending on lavish parties and dinners. He also allegedly received kickbacks from a jet broker for buying airplanes. The lawsuit estimates the misappropriations may run as high as $30 million over two years. The company said it has funds to continue operations, although current executives didn’t respond to several requests for an interview.

After reading about Zetta’s filing, one reader, Robert Velo, a Hollywood-based producer reached out to me asking, “Are they still in business?” It turns out he didn’t lose money as he was using Zetta Jet on a pay as you go on-demand charter basis. He says, “I’ve had nothing but good experiences” flying with them and says he will “absolutely” continue to fly with the company. “They are awesome…great customer service,” he adds.

At the same time, a travel agent who contacted me said she had to chase down her commissions from the company. Leslie Fineman of Verge Travel said she was only paid after threatening to let other agents know about the delinquency in paying her. After being paid and posting about it on Facebook, she received a letter from a Zetta lawyer, according to an email she provided, stating, “ While it is unfortunate that you did not receive your payment more rapidly - for which we apologize - continuing to leave the post in place is, at best, defamatory, especially in light of a response that was left to your posting since you were paid. Unfortunately, should you fail to do so, we will be forced to take legal action.”

Clearly, there is a lot of money in private aviation, and while most pictures show passengers smiling and sipping champagne when things go bad, emotions and legal letters run strong. It’s hard to tell how well most of these businesses do financially as most are privately held or if part of larger public companies, there isn't a significant amount of information that is broken out. Clearly, the space holds enough promise it continues to attract capital from large investment groups such as KKR and TPG (a stakeholder in XOJET), in addition to the likes of Shawn "Jay-Z " Carter, Ashton Kutcher and sovereign funds from the Middle East. At the same time, there is nothing that says how this movie will end. Who goes off into the sunset happily? Who goes home battered and bruised?

Still, the new entrants continue, as I outlined last month. And this month Canadian-based Jettly is the latest newcomer seeking to revolutionize private jet travel. After trying a seat-sharing model that ran afoul of regulations, its serial entrepreneur founder Justin Crabbe has taken a new tact. Many business aviation users shop multiple brokers for on-demand charter. One reason is that the markup of brokers is unregulated, so by checking with several brokers, you have a chance to negotiate a better deal. Victor has sought to address the price question by marking up all its charter flights a standard 10%.

Jettly is now taking it a step further. It is brokering charter flights with no commissions or service fees. Crabbe says broker markup ranges between 10 and 50 percent, so his prices will be significantly lower.

His revenue comes from two places. Operators pay to list their aircraft that are available for charter, and consumers pay either monthly or annual fees. For three charters per month, the cost is $370, or annually $3,552. The business program, which allows 10 charters per month, is priced at $670 per month or $7,152 annually. Crabbe says with one or two charters, members earn back their fees in what they are saving via the no-commission structure. There is no limit to the number of searches you can make, and a charter can include multiple legs.

Crabbe is hoping his approach means customers “don’t feel like they have to go to another website.” In terms of payments, Jettly is really serving as a matchmaker. The contracts and payments for users are with the actual aircraft operator. Jettly offers between five and 10 quotes from operators and discloses information such as tail number and safety ratings to members, and it's up to the customer to then decide.

Jettly is targeting regular business aviation users who are already savvy and are booking multiple times per month, and also have the most to save by eliminating commissions, says Crabbe.

In terms of what it will take to make ends meet, Crabbe says Jettly is low-cost with only six employees and all its technology is in place and in-house so the main expense will be marketing. “I want it to be like Amazon Prime, ridiculous value for a very low fee,” he says.

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