Is JetSmarter a Ponzi scheme? (Part 1)
Fort Lauderdale based JetSmarter offers an amazing combination of value and convenience for travelers willing to share a small corporate jet with other strangers. The company’s mobile app is a user-friendly platform which allows members to book travel and unlimited seats at a very low annual membership cost of $15,000. And while the jet-sharing model may not appeal to everyone because of crowded cabins, limited availability and route restrictions, for certain individuals who have travel requirements in line with the operating schedule the JetSmarter deal is perfect.
Money for nothing and Private Jets for free…
The jet-sharing model for private aviation is not a new concept. In the last 15 years, it has been tried numerous times, but has failed horribly in each and every case. However, from the outside looking in, it seems JetSmarter has finally made a breakthrough with the model and is experiencing amazing success. But is that really what’s going on here? Luckily, I have a close friend who is a Jetsmarter member and he has offered to share information with me from his experience in order to further dissect the Jetsmarter phenomenon.
This close friend of mine is one of JetSmarter’s happy customers and he has been a member for nearly a year now. Since I work in the Private Air Charter Industry, he naturally looked to me for sound advice prior to purchasing the $11,000/year membership (now $12,000 and set to increase to $15,000 on 3/01/17 for new members).
After studying my friend’s travel goals and reviewing JetSmarter’s restrictions and terms & conditions, I concluded and informed my friend that he was making a wise purchase, as long as he understood that “sharing” a private jet is not flying private. It is actually the opposite, and in my opinion worse than flying commercial. A key difference between private planes and commercial airliners is their configuration. Seats on the airlines all face the same direction, but on a private jet most of the seats actually face each other! Who wants to bump knees and sit face to face with a complete stranger for five hours straight? Many of the other key benefits of private air travel are also lost with the “share-a-jet” model, but I’ll leave those points for a future post. Nonetheless, the program structure and costs made sense for him, so he signed on.
Now, with almost a full year of membership and under his belt, my friend has provided me with some insight from his experience. The thing that really caught my attention was the utilization factor for shared flights (JetSmarter’s core product offering) versus the annual membership fee.
Based on conversations with other JetSmarter members on board the shared flights, my friend estimates his utilization is around 50% less than the average member. According to him the flights are filled with young professionals who travel frequently. However, for our example we’ll use a generous bias and consider my friend’s utilization as a representation of the average.
The route he frequents is between White Plains, NY (HPN) and Oakland, CA (OAK) and the flights range from 4.5 hours to over 6 hours depending on the direction of the flight. He is averaging 1.5 flights per month going back and forth to the West Coast, which over one year’s time equates to 18 one-way trips total. If we divide his $11,000/year membership fee by 18 we arrive at a cost of $611.11 per flight, or the gross income JetSmarter is receiving for this individual seat on a single flight. So, in this case they are taking in $611.11, but how much does the seat cost them?
On these cross-country flights, JetSmarter is utilizing a Gulfstream G-IV model business jet. Technically the aircraft seats 13, but the company’s policy is to fill only 12 of the 13 seats since three are actually on a three place divan. Personally, I can’t imagine how uncomfortable it has to be to fly with that many strangers packed into such a small cabin like a can of sardines, but it’s happening nonetheless.
Because JetSmarter is a brokerage and does not own or operate aircraft they outsource either N977CS or N945GS for this particular route, both of which are Gulfstream G-IV’s operated by Van Nuys based Jet Edge International. Since I work in the charter market, I also purchase flight time for my clients from this same “air carrier”, so I know how much JetSmarter spends on these flights. The estimated cost on the HPN-OAK route is $30-32k per flight with federal taxes included. This estimate is also based on the assumption that JetSmarter is receiving a significant volume discount, so if they are not spending and negotiating wisely, their cost could easily be much higher. Again, I’ll be generous and use the $30k figure for my calculation, but even at this low price each seat costs JetSmarter $2,500, which significantly exceeds the $611.11 my friend is paying for that same seat. So the real question then becomes, who is making up the difference?
To put this into perspective, in our example JetSmarter loses $22,666.68 on each shuttle they run between New York and California. However, this is just a single flight, in reality they contract dozens of charter aircraft to run dedicated shuttles on a daily basis.
JetSmarter does not own or operate any of the aircraft they utilize for their member flights. Instead, they contract through a handful of FAA Part 135 certified air carriers who operate corporate jets, such as Van Nuys based Jet Edge International and Indiana based Travel Management Company (TMC).
JetSmarter is providing these companies with a tremendous amount of charter revenue on their respective fleets. Charter operators will not fly their aircraft at a loss and there is no secret way to reduce the cost of operating a jet, so outside of the volume discount, there is no special pricing for JetSmarter. Assuming JetSmarter’s purchasers understand charter operation costs and possess some negotiating skill, they will pay the same price as everybody else. As of now, the JetSmarter business model has proven to be very lucrative for a handful of aircraft operators and owners, the company’s President Gennady Barsky, and its CEO Sergey Petrossov.
In addition to the companies that operate the jets and the jet owners, the other winners in this scenario are the JetSmarter customers, like my friend, who is only paying $611.11 for a seat on a corporate jet that should really cost closer to $3,000. As a business owner, the difference between those two numbers is mind-boggling. How is something like this possible?
So Where is the cash coming from to cover these huge losses? Well, that is where this story gets much more interesting as there is one more group involved in this equation.