Steve Varsano: Jets, Current Market Affairs & Industry Trends

Hi, I'm Steve Varsano. I'm the founder of the jet business here in London, and I'm about to do an interview with a business channel in Germany to talk about the current situation of the corporate jet industry.

So, I suppose a good place to start is Academia. I'm asking how's business?

Actually, it's slower than last year, which is better for us. So, I think, you know, the industry did take a big dip— a big dip right when the first lockdown occurred in the beginning of 2020. I'd say the market probably dropped 20 or 30 percent as far as prices, and, you know, most of the activities stopped dead because everybody thought it was the end of the world and, you know, nobody was going to fly anymore anywhere in the world and everybody was going to die.

It didn't take long after that for people to realize, okay, the world's not coming to an end, and they started seeing there was potential for light at the end of the tunnel, and things started coming back alive. It slowly, slowly started picking up speed, almost like a locomotive coming out of a station. You know, it just really, really chugged along at the beginning, and through 2020 it probably came back to somewhat of a normality.

Then, in 2021, it actually picked up a little bit more speed, and prices started increasing a little bit. Then, in 2022, for some reason, when a lot of the restrictions of COVID around the world got dropped and the international borders were open, you really started seeing a big demand come back. Of course, economics 101: you have a big demand and low supply, prices go up. That's very odd for our industry.

I mean, similar to, let's say, a car: you know, an airplane is a depreciating asset, and they never go up in price. But that, you know, changed in the past year or two, and the anomaly came back very strongly. The prices went from down 30 percent, somewhere up 20 to some places up 100 for the older, older, cheaper airplanes.

I think now you’re starting to see we’re sort of just over the top of that inverted bell curve, and we’re starting to see a little bit of slowness. Not as many people are crazy to go buy airplanes. People are willing to sort of start saying they’re going to reduce their price a little bit, which you never heard for the past year or a year and a half.

What do you attribute the boost in demand to?

Well, when COVID first happened, I mean, the airlines, the commercial airlines probably cut somewhere between 60 to 70 percent of their schedules. So, if you wanted to go from point A to B, you just couldn't get there, quite frankly. Maybe you could, but you might have to take one or two or three different connections.

Internationally, maybe it was okay in the US because the US is one country, and you could travel around more freely. But, you know, in Europe, let’s say every place normally, you know, you would get on an airplane, you’re going to go someplace internationally. Maybe in Germany, it’s a little different because you have a lot of places people going from one end to the other. But really, like let’s say in the UK, you know, anytime you get on an airplane, you’re going to take an international trip, and you just couldn’t get there.

Even if you could get there, of course today, boundaries were open and the COVID restrictions allowed you to get there. There was still a chance you got there, and then they changed them, and you couldn't get back.

So, people started flying with corporate aircraft, whether through charter, whether through buying a jet card—which is sort of like a debit card of a charter certificate—or buying a fractional piece of an aircraft or buying a whole airplane. And that was one of the big reasons.

The second reason is of course health concern; people didn't want to travel with a lot of other people in a big airplane. A lot of the commercial aircraft also recirculate the air inside the cabin, whereas on a corporate aircraft, you're actually taking fresh air in from outside. So, that's also a little bit of an issue some people had. The commercial airplanes were able to take fresh air in, but it has to burn more fuel, which costs more money, and the airlines prefer not to do that.

You had the convenience of being able to get there because you didn’t have another way, the health issue, and it’s interesting that the demand remained high after the pandemic restrictions. Now that the airlines seem to have largely recovered, why has it continued?

I guess, you know, one thing is that a lot of the charter operators saw a huge increase in demand. I mean, really like a 50 to 60 percent increase in people who wanted to charter a corporate jet, and 50 percent of those people never flew on a corporate jet before. So, it was a thing where you got a lot of people who—or a lot of corporations—who can afford to do it, but they never really saw the benefit and thought it was too expensive.

But once you see the conveniences and how it could really increase your quality of life, you know, the fact of the matter is is on a corporate jet, you can get to two or three places in a day and get back at the end of the day in the same place, if you need to. You can leave in the middle of the night; you can leave at any time you want. You don't have to worry about somebody else's schedule.

So, the corporations and people who can afford to do it actually moved over the line to try it out, and they saw, hey, you know, this is really something that can help my business. It had some sticking to it, and, you know, of course all those people will not continue to fly regularly on a corporate jet. But I think you’ll probably see, you know, a good 20 to 30 percent of those people who never flew on a corporate jet will continue to do so.

This is something you more or less answered there, but I'd like to get a bit more into this: how has the customer base changed over the past few years? You mentioned that people can sort of buy a share of a jet. Did you say that means it enables people of a, I suppose, lower income or lower wealth to get involved in ownership of a private jet?

Of course, yeah. I mean, but it also is if you don't need a complete airplane to have full time. I mean, some people fly all year, and they need a lot of—they have a lot of requirements for flying.

What we usually say is if you're not flying between 150 and 200 hours a year, you probably shouldn't own a jet. If you're flying less than 150 to 200 hours a year, you should probably rent one or buy a fractional piece.

Just to give you an equivalent, 150 to 200 hours a year, 200 hours a year is about equivalent to what you see on the airlines when you get a hundred thousand miles, and that's like a platinum level. That's about 200 hours a year. So what we're saying is unless you fly that much, okay, you really shouldn’t buy an airplane, not for financial reasons but logistic reasons.

If you're not a platinum flyer anyway, then you probably shouldn't be. Well, I mean if you don't have the need, you know? I mean, if you're always flying between, you know, London and New York, or you know two major cities, and you're one person, then it makes sense to fly commercial and that's fine.

But if you have teams of people flying with you and you're going to go to two or three different sites, it's in your schedule has changed pretty radically, and sometimes you can't make that trip on a commercial airplane. It just makes sense. You can't say, "Wow, because it's so much more to fly on a corporate jet than an airline" because there's so many intangible benefits.

It's really a time machine. I mean one thing, no matter how much money a person or a company has, you can't buy time. But having a corporate jet actually allows you to do that.

One of the things that makes the growth in the private jet market surprising is that the increased climate awareness that there is and also the fact that buying a corporate jet is less environmentally friendly, people would assume at least, than flying with Ryanair or something. How do those two things square and how do people justify the purchase on environmental grounds?

This is nowadays the second comment you get after "Hello, how are you?" So, it is really a misplaced question because flying on Ryanair is not as environmentally friendly as taking a horse.

I mean, you know, there is a certain point people here in London, you can take the subway, you know the tube, you can take a bus, you can take a taxi, you could take an Uber X, you could take, you know, a black Uber, you could take a chauffeur-driven car, you can take your own Rolls-Royce. Okay? There's plenty of ways to get from point A to point B, and it depends on, you know, what level of, you know, financial position or what your requirement is—you adjust that.

If you have a car, okay, you need a car in your day-to-day life to basically go take your kids to school, go to work, go shopping for groceries, you know, go out at night or something like that, you don't think, "Am I damaging the environment?" It's something, it's your form of doing your day-to-day lifestyle.

For corporations, it’s a similar kind of thing. Whether anybody wants to believe it or not, corporations will have bases all around the world. They need this kind of flexibility to be able to travel around the place. This is like 2023, you know? We're not in the 1800s.

So, the thing is if you really want to attack what is environmentally unfriendly, you know, people should just become vegetarians because, you know, the cows in the world, okay, are contributing 15 percent of the carbon footprint problem in the world. And it's actually worse than that because it's 50 times more negative effect on the environment because it's all a toxic gas; it's methane gas that lasts in the environment a lot longer.

Corporate jets are 0.04 percent of the carbon footprint in the world—point zero four percent. Okay? You have 15 percent is cows. I mean, China is 30 by itself. No matter what the rest of the world does, they're going to do what they do, and it's not going to—you know, everybody's trying to do their part, which is great, but no matter what we do, the rest of the world is going to be doing damage.

The corporate aircraft and commercial aircraft industry is doing a lot to even reduce that 0.04 down there is a sustainable aviation fuel. Okay? There's electrification of aviation, which is coming through in the next, you know, two or three or four years. There’s much more technology through artificial intelligence to basically make the engines more efficient.

There is a lot the industry is doing that, believe me, they are not doing anything but trying to better their position. It's unfortunate that, you know, other people just want to target some of these airplanes because, you know, they think it’s just rich people flying on airplanes having joy rides, and that’s not really the case.

I mean, 75 percent of every corporate jet has middle management flying around in them. And, you know, then the others are corporate executives going to different meetings. The reality is just not matching with the real image people see. Most people who have their own airplane or are chartering aircraft, okay, are doing carbon offsets, which is not just carbon offsetting, but I’m talking about double or triple their carbon footprint that they are letting out.

The commercial airlines are not doing this, so if you really want to go out there and measure it, that 0.04 percent is probably—I don't have just the exact statistic—but it's probably almost zero because the industry is actually investing in the carbon offset.

So, you know, whether it’s planting trees or paying for different kinds of power plants to offset this kind of thing or trying to find ways to extract the carbon out of the atmosphere, I mean there is a lot being done to try to solve this problem, not just for the corporate aviation industry but just the carbon footprint problem universally.

If I can try and pick your brains about the sort of the global jet market because I know you’re UK based, but obviously, I know more about any of this than I do. A main driver of general luxury spending at the moment is China’s upper-middle class and its growth. Have you seen in the jet industry similar Asia-driven growth in demand?

No, you’re right. I mean you look at LVMH; they just became a 500 billion Euro company. The first time in Europe a company ever became that big; why? China. Okay, so that is a big reason why a lot of the luxury groups are going up in value and have incredible success in sales.

It’s amazing— all of Asia does not take up five percent of the corporate jets in the world. So just to give you some numbers, and yeah, I’m based in the UK, but my business is all around the world. There are 24,000 corporate jets in the world, okay? 24,000.

If you look at all of mainland China, Macau, Taiwan, and Hong Kong, there are about 500 jets out of 24,000. So, it's a very tiny percentage. And the biggest reason is one—in mainland China, the airspace is 70 percent controlled by the military. So, corporate aircraft cannot fly in it.

The other reason is that if you compare, let’s say, China’s footprint as a land mass, it’s about equivalent to, let’s say, the U.S., and in the U.S. there are 5,000 airports a corporate jet could fly into, and in China, it’s about 145.

So even if you could fly, you really can’t get around to the places you want to close enough, so it doesn’t make as much sense. Yet, of course, the biggest reason is if you have a corporate jet in China, you know, the government will start looking at you much more closely, and people would just rather be underneath the radar and not be scrutinized.

That's interesting. So, all those reasons you’ve listed don’t seem like things that are going to change anytime soon, so there's not optimism for growth in that region?

No, it’s a shame because there is a huge potential there. There’s a lot of wealth. I mean, the companies there are very big, they’re very profitable, and they really need these aircraft. A lot of them are using aircraft that they’re chartering rather than buying, and they just use them as they’re required, but it’s a shame because, you know, the number of people there, the amount of wealth that’s there, the amount of success the corporations have, and most of the corporations are dealing on a global basis—that’s probably where the industry is most needed.

So, but in the current, you know, situation, it’s not going to change right in the near term, you’re saying?

Back at the start, it feels like it’s starting to sort of level off now, although I was reading some research yesterday that came out only just; I think it only came out yesterday—that private jet sales are going to hit that peak next year. Do you expect the demand to remain at the same level or tail off? Is there something special going on at the moment that is going to come to an end?

If you got that report just the other day, maybe it was delivered to you by horse because that information is old, and it’s not true.

We, the industry, probably hit its peak, I’d probably say six months ago, and, you know, prior to the end of the year, and since the end of the year, we’re already starting to see it starting slowing down a little bit when interest rates started going up around the world. The threat of a European and a U.S. recession is coming. You see these bank failures now are giving people costs for, you know, holding back.

I think there’s a multitude of, you know, stocks. Okay, you start seeing the five or ten big name stocks have jumped back up, but you know most of the little people, little companies have really had drastic drops in the last six months in this in the stock market.

Private equity markets have gotten really, really quiet, and um the companies who are private, you know, were always jumping and going after revenue, revenue, revenue. Now they’re saying, “Hey, go find a way to make profits.” They're cutting back on their investments and just a lot of the world is just taking a breather.

Listen, it’s nothing different that’s happened in the past. Everybody thinks, “Oh, the end is here,” but it’s just a cycle. Okay? So we’ll see a bigger drop as the year goes on, and there might, you know, interest rates hopefully would have peaked, but I think that there are going to be a lot of issues with the banks and real estate and defaults and things like that, and as the year goes on, we’ll see a drop.

But as soon as what I hear from people that are pretty smart in the world of economics—at the beginning of 24, interest rates, you know, start dropping down, and the world starts recovering, and when all of a sudden, you go right back up again.

So, the faster we can get through this dip, the faster we go back up.

Well, I think that's a good line on which to end it. So, thank you very much for your time. I learned some interesting stuff there. I mean what you're saying about China not really—you know, the market not really being there is interesting because the likes of LVMH, I think, are hoping to ride out what's going to happen in the U.S. on the back of the sales that they can make in Asia. If your industry hasn’t got that to fall back on, I can see why that’s a concern.

Yeah, I mean, the corporate aircraft manufacturers—they’re fine because during the strength of the market in the last year and a half, they’ve built up about a two-year backlog. So, even if things slow down this year, you know, they have enough manufacturing backlog to get them through.

As a matter of fact, once you get past it, you know, a longer than a two-year backlog—people don’t even want to order a new aircraft because they don’t want to really wait three or four years. It’s not good, so it’s actually a little healthy for the market.

You know you have the Middle East is actually getting pretty stronger now. I mean the Middle East has gotten much better in the past couple of years, especially through the pandemic, and now it’s even growing more. You know, Dubai’s been on fire. Saudi is really, you know, going to be ready to sprout, and that’s a big, I think, injection into the Middle East market that’s going to help the industry a lot globally.

I’m glad you mentioned that because I hadn’t actually mentioned the Middle East, and that's an important market to have that mentioned. I think that’s all my questions covered, though. So, thank you very much for your time.

Thank you. I said I’ll let you know as soon as this is ready to go up. Actually, I should just ask if there was anything else you wanted to add that you feel is always worth mentioning.

No, I think, you know, this—oh, you wanted to ask earlier about the type of client or the type of buyer. I will say that, and I've been in this business a long, long time, and, you know, in earlier days, you know, going back 25 to 35 years, the normal buyer, or I would say the executive in a corporation or an individual that has an entrepreneurial business was probably in the 60 to 75 years old.

I think that has probably moved down significantly, and the average now is probably 40 to maybe 65. Okay? So, the age has come down a lot, and in the charter market and the fractional market, that has also come down a mark, which is a big piece because that's adding a whole new category of potential clients in the industry.

Before it was just very, very senior people who were chartering, but I think the world has changed, and like I said, it’s 2023. It’s, you know, people are used to flying around—not just not in corporate jets—but they’re being exposed to it more, and it’s becoming just more efficient to do it, and people are, you know, joining forces and seeing how much more easier it is to travel that way.

40 years old, I've got five years to save up for my private jet there!

Okay, this interview is going to make you rich.

Thank you!

Okay. I wish you, it wasn’t evening, a pleasant week.

Thank you! Thanks a lot, appreciate it, Rob. Take care.