with tin cups in hand asking for a $25 billion government bailout, they triggered public outrage when it was revealed they'd flown in on luxury private jets. With shareholder and taxpayer frustration growing, companies are starting to see corporate jets as a liability.
That's where Silicon Valley's XOJET airline comes in. The San Carlos, Calif.-based airline provides a kind of private jet time sharing service for corporations. Sure, it's not your typical Silicon Valley startup. But it's an example of how innovative thinking can reengineer an entire industry.
The business was the brainchild of Silicon Valley veteran entrepreneur and XOJET chairman Paul Touw. He cashed in big when Ariba, a procurement software company, went public in 1999. Ariba allowed companies to offload their corporate spending processes by coming up with more efficient and measureable web-based processes. It saved companies billions of dollars.
He noticed that $40 million Gulfstream jets were often in the air only 2.5 percent of the year, while major airlines put their planes to use 55 percent of time. He bought his own jet in 2001 and began experimenting with it. He added a second jet in 2004 and a third in 2005. He then raised funding from private equity firm Texas Pacific Group.
"Some people thought I was crazy to start an airline," Touw said in an interview. "But right now, I feel good because recessions always favor the most efficient players."
By sharing a plane among multiple customers, Touw found he could get about 1,200 hours of flying time from each jet -- four times more than the average.
The model is very similar to the Residence Inn suite motels, where frequent visitors can always get a room if they pay more. In the meantime, the motel rents out rooms when the frequent guests aren't there. The charter customers allow the jets to be used much more of the time. Thanks to some fancy technology in the scheduling software, about 97 percent of the flights are occupied. The company has 17 full-time software engineers helping to make this happen.
"This business is 10 times more complicated than anything I've done before," Touw said. "You have to consider the safety of people first. There is some very complex financing. And there are unexpected changes such as mechanical issues with a jet."
By the end of the year, the company will have 27 jets on hand and 275 employees. The jets are new Cessna Citation X or Challenger 300 jets with room for eight to 10 people each. Rivals include traditional charter companies as well as new companies like Netjets, Flexjet and Citation Shares. They have similar time-sharing models (known as fractional ownership), but fractional can be costly. Charter service is inconsistent.
XOJET tries for fewer users per jet. Touw said his strategy is to guarantee flights, even during peak times. Customers reserve jets, not seats. The company has an on-time record of 99.5 percent. The company also only uses new jets and doesn't outsource its passengers, even if there are heavy bookings. It doesn't want customers to feel like they've been cheated out of using the best aircrafts. XOJET uses only two types of jets to reduce the complexity of maintenance. The result of the changes is a business that meets the quality demands of the most demanding passengers and can still seem like a bargain, Touw said.
It might seem like the recession would cause a business like this to crash and burn. But companies that use jets always make a cost-benefit analysis. If they're paying a chief executive $1 million a year, it costs the company a lot of money if the CEO suffers through the delays of commercial aviation. The average XOJET flight costs $20,000. But the costs of an under-utilized executive are more than that. And many Fortune 500 companies are considering getting rid of their jets altogether. In fact, XOJET is in negotiations with seven such big companies right now.
Electronic Arts is one customer. Its executives use the jets to get around to the company's many different game development studios, some of which are in hard-to-reach cities. XOJET's biggest destinations are New York, Florida, Los Angeles and San Francisco. But it doesn't operate a hub-and-spoke system like a traditional airline. It flies point to point, since its customers go to so many different destination cities.
It claims to have more than 500 customers, including real estate developers, professional athletes (Shaquille O'Neil), celebrities and other affluent individuals. The firm has had four rounds of debt and equity funding, including $2.45 billion in private equity in May. Texas Pacific Group's David Bonderman joined the board in 2007.
Flight hours are up 197 percent and revenues are up 230 percent from last year. But the company is still in a heavy fleet expansion phase, and it isn't profitable. Next year, Touw projects the company will have positive earnings before income taxes, depreciation and amortization (EBITDA). In 2010, Touw says the net profits will be positive.
One of the regions where the company is expanding is the Middle East. The company has set up a $10 million base of operations there. Regulatory hurdles usually mean it takes a year before the company can start flying.
Of course, the super super rich, like Larry Ellison, aren't going to give up their own personal jets no matter how much they cost. "This isn't for the people who don't care about efficiency," Touw said.