The Private Jet Industry's Initial Descent?

Companies including Gulfstream and NetJets have been riding the stock market boom but a market crash could shoot them down, too

by Douglas MacMillan

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David MacNeil, chief executive of MacNeil Automotive Products in Downers Grove, Ill., can't imagine doing business without a Cessna handy. "All the faxes and telegraphs and text messages and e-mails are fine and well, but when you want to put a significant deal together it has to be done in person," he says. Face time is such a priority to MacNeil that he upgrades his jet as often as most managers do their PCs: Since 2003, he's owned a Cessna Citation CJ1 and CJ2, currently owns a $7 million CJ2+, and plans to re-up to a CJ3 next year.

Private jet usage has become increasingly commonplace for thousands of business travelers like MacNeil. In 2006, sales of business jets worldwide shot up 18% over the year before, and up 185% over the preceding 10 years, to 885. Fractional ownership programs such as Berkshire Hathaway (BRKA) subsidiary NetJets, charter memberships including JetDirect subsidiary Sentient Jet, and charter consolidation services like Jets.com, have attracted customers looking for a lighter commitment (see BusinessWeek.com, 9/4/06, "Over the Madding Crowds").

Lofty ROI…For Now

And if only for this brief moment of super-high demand, owning a private jet is actually profitable—planes purchased new in 2006 are selling on the used market for as much as 22% more than what they cost. The most expensive entry in the business jet category, Gulfstream's G550, is fetching a spectacular $55 million—if you can find one—more than $8 million above what it cost new last year. (Boeing also sells its aircraft to extremely wealthy private buyers—Google (GOOG) founders Sergey Brin and Larry Page purchased a used 767-200 widebody jet for an estimated $15 million—but their planes are considered commercial aviation products.)

"The business aviation industry is as robust as it has ever been in its history," says William Garvey, editor of Business & Commercial Aviation (a publication of the McGraw-Hill Companies (MHP), BusinessWeek's corporate parent). He points to current trends as validation and promise for future growth: "This is a long upswing." But others warn that paying top dollar now could be a big risk—they've started bracing for initial descent.

Estimations of used value in this article are provided by Vref, the standard price guide for the private jet industry since 1994. Its founder and publisher Fletcher Aldridge says that, "When things are hot, it's fashionable to predict they're coming down. But nobody really knows where the peak of the market is." The best clues, he says, can be gleaned on Wall Street: "The aircraft market is joined at the hip with the stock market."

Fractional Ownership

Even fractional ownership programs, which account for nearly 5,000 private fliers worldwide, may pose a risky investment. Typically plans work like this: a customer buys a share in a private jet (as little as 1/16th), flies anywhere from 50 to 200 hours per year, and five years later has the option of selling the share back to the service provider at a discounted value or holding on to it.