Wednesday, September 20, 2017

General Electric to Shut Down Its Corporate Jet Fleet: Executives to use charter services as new CEO John Flannery moves to slash costs

General Electric Co.  executives will have to find new ways to fly around the globe.

The conglomerate is grounding its corporate fleet of jets and preparing to sell them, as new GE chief John Flannery continues to look to slash costs at the industrial giant.

Mr. Flannery is cutting spending in GE corporate operations, including unwinding the internal airline for corporate executives, effective Wednesday, according to a person familiar with the situation. GE will still operate some helicopters and other aircraft, while using charter services as needed.

GE owns several business jets, federal records show, including at least two Bombardier Challenger aircraft. Its pilots for decades have shuttled executives to business meetings and operations around the globe, racking up hundreds of hours a year.

The company has required its chief executive to use private aircraft for all travel, including personal travel, for safety and security purposes, but the board recently changed that policy to allow for charter and commercial flights. With profits under pressure and sales pinched by weakness in parts of the company, Mr. Flannery is looking for ways to save.

”As we have said, we are executing on a plan to take out $2 billion in cost by the end of 2018,” a GE spokeswoman said. “As part of that effort, starting today, we are reducing the Corporate Air Transport services and will use charter companies as needed.”

GE disclosed that it spent $258,000 on personal jet travel for former CEO Jeff Immelt in 2016, counting only the “incremental” costs of the flights such as fuel and crew travel expenses. The company spent another $75,000 on personal travel for other top executives, it said.

The move marks a change from recent plans. When it relocated from Fairfield, Conn., to Boston, the company negotiated with city and state officials to secure parking at Logan International Airport for one executive jet and one helicopter, according to the agreement. The company also requested hangar space at nearby Hanscom Field that could fit six business jets, the documents show.

New CEO John Flannery has been looking for ways to cut costs.

Mr. Flannery is trimming staff at the corporate level and recently delayed part of the construction of GE’s new headquarters complex in Boston, a relocation initiated by Mr. Immelt.

Mr. Immelt, who stepped aside on Aug. 1, pledged to boost cost-cutting earlier this year after talks with activist investor Trian Fund Management LP, which has been frustrated by missed profit goals at GE.

GE doesn’t just own business jets; it also supplies engines and other parts used on some business jets. The company also makes jet engines for commercial planes, and its GE Capital division has a large business of leasing aircraft, though it sold the unit that rents corporate jets in 2015.

In July, GE told investors they would have to wait until November to hear the new boss’s strategy for boosting results, but investors haven’t been waiting in selling their shares. The stock is down 23% this year amid a surging broader market and has lost 15% in the last three months alone.

Mr. Flannery, who formerly ran GE’s health-care unit, is meeting with small groups of investors and visiting the business units of the roughly 300,000-person company. He has said he would look at every aspect of the company and its strategy, although he won’t consider reducing its dividend.

General Electric Co.’s cost-cutting plan is claiming a high-profile victim: the company’s corporate-jet fleet.

Under new Chief Executive Officer John Flannery, the manufacturer is turning the page on an era when it would hand top bosses the keys to its private aircraft. Starting Wednesday, flights will be scaled back and replaced as needed by charter services, the Boston-based company said in an emailed statement. GE intends to sell the jets, it said without providing fleet details.

The straitened approach to air travel shows how Flannery is considering all options as he seeks to shore up earnings and reverse this year’s biggest stock slide on the Dow Jones Industrial Average. The cuts are part of of GE’s two-year plan to eliminate $2 billion in expenses -- a target Flannery’s predecessor, Jeffrey Immelt, agreed to in March after talks with activist investor Trian Fund Management.

“GE is currently undergoing perhaps the most far-reaching reassessment in its history,” Nicholas Heymann, an analyst at William Blair & Co., said in a note to clients. “Management under new CEO John Flannery is enacting a structural reorientation of GE’s culture to likely be more cost conscious, transparent, and decentralized.”

Cost reductions are poised to rise as high as $1.4 billion this year, surpassing the $1 billion target, Heymann said. Next year’s cuts are likely to reach as much as $1.7 billion, fueled in part by “expanded workforce reductions” and “exiting peripheral businesses,” he estimated.

CEO Travel

Like many other large businesses, GE has required its CEO to use the company’s aircraft both for business and personal travel for security reasons, according to its proxy statement. Immelt tallied up $257,639 for personal trips in 2016, his last full year on the job. That figure doesn’t include business travel. The CEO is now permitted to fly on charter or commercial flights after a change to company policy.

During the last three calendar years, top managers spent a combined total of $1.4 million on personal trips on company planes, according to data compiled by Bloomberg.

GE, which manufactures jet engines, owns six corporate jets and two AgustaWestland helicopters, according to Federal Aviation Administration records. The company has three Challenger 600s and two Global 5000s, which are all made by Bombardier Inc. It also owns a HondaJet, a light plane for which GE developed the powerplant.

The six corporate jets would fetch a combined total of about $70 million, according to valuations from Aircraft Bluebook based on average equipment and the year made. Values can change depending on the number of flight hours, equipment and whether the aircraft has an engine-maintenance program.

Flight Costs

The annual flight and fixed costs based on 423 flight hours, a common benchmark, are about $1.75 million for each of the Challengers and about $2.5 million for each Global, according to data from the Conklin & de Decker aircraft cost evaluator. The HondaJet’s annual fixed and flight costs are about $560,000 for the same flight time.

GE also has an equity share of five corporate aircraft, including three Gulfstream planes, that are owned by fractional jet operator NetJets Inc., a unit of Warren Buffett’s Berkshire Hathaway Inc. The remaining two of the five fractionally-owned planes are an Embraer SA Phenom 300 and a Cessna Citation Excel, FAA records show.

Under an agreement signed with Massachusetts and Boston last year, GE was granted access to parking for an executive jet and helicopter at Logan International Airport and offered a hangar site for six corporate planes at Hanscom Field.