Monday, November 20, 2017

Don’t Sell Your Company’s Private Jet Fleet Just Yet: When company’s operations are spread out and governance is good, corporate jets can boost performance

The Wall Street Journal
By Alex Frangos
Nov. 20, 2017 12:49 p.m. ET

General Electric’s executives are getting reacquainted with the joys of commercial air travel. But the decision by the company’s new chief executive to cut the use of company-owned jets may pay off in symbolism rather than performance.

GE became the latest high profile case of corporate aviation misadventures, when the company revealed it had been sending a backup plane to fly with former boss Jeffrey Immelt. The decision by new chief, John Flannery, is a welcome sign of improved governance, but for a company with as many locations and operations as GE, it risks going too far.

In fact, the time saved and communication facilitated by private jet travel generates improved operating performance in terms of measures such as return on assets, notes a recent working paper by finance and accounting professors Lian Fen Lee, Michelle Lowry and Susan Shu. Using The Wall Street Journal’s flight tracker database, published in 2011, the trio of academics collated the routes of private jets with the location of company subsidiaries.

The findings were strongest for firms that had the most widely spread business operations and would seem to benefit from being able to have executives hopscotch from location to location. Also benefiting from jet travel: firms in industries with high research and development costs, for whom complicated information sharing requires face-to-face explanations.

The risk is that companies don’t use the jets for legitimate business purposes. Around 10% of flights are to resort destinations such as Scottsdale, Ariz., West Palm Beach, Fla., and Las Vegas. Companies that had otherwise poor corporate governance metrics, such as dual class shares, joint chief executive and chairman and anti-merger provisions, benefited the least from using private jets.

If corporate jets were purely seen as excessive, their use would probably be on the wane. But in fact, roughly half of public companies report jet use in some form in their corporate documents. The actual number is probably higher. And that hasn’t changed much in recent years, even as activist investors and corporate governance pressure has increased in other areas of boardroom conduct. For corporate jet makers such as General Dynamics and Bombardier, GE, may be an outlier.

The trouble is how to determine whether the plane is being used for work or pleasure. After The Wall Street Journal popularized the use of public database searches to track planes, executives and companies have gone to great lengths to obscure their flights. Clever hedge funds may still be able to track tail numbers, but the investing public is mostly in the dark.

Investors could demand another solution: Ask companies to voluntarily disclose in broad strokes how private jets are used. If say, 95% of trips were to subsidiaries or finance centers like New York, rather than vacation spots like Honolulu, that would be a sign of judiciousness. Investors would feel better and executives might not feel guilty about one of the key perks they enjoy.

Original article can be found here ➤


Anonymous said...

After working in multiple companies with private jets, traveling on them, and seeing how senior execs use them, I am convinced that they are just an expensive perk. A few of the abuses I have seen:
- exec charters jet for well below market rate to fly family to Florida and wait on standby for a week to fly them home. Standby was free and the jet was not useable by others during this time.
- execs use jet to go to Super Bowl for "business meetings"
- exec uses jet to commute between office in one city and home in another city every week (seen this twice at two separate companies)
- exec has jet on standby in Vail near his second home all Summer in case he is needed at the last minute to "close a deal"
- exec kicks underlings off plane so he is not bothered during flight, underlings fly economy
It is all legal, but not ethical or good business.

Anonymous said...

Comparing private aviation to commercial aviation is akin to comparing flying to driving or taking an ocean liner. With proper governance in place, a private aircraft can be a competitive advantage for a company in managing its operations, maintaining executive level contact with its customers, and responding faster to needs of various stakeholders by a whole different order of magnitude.