Thursday, November 2, 2017

In defense of the ever-unpopular corporate aircraft: Even frugal Walmart has 20 planes -- It's about 'efficiency of time'

Bloomberg News
Joe Nocera

The Wall Street Journal has had a jolly good time recently exposing a small example of corporate excess: It seems that during the years Jeff Immelt was the chief executive of General Electric Co., the company often sent a backup plane on his travel in case something happened to the corporate aircraft he was using.

The practice was first revealed in mid-October, in a Journal story that was mostly about how GE’s new CEO, John Flannery, was cutting costs. Four months on the job, he’d already shut down three research centres. He cut out the 700 company cars. He has delayed construction of a new headquarters building in Boston. And he is planning to soon unveil a series of major steps aimed at both restructuring the company and reducing costs by US$2 billion, a target Immelt set before stepping down.

One can hardly disagree with the aim. GE’s margins are significantly lower than those of other conglomerates, such as Siemens and United Technologies. Its market cap this year has declined by US$100 billion, making it the worst performer in the Dow Jones Industrial Average. And it has been under pressure from Nelson Peltz’s Trian Partners, which recently got a seat on the board.

As a small but telling example of Immelt-era “excess,” the backup jet story is just about perfect. Among other things, it offers a contrast between the presumably free-spending Immelt and his tight-fisted successor Flannery, who quickly ended the practice. You can understand why the Flannery team didn’t mind seeing it exposed in the Journal.

But it’s not just the backup plane Flannery has cut out. He is also eliminating the company’s entire corporate fleet, which includes five jets. The company is holding onto only a few small planes for short flights. This is the cost-cutting equivalent of cutting off your nose to spite your face.

Yeah, I know: Nothing looks more excessive — and more plutocratic — than flying on a private jet. No dealing with riffraff in crowded airports, no long security lines, no endless waiting for takeoff, no cramped seats, no need to accommodate an airline schedule. Instead, you drive into a private airport, park your car nearby, hand your luggage to an attendant who puts it on the plane, plop into your comfortable seat and away you go. Once you’ve flown private, you never want to go back.

For this reason, private jets have always been easy targets. When the three auto CEOs came to Congress in 2008 to plead for a $25 billion federal loan package, they were excoriated for flying in their “private luxury jets” to ask for a taxpayer bailout. When Steve Jobs officially became the CEO of Apple in 2000, he asked the board to give him a private jet. The board’s willingness to pick up the annual tab was one of the few criticisms shareholders had during Jobs’s tenure.

Warren Buffett had long been critical of companies spending shareholders’ money on private jets. When he finally bought his first plane in the 1990s, he named it “The Indefensible.” But you know what? A few years later, he changed the name to “The Indispensable.” Buffett had discovered that when you run a big company, a corporate jet really isn’t an indulgence. Rather, it’s a tool. (This may also help explain why he bought NetJets Inc., the fractional aircraft company, in 1998.)

Companies buy corporate aircraft because there are many situations in which time is more valuable than money. Sure, you might be able to save a few dollars by forcing all your executives to fly commercial or charter. But all that getting to the airport early, waiting in line, dealing with delays, and so on, is going to cut into the amount productive time they have to, you know, work. When someone is running a big division and has far more to do than there are hours in the day, flying commercial is counterproductive and costly.

There isn’t a company in the U.S. more frugal than Walmart; when its executives are on the road, the company expects them to double up and share hotel rooms. Yet it maintains the biggest corporate fleet in the country, about 20 corporate aircraft. Its former director of global travel services, Duane Futch, has said that Walmart uses its jets primarily for regional vice-presidents who have to frequently visit the stores in their territory. It also saves them from having to stay overnight. “Efficiency of time is one of the main reasons we have the corporate fleet,” he has said.

Many industry experts doubt that GE will save all that much by eliminating its corporate jets. Its used planes won’t generate much cash, given the glut of used jets on the market. As GE executives, needing to put time over money, start using expensive charter jets, they may well wind up spending more of the company’s money, not less. Pete Agur, founder of aviation consultancy VanAllen Group, told Bloomberg that “long term, there’s no way a global company can operate only within the airlines or only with commercial options, including fractionals.”

GE does 70 percent of its business overseas. Its executives don’t just need to travel, they need to travel efficiently. Yes, it’s pleasant to fly private — and bound to breed a certain resentment — but it is also the most efficient, most productive way for a busy executive to get from Point A to Point B. Shareholders should want that.

You usually expect politicians to embrace symbolic acts even when they’re counterproductive. You don’t expect it from the chief executive of General Electric. Yet that’s exactly what he’s done. I don’t know if Flannery is right to be cutting research centres, but I am sure he’s wrong to be cutting out the company’s corporate jet. To me, it’s a red flag about the new man in charge.

Story and comments:  http://business.financialpost.com

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