Is XOJet killing your business?

[OCR]

Is anyone else being asked to quote one way pricing on jets at ridiculously low prices to compete with XOJet? Their new one way pricing, which covers many coast to coast city pairs, is being advertised at $19K, inclusive of ground transportation, basic catering, and flight phone charges.

Doing the math, if the average coast to coast flight is five hours, and they have to reposition for an average of 30 minutes, that is 5.5 hours of flying. Subtract $1,000 for catering/ground/flight phone, and subtract another $1500 to cover overnight fees while they await their next leg, and they are likely netting about $16,500 for 5.5 hours of flying, which comes out to $3,000 per hour for a Citation X or Challenger 300.

Considering that they just bought these planes, and they own many of them outright, how can they possibly cover the cost of capital, property taxes, crew expenses, overhead, and marketing, and work for such a low hourly rate? Just the variable DOCs have got to be close to $2,000 per hour. This margin doesn't even cover the cost of pilots.

It seems like this is a desperation move that is the end result of a bad business plan that got even worse as the economy turned. Unfortunately, our charter clients now expect us to match these prices. Is anyone else dealing with this? If so, what are you doing to respond?

 

[jonjuan]

Well, they do claim on the fractional board that they are very busy and are seeing no slow down. I suppose for them that doing this, flying at a loss, is better than doing no flying at all. Many small businesses start this way by giving their product away and hoping people will return, but instead paying much more for the same product.
With the tremendous amount of debt with the aircraft orders and few new "fractional" owners in this economy, they have to show the investors that they are staying busy. They can then release to the press that they are "increasing marketshare" by adding to their "1,500 clients and growing" spin. I wonder what the true fractional owners that they do have think about these hourly rates.

 

[t-bone]

Those rates "start at" $19,000. I don't believe that a west bound transcon can be had for that price...but I haven't seen any of our quotes. Please provide specific city pairs that have been quoted at that price.

 

[X-rated]

Like T-Bone said, Those rates are for very restrictive city pairs, and the 19k is the lowest of all city pairs and those pairs probably often do not require reposition legs. Like VNY-TEB; In this market, It's likely we can cover that trip with no reposition.

As pilots, we certainly don't want to see anyones business "killed." However, don't kid yourself. This type of promotion is designed to gain market share. We feel confident that customers will appreciate our brand of service, and will continue to request us after this promotion ends.

Also, we are certainly NOT desperate. We are doing very well at maintaing cash flow in this difficult economy. I'm certainly not saying we are loosing money, but even if we are, loosing a little money in this economy is not what kills companies. Shutting off cash flow is.

 

[jonjuan]

Those rates "start at" $19,000. I don't believe that a west bound transcon can be had for that price...but I haven't seen any of our quotes. Please provide specific city pairs that have been quoted at that price.

http://www.xojet.com/index.php?/reserve

 

[OCR]

XO's website shows all city pairs at a flat $19K, in either direction. It includes the lesser traveled destinations, like San Diego, Boston, and Phoenix. Whether they are really honoring these prices on every request is another question. At face value though, it appears their web site would indicate they are.

If these airplanes cost approximately $20M, just the interest at 5% is $1M/year, or $83K per month. Add the cost of pilots, dispatchers, mechanics, and property taxes, and the fixed overhead per plane is easily approaching $200K per month.

If the gross margin per hour is even $1300 (and that is being generous), they would have to fly each airplane more than 150 hours per month just to break even. Keep in mind that I haven't even mentioned the cost of office space, utilities, management salaries, marketing, insurance, and other overhead.

There is a reason that companies like Sentient, Marquis, Flexjet, and Citation Shares all charge between $8,000-$10,000 per hour in their card programs for a super-mid size jet like the Citation X or Challenger 300. Even at those prices, companies were not making substantial profits. Now imagine what happens to profits when hourly rates drop down to the $3500 range per hour. It's downright disastrous.

Why should we all worry about this? Here's one good reason. Pilot salaries have always in part been based on how much gross profit these fractionals and charter companies can earn from our services. As the margins diminish, the amount they are willing to pay us diminishes with it. Add to that the fact that there are so many furloughed pilots looking for work, and you can see where this is going to lead to.

So I maintain that while XO may have found a way to fly their planes in the short run, the damage they are doing to the industry, and to the pilots, will continue long past the days of these "introductory prices".

 

[brokeflyer]

probly what happens is by going really cheap and operating at aloss means that you have X amount of money to operate for fixed period of time. Similar to what places like Independence Air did. Operate the same thing as the competition hoping they will fold, then you get their market and bump your prices back up.

The gamble is what happens when your competition DONT fold. Then you have a little plane selling party and try again.

Did the furloughed XO guys get called back yet T-Bone?

 

[tdwnds1]

Airfare wars are nothing new in the flying world, so why should it be new in the Fractional business? It is all about grabbing market share from the other guy and if it works for XO jet then so be it.

The danger in all of this is the "race to the bottom" of the price scale. I doubt that XO Jet would be operating these routes at a loss, but nothing is ever certain in flying. If it keeps them busy an grabs market share from the "weaker" competetors, then it works for them.

FYI...I have had an application with them for over a year, but havent heard anything yet, but I keep updating.

 

[CelticCitation]

I don't know that XO, or anyone needs to grab market share at this time, but rather, survive. If there are fewer operators at the other side of the recession, it means greater market share for those who remain.

Too many operators are selling trips for less than cost, for the cash flow. That may aid to survival, but it also educates clientelle. Look at the airlines. Who expects to pay more than $200 to go anywhere domestic?

This is a scary time to be in the charter business. The phone doesn't ring, then any quotes get beat up to where nothing is profittable. It all has to turn soon, or I'll be living under a bridge, and I live in a cold climate.

 

[tdwnds1]

I understand, I wasnt disparaging the charter business or anyone else. You are right, its about survival.

Ive NEVER seen it this bad...and I feel for you with how slow business has been. I wish for the success of all parts of aviation: fractional, charter, cargo, etc.

You might have alot of company underneath that bridge if things dont get better..including me!

 

[X-rated]

XO's website shows all city pairs at a flat $19K, in either direction. It includes the lesser traveled destinations, like San Diego, Boston, and Phoenix. Whether they are really honoring these prices on every request is another question. At face value though, it appears their web site would indicate they are.

OCR,

That's not what it says at all. Next time post the whole sentence, try to slow down, be less emotional, and read! There is a very big difference between 4000 and 9.

"Fly the market share leader in transcontinental charter. Choose from over 4,000 airport pairs serving nine major metro areas and fly for as little as $19K one-way."
Preferred airports at which the $19,000 rate is available include: Teterboro (New York), Northeast Philadelphia (Philadelphia), Bedford (Boston), Manassas (Washington, D.C.), Van Nuys (Los Angeles), Henderson (Las Vegas), Oakland (San Francisco), Carlsbad (San Diego), and Deer Valley (Phoenix/Scottsdale).
Subject to availability. Other restrictions apply.

I understand the charter market is extremely poor and business is hard to come by for many operators. However, blaming a single operator who is currently crewing a grand total of 17 airframes domestically for killing your business is simply ridiculous. If your company is not competing well in the marketplace, you might consider a closer examination as to why. I'm sure you don't like this marketing campaign. It makes it hard on the competition, and that is precisely what it was intended to do.

As for your comments regarding XOJETs effect on pilots salaries, I'll just say our pilot pay package has been posted on this website several times. I believe it is very respectable, and would be shocked to learn if your charter outfit is even in our ballpark. Please correct me if I'm wrong.

I wish you and your company good luck in these difficult times.

X

 

[t-bone]

Did the furloughed XO guys get called back yet T-Bone?

Unfortunately, they were not furloughed. And no, there have not been any new-hires lately.

 

[brokeflyer]

terminated?.....that sucks

 

[TransMach]

NO - But XO may be killing their own business ...

When you deeply discount your product in a down time, just to keep cash flow alive, it is VERY DARN DIFFICULT to raise your pricing back to normally supportative levels when conditions improve.

Your customers (particularly new customers who were lured in by an unrealistically low price) will really have a hard time accepting steeply increasing pricing. They (the customers) will believe they are being gauged. I've seen it happen in several industries.

Good luck to all!

TransMach

 

[OCR]

X-Rated,

I have re-read my post several times now, and I'm quite confident that nothing I stated was based on emotion or anything of the sort. I even disclosed that while the city pairs on the XO web site indicate the $19K pricing is available for those pairs, that whether clients are actually receiving those prices is unknown to me.

Yes, this is a pricing war, and XO has taken a bold lead in the war. However, I do not believe that this is a sign of strength on their part. I think it is a desperation move based on the fact that they committed to so many airplanes when the market was strong that they now have to do something with them while they try and figure out how to get out of the mess they are in. If you really think they are not losing substantial amounts of money on this venture, why not ask Dave and Paul directly and see how they respond?

There are many companies that are not responding to the price wars that companies like XO are fighting. These would include EJM and Jet Aviation, who have simply accepted that their charter fleet will be flying less. This does not make them weaker competitors in my opinion, just smarter ones. Because both of them have plenty of cash to wait this out and don't need to resort to acts of desperation just to keep their planes flying.

And no, XO is not the only company fighting this price war. There are a number of companies now flying point to point at hourly rates that are below what we all used to charge for round trips. One of them is rumored to have just had several planes repossessed by the bank. These stories will just go down in the history books of more companies that thought they could make money by buying airplanes to charter out. It's not the first time we have seen this business model fail, and I'm sure it will not be the last.

Finally, without a doubt, pilot salaries have been falling. Gulfstream pilots who used to make over $120K a year are now fighting over jobs that pay $75K, and for every one that gets hired, there are five more still looking and not finding anything. XO is certainly not single handedly responsible for this, but the industry in general is being forced to reconsider how much they pay pilots based on the reduced profit margins they are being forced to accept in the current market.

 

[say again]

Not an XOJet fan OCR?!?!?!

 

[OCR]

It is not my intent for any of these comments to be of a personal nature, nor to in any way suggest that the fine people who work hard at XO are in any way doing something wrong. I'm glad to see that they are employing as many pilots as they are. The last thing we need are any more pink slips in this industry.

Our industry is going through some difficult times. XO is certainly not the only nor the main reason for this. Our industry has been hard hit by many issues, including bad press from Washington, a really tough economy, and a perception that our service is unnecessarily luxurious at a time when people are scaling back and spending less.

Our industry is reacting by lowering prices - a very natural thing to expect to happen as demand softens. The problem is when the prices drop so low that they are being offered at below their true, fully burdened cost, which forces other operators to operate at a loss to compete, or to drastically reduce their flying. While this may serve as a short term strategy, I believe in the long term it hurts all of us.

I was not a big fan of JetDirect either. The concept of one company gobbling up so many management contracts seemed to be generally bad for the industry, and for the many regional operators that work hard to do a good job servicing local clients. As we watch JetDirect crater, we should all learn a lesson on what happens when a lot of money is thrown at a business plan that is not sound.

I just hope that the economy turns around before it gets to the point where the industry sustains so much damage that it can not fully recover.

 

[X-rated]

There are many companies that are not responding to the price wars that companies like XO are fighting. These would include EJM and Jet Aviation, who have simply accepted that their charter fleet will be flying less. This does not make them weaker competitors in my opinion, just smarter ones. Because both of them have plenty of cash to wait this out and don't need to resort to acts of desperation just to keep their planes flying.

OCR,

I don't understand your "logic." How in the world is it "smarter" to keep the airplanes in the hangar and loose money by the truckload?

I'll use your numbers from your earlier post to illustrate a point since I have no idea what the real numbers are. You say an average transcon in the X is about 5 hours, and the DOC is about $2000 per hour. So according to your numbers, the direct cost to fly the airplane is about 10,000 dollars for a typical transcon. That leaves $9000 per leg to offset other fixed costs including that 83,000 dollar aircraft payment you mentioned. If we do 10 roundtrips (which is realistic since we will average very near 100 hours per crewed aircraft this month) at this bargain "loss leader" fare, we will have not only covered direct operating cost, but also generated an additional $180,000 to cover fixed costs. Your numbers say those are about $200K. Since this is our very lowest fare, according to your numbers, we have a legitimate shot of breaking even or making a small profit in a terrible economy.

You say EJM and Jet Aviation is smarter to leave their aircraft sitting in the hangar, but they have the same fixed costs we do. So, if we're breaking even or almost breaking even, and they're loosing two hundred thousand dollars per month per airplane, I think I would prefer to remain as dumb as rock in your estimation.

Finally, without a doubt, pilot salaries have been falling. Gulfstream pilots who used to make over $120K a year are now fighting over jobs that pay $75K, and for every one that gets hired, there are five more still looking and not finding anything. XO is certainly not single handedly responsible for this, but the industry in general is being forced to reconsider how much they pay pilots based on the reduced profit margins they are being forced to accept in the current market.

Again back to the above example, who has the better profit margin if XO is breaking even, and EJM and Jet Aviation loosing 200K per month per airplane?

You're right, XOJET is not responsible for the recession, or the current state of business aviation. We're just doing better than some at surviving it. Again, our pilots are among the best paid in the industry, so stop putting that falling salary crap on us. It has nothing to do with us! The industry is in free fall and we are holding our own. I hope your company can do the same.

X.

 

[rice]

OCR,

I don't understand your "logic." How in the world is it "smarter" to keep the airplanes in the hangar and loose money by the truckload?

I'll use your numbers from your earlier post to illustrate a point since I have no idea what the real numbers are. You say an average transcon in the X is about 5 hours, and the DOC is about $2000 per hour. So according to your numbers, the direct cost to fly the airplane is about 10,000 dollars for a typical transcon. That leaves $9000 per leg to offset other fixed costs including that 83,000 dollar aircraft payment you mentioned. If we do 10 roundtrips (which is realistic since we will average very near 100 hours per crewed aircraft this month) at this bargain "loss leader" fare, we will have not only covered direct operating cost, but also generated an additional $180,000 to cover fixed costs. Your numbers say those are about $200K. Since this is our very lowest fare, according to your numbers, we have a legitimate shot of breaking even or making a small profit in a terrible economy.

You say EJM and Jet Aviation is smarter to leave their aircraft sitting in the hangar, but they have the same fixed costs we do. So, if we're breaking even or almost breaking even, and they're loosing two hundred thousand dollars per month per airplane, I think I would prefer to remain as dumb as rock in your estimation.




Again back to the above example, who has the better profit margin if XO is breaking even, and EJM and Jet Aviation loosing 200K per month per airplane?
You're right, XOJET is not responsible for the recession, or the current state of business aviation. We're just doing better than some at surviving it. Again, our pilots are among the best paid in the industry, so stop putting that falling salary crap on us. It has nothing to do with us! The industry is in free fall and we are holding our own. I hope your company can do the same.

X.

Uh, neither EJM or Jet Aviation own the aircraft they utilize for charter revenue. The planes are owned by other entities. Therefore your argument about losing $200k per plane are moot. Very few charter companies actually own/lease (in the traditional sense) the aircraft they fly in revenue service. It has been proven time and again that charter demand does not produce enough revenue on an annual basis to support the debt load on a typical business aircraft. Just thought I'd point that out.

 

[TheSulaco]

I do know for a fact that EJM is chartering similar flights for quite a bit less than what XO is advertising.