Can Corporate CEOs Justify Private Jet Travel?

The Washington Post had a story today about CEO perks at rescued banks. Among the most common, of course, is the use of a private jet for private purposes. But this begs a more fundamental question: is it possible to justify the use of private jets for business purposes?

I picked one CEO at random to try to figure it out. Dieter E. Zetsche, the CEO of Daimler Benz, gets paid about $3 million per year (which actually seems reasonable to me, in light of his responsibilities). Let’s say the typical CEO works 60 hours a week, 50 weeks per year. This means Zetsche earns about $1000 per hour.

I am going to take as a given that it is worth upgrading the CEO to first class on a commercial flight–it is hard to work while flying in coach, so on a round trip cross country flight, giving the CEO a reasonable environment for work is worth about $10K. The marginal cost of round trip first class tickets is a lot less than that.

Most of the time saving from flying a private jet comes at the airport. I got to fly on a corporate jet once (confession: it is fun). One drives right up to the plane and walks on–no ticket counter, no security. So let’s say time saved at the airport on both ends of a round trip is 4 hours: $4000. According to one source, the cost of flying a private jet ranges from $1800 to $5000 per hour. Let’s just use $2500. It takes about 5 hours to fly from LA to New York, so round trip, that it $25,000. Let’s say the CEO take someone with him/her. Now the cost is down to $12,500 per person.

I just checked on Kayak, and first class airfare from NY to Los Angeles is $2250 on Virgin and Delta. So the marginal cost of the private plane is about $8,000, and the benefit is around $4,000. And of course the cost benefit calculation for the second person is even worse.

I do understand that CEO’s on occasion need to go places without commercial airports, and that the time spent driving from a commercial airport to these places might make the private jet pencil out. But they could use shared ownership, or net jets, to take care of those cases. Most of the time, they should fly with the rest of us.

About Richard K. Green 102 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

Visit: Real Estate and Urban Economics Blog

4 Comments on Can Corporate CEOs Justify Private Jet Travel?

  1. Great insight. Check out Greenjets shared-ride private jet service.

    We market shared rides between major market in the US, on private jets. Basically, pay for the seats you need, not the whole plane!

    Flying Greenjets, your NY-LA trip would cost as low as $3000 per seat for two traveling together – to fly on a private jet! NY-FL for example is only $1500 per seat. These are Greenjets lowest prices and requires a membership, but this is the ammortized all included price, with a membership. Double if for less frequent fliers, and its still way more affordable than first class… Half.

    – we calculate the time savings to equate to 2 weeks of work time, if someone takes one return trip per month with Greenjets compared to the airlines.

    – we would argue that the economic impact of the CEO or any other employee to their company, is much higher than their pay. This should be the basis for the time-value analysis.

    Great job! Thanks.

  2. Of course, this is very, very oversimplified and just not a very realistic or relevant example.

    What if there are 5 people on board? What if they aren’t traveling between America’s two largest cities but instead are visiting a rural location that, by the airlines, requires flight changes, long drives in rental cars, and an overnight stay. What if the 5 people want to hold a meeting in private during the trip? What if, on the trip, they need to visit multiple locations? Often, flights that can be made on private aircraft just can’t be made on the airlines because the airlines serve 450 airports and private aircraft 5000.

    “We never could have done it without these airplanes,” said Sam Walton, himself a pilot. Walmart flies a fleet of 19 matching Learjets out of NW Arkansas. They don’t have 19 CEOs…these planes are used to move middle management, real estate department staff, buyers, vendors, and more. The world’s most efficient retailer finds that private aircraft make them more efficient! Do you feel qualified to question Walmart’s efficiency? I sure don’t.

  3. I agree with SkyMachines. Business Aviation can be a luxury for some companies but for others it saves time and money. Most CEO’s are not going from NY to LA. They are going where their business takes them, often to places you probably haven’t heard of.

    Look at it this way-

    Imagine you were a corporation and you needed to get five middle management employees from Mineral Wells, Texas to Topeka, Kansas for a few hours to do business. Lets say that each employee makes 200K per year.

    Lets look at airline travel first. The long and short of it is you are not going to be able to accomplish it in a day. You would probably have to drive on both ends of the travel in both directions. By the time you factor in driving to an airport with airline service, checking in, going through security, getting on a flight at a time of the airline’s choosing, then waiting on at least one connecting flight at another time of the airline’s choosing; you just cannot get back to Mineral Wells the same day. It may actually take three days but lets go with two and say our people are really “go getters” and willing to work long days. So that means all five employees will be out of the office for 2 days for a mere few hours of business. They will be away from home for a night, and will come back fatigued and stressed.

    $500 per airline ticket- $2500
    Costs of hotel rooms and meals- $1000
    Two days of salary paid to all 5 employees- $8000

    Thats a cost to the company of $11,500

    So now lets talk about a Learjet or something similar. The employees can wake up, drive to their nearest airport which would be Mineral Wells, at a time of their choosing, get on a plane, discuss their meeting enroute, arrive at Topeka by mid morning after a one hour direct flight. They do their business, and often can get done early. So guess what, they come home early too! They don’t need to wait for an airline schedule. They get back home in time for dinner with their family and thus increase their quality of life as well. An extra night at home is worth a lot to a road warrior. Trust me.

    So lets look at these costs shall we?

    $2000 per hour for the Learjet: $4000
    One day salary for five employees: $4000
    Total for the Corporate jet travel: $8000

    Savings to the company: $3500
    Happier employees who aren’t tired and worn out when they get home? PRICELESS

  4. Mr. Green fails to take into account collateral benefits of business aviation. He further ignores scheduling issues, stress issues, collaboration during travel, as well as the fact that the airlines only fly to about 500 airports, a number that is shrinking seemingly each day as airlines continue to drop service to small communities across the country. GA flies to over 5,000 airports on-time, and on-demand. General aviation is literally the lifeline to these small towns, generating jobs and economic impact to rural communities across the country. General aviation is critical to my business operations. It allows me to connect with customers nearly everywhere in the U.S. quickly and on a moments notice. For business owners like myself, my small aircraft is not only easily justified, it is a business necessity.

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