WARREN BUFFETT once remarked that the airline industry has proved a “death trap for investors”. So unprofitable has the industry been that he went so far as to quip that investors would have been better off if they had shot Orville Wright at Kitty Hawk in the 1930s.
For Laela Pakpour Tabrizi, the new chief financial officer of high-end jet operator VistaJet, securing $300m (£205.6m) of investment into the private aviation business proved the catalyst to her promotion to CFO in June last year.
Instrumental in supporting what VistaJet believes is the first every unsecured US dollar bond in private aviation, Tabrizi says it represents a “huge watermark” for how far the business has come financially since its launch in 2004.
“When we convinced people that the business model, financials and KPIs we were delivering on were real, we were able to get that investor confidence up enough to give us a five year unsecured note. We came through all of that stronger, better knowing we were able to withstand the scrutiny,” Tabrizi says.
With flights from $15,000 an hour, wood and leather interiors and a menu developed by Nobu, the business model behind VistaJet’s luxury travel service – offering flights at hourly rates – is unique in an industry dominated by fractional ownership and per flight models.
That model is proving successful with its high net worth punters. In 2013, VistaJet expanded its Europe and emerging markets focus and teamed up with JetAviation to launch its fleet in the US – a market that includes Buffett’s own private jet investment, NetJets. Although the business does not issue detailed profits, last year it increased revenue by 25% and carried 27,000 passenger in 12,000 flights to 142 countries.
Four Seasons in the sky
Launched by Swiss national Thomas Flohr in 2004 in response to frustration over the lack of a consistent, quality product in the market – he once complained of coffee being served out of Styrofoam cups when paying $30,000 a flight – the business is considered the ‘Four Seasons’ of aviation.
Each of its fleet of 55 Bombardier and Challenger jets are silver with a blood red stripe. That consistency is important. All of VistaJet’s aircraft a wholly owned – barring a couple of leases purely for contingency – which gives the business “total control over quality, consistency, reliability, and delivery of its service”.
“We provide a service akin to luxury. Attention to detail is our modus operandi. This doesn’t always mean extravagant spending”, Tabrizi explains. “You can be attentive to smaller things like remembering they like one sugar in their coffee. That distinguishes us from random charter operator.”
Tabrizi says the 50-strong finance function has a dedicated procurement team which focuses on getting best value. But that doesn’t mean scouring the globe in order to source beluga caviar. Fuel – although not a cost to VistaJet’s bottom line because it is recharged to the customer – is an area where its purchasing power can be brought to bear.
“The bigger we are the more purchasing power we have with some of our suppliers. In this industry when it comes to buying fuel, having 56 aircraft gives us some negotiating power,” Tabrizi says.
“It’s completely standard practice across the industry to surcharge whenever fuel goes over a basis point. It’s indexed linked as we pass that through. It does make us very different to an airline in terms of our financial metrics.”
In terms of the bottom line, VistaJet’s biggest costs are its key asset – the jets themselves. In 2012, VistaJet placed the largest single transaction in the history of business aviation – a $7.2bn order for 56 new Bombardier Global aircraft with further options for an additional 86. In June 2013, VistaJet placed a further $1.7bn order for 20 Challenger 350 aircraft with options for an additional 20.
Most of the aircraft are purchased through secured financing – in aircraft financing it is typical for 75% to 80% of the purchase price is financed by debt – and consequently Tabrizi’s knowledge of the debt markets proved key in the business’ financing activities.
Tabrizi joined VistaJet from sister-company IALT (International Aircraft Leasing and Trading), having provided financial, planning and analysis support to VistaJet on a project basis. A debt finance specialist, Tabrizi spent most of her career at BNP Paribas Corporate & Investment Bank in Paris and New York where she specialised in structured finance.
That experience proved invaluable to the issuance. “On the road we came across a lot of people I knew in the industry. We could explain what we were doing in a language they understood,” she says. “A lot of first time issuers who don’t have an inside person fall into pitfalls. That capital markets exposure was very useful for the bond because I started to become exposed to all sorts of investors and started to figure out why they would buy debt paper.”
Given the sizeable fleet costs and crucial role of debt finance having good revenue visibility is “fundamental to how we operate the business and how we determine how many planes to take”, Tabrizi says.
Customers commit to flying a certain number of hours over a multi-year period. “Being able to sign people up like that gives us revenue visibility. That customer base is our stable revenue block,” she explains.
“It’s all about understanding demand. We have good visibility of our pipeline in the next 12 months. We have historical conversion rates, our sales force is constantly feeding back how many hours they can sell, we constantly monitor new sales, and our high renewal rates gives us that banked factor.”
Unused capacity is filed by offering charter flights in areas its multi-year clients are flying and as VistaJet’s fleet has no home base – its jets are maintained at 40 Bombardier service centres worldwide – the business is provided with some degree of financial flexibility.
“We don’t need to go back to a home base. If demand dampens in one area we can shift to another. That gives us complete coverage from a financial perspective over economic cycles and regional crises,” Tabrizi says.
The ‘on-demand’ product prices with the market but Tabrizi says the business would never take a flight where its costs weren’t covered.
“We’re not going to start discounting our prices but we do want to maximise our efficiency. We look at our KPIs and ask if this flight makes sense from an operational, financial and sales perspective,” she says. Those KPIs include how many hours its aircraft are flying, the average yield they are flying at, flight hours – the longer the flight the more profitable it is as most costs are in take-off and landing.
“That’s why strategically the company has moved to larger jets. The smaller to mid-size jet market is more volatile in terms of residual value of the asset and customer base,” Tabrizi explains. “Targeting the longer flights on the bigger aircraft puts us into a category of customer that are more economically resilient. They continue to need to travel internationally in a down-cycle putting out fires.”
VistaJet has flown 150,000 passengers on 70,000 flights since its launch, and with its fleet of new jets it is targeting growing the business even further. In June, the business entered the Chinese market in a deal similar to the one struck in the US. And the business now flies to some of the remotest locations on earth.
“We are taking people to destinations other airlines don’t go to. We have been to 180 countries in the world. We have flown to thousands of airports in remote countries where we have to do our own diligence. Lagos, Maputo, Moscow, Vienna, Shanghai to Seattle.”
July 2015 – present Chief financial officer, VistaJet
November 2013 – June 2015 Vice president, financial planning and analysis, IALT
September 2005 – March 2012 Vice president, structured finance division, BNP Paribas Corporate Investment Bank
June 2004 – September 2004 Intern, Goldman Sachs International (Europe)