A CFO Explains Private Jets

0:00You remember that song Fly Like a G6? Yeah, what is this, 2014, 2013? 2012, because we played it on spring break over and over and over again. And today, I'm glad to tell you that we are not getting a jet here at Mostly Media. But we're going to talk some s*** about important people flying on jets. Ben, I know you're a huge Palantir guy. The biggest. You would prefer the human race to endure, right? How much do you think CEO Alex Karp spent on private jets last year? $10 million. $17 million on private aviation. Do you know how many Southwest Peanuts bags that is? It's definitely in the allots.

0:38You'd have to carry a couple of ones there. But I've never been this excited, actually, to do one of these exploratory episodes. I feel like private corporate aviation is one of those taboo topics where we all know these exacts are flying around. They're using the company's money to live what many perceive as this lavish lifestyle. And I want to talk about it through the business lens because we see celebrities all the time. You scroll through YouTube, TikTok, and it's like, oh, look, I'm going on this private jet. I'm going to go to Monaco and watch F1. I'm going to go to, I don't know, the Virgin Islands or something.

1:11I want to talk about the usage of jets for corporate travel and more importantly, like how this even plays out on the financial statements. I'm curious to know what expensing a private jet looks like when you put that in the bricks. Is this thing on? Yesterday's price is not today's price.

1:38So take us back here, CJ. Where does all this start? Where does this begin? Funny enough, it starts with the most frugal guy ever. It started with Sam Walton in the 1950s, believe it or not. We've got a better product and a better value and a better price than we've had ever before. Not many people know this, but Sam Walton, founder of Walmart, was also a pilot. And he wanted to visit more than one in a day. So he went out and he bought a plane. It was called an Air Coupe. It was a shitbox, for lack of a better term. His brother, Bud, who was in business with him, and he used to laugh at Sam and be like, this thing doesn't even look like a plane.

2:12I'm just imagining like an actual box with wings and a propeller on the front, like you'd make when you're five years old or something. This was far from glamorous. It was a two-seater plane, right? He was the only pilot. Next to him most of the time was his dog, O 'Roy. And this thing could fly up to 430 miles on a tank of gas. Could you imagine Wally riding next to you in a plane every single day? I hope producer Steve can do this with me and my dog in the passenger seat. So he had two purposes for this. One was to hit as many stores as possible in a single day. His goal usually was to visit two to three stores, walk the floors, literally, talk to all the people there, have lunch with the cashiers.

2:48And he was famous for carrying around these yellow legal pads where he would scribble a bunch of notes. And then he would rush back to his airplane, take off again, and land in another office in the same day. Wait, so why wasn't he just driving to the stores? Like, why did he have to fly? There weren't many highways back then, especially through the Midwest and South. So what would be an eight-hour drive, he could accomplish in a 90-minute flight. He's using this so he can hit multiple locations in the same day and gather intel. This isn't a business where you can work from home. He physically has to be in the stores to figure out what's selling and how the operations are going.

3:20So the three reasons to save money here, eliminating lost opportunity cost of travel time. The second is squeezing multiple cities into a day. And third, he was spreading the flying costs across six to eight people rather than having to buy up hotel rooms. And keep in mind, these planes back then, they were not cream of the crop planes. They could fit six to eight people, but they were not pressurized, kind of just plodded along at 250 miles per hour and didn't want them to waste valuable working hours. That was like his North Star. Did he have any flight people with him or what did the flights look like?

3:51So he would load these planes up with buyers and real estate managers. And since he hated paying for co-pilots, he would routinely look back into the passenger cabin. He would point at one of the execs back there and he would say, if something happens to me, this is how you change the wing speed. I've heard pilots say like the computer basically flies the plane itself. But this was definitely not what that was at this time. One more anecdote. So Sam Walton was famous for flying in super shitty weather. Back then, like the Bentonville Airport in Arkansas, not a lot of flight controls, right? They didn't even have a control tower.

4:24There was one time that he had a sales manager go to the end of the runway with his car and turn on the headlights so he could literally land the plane. All right, so walk me through the next steps here. Like, what happened next? How did the first fleet evolve? So in 1968, Sam and his brother Bud formed Walmart Aviation, okay? This was looked at as the first corporate travel arm, and they were buying their own planes. They weren't leasing them. They weren't trying to do any net jets that wasn't around back then. So they were physically buying these planes. And it evolved from going from that Air Coupe, which was under$2 ,000 as a two-seater, to the Cessna, which was a six-seater.

4:58And that was a few hundred thousand dollars. That was a big investment at the time for them. To the Beechcraft King Air, which to me sounds like a type of mattress. It flew up to 250 miles per hour. and these would go for about 1.5 million to 3 million. We're going to get to the Bombardier jets later, but I do want to pause on this part because what's cool is they established this cadence of flying, which they called the flight grid. So they just like flew up and down the states or something like that? What's that look like? So at this point, Walmart was the fastest company to get to a billion dollars in sales.

5:31Pretty incredible. And they were doing that by having feet on the ground in all the different stores so they could figure out what the ground truce were. walking the aisles, getting feedback from customers, from the cashiers. And so what they established was basically like a bus routing system for the execs to get on these planes every single Monday and be back in the office by Thursday at the latest. Most of them were back that same day. Like I said, they didn't want to pay for hotel costs. I'd imagine that those Cessnas couldn't really get coast to coast. What would they do when they sort of expanded that far?

6:04They had to buy faster planes. So at this point, we've evolved from a plane that can only go like as fast as a car to start out to then a plane that can go 250 miles per hour. So you're now going faster to now a bombardier jet that can go 500 miles per hour, which costs a lot more money. But it evolved from being this Midwest loop and go system to literally East Coast to West Coast in a day. Just for a benchmark here, because we're going to hit on the cost of private aviation later. Walmart, when they were flying these Beechcraft King Airs, they cost between$1.5 million and$3.2 million to buy.

6:39And the cost per flight hour was only$400 to$700 per hour. It is more than 10x on the corporate jets that people are using today. What about operations and maintenance? So today, Walmart operates a modernized corporate jet network. And it's out of this massive, wholly owned terminal facility that's located just eight hours from the headquarters. Walmart's jets streak skyward. carrying company executives throughout the country. So they don't own the runway per se, but they own literally all the operations within it, Ben. And they have 15 to 22 at any point, modern jets in there. And I was able to back into a number.

7:15This isn't exactly disclosed in their financial statements, but it looks like they're spending between 40 and$60 million a year just on the operations and maintenance of these jets. That doesn't even include what they have to pay to buy them. So where does this actually show up in the SEC filing? I'm glad you asked because I read a lot of SEC filings. There are two places, really. The first is executive compensation. And the second one is corporate operational track. So bear with me here. The broader operational expenses, that's like the fuel, the hangar leases, the pilot salaries, that's all going to be bundled under standard SG &A, or selling general administrative expenses, and the annual 10K reports.

7:51That'll be on the P &L. Can we go deeper than that? I'm going to go inception level. Yes, we can go deeper. And it will be like a taco inside a taco within a Taco Bell that's inside a KFC within a mall that's inside your drain. I like to read through footnotes within these SEC statements and the deeper operational realities of owning a jet. It can be exposed partially through what you call a form DEF 14A. OK, so think about this as a report that just has a shitload of footnotes. And in those footnotes, it basically goes through all the different ways they paid executives, whether that's payment in kind, like using jets, cash or bonuses or stock.

8:31CJ footnotes gusts of some strikes again, but I feel like you're about to drop some serious tables on me. It contains a summary compensation table and it takes out the total comp, the packages per se, for the CEO, CFO, plus the three other highest paid execs. So like I said, it includes salaries, performance bonuses, stock awards, and all the fringe benefits. And that's where personal travel on corporate aircraft must be calculated and itemized by law. Okay, keep going. So there is a limit to these benefits. Historic filings, at least for Walmart, they would set a cap of$130 ,000 to$400 ,000 per year.

9:05Each company gets to determine its own cap. They have to tell shareholders about it. And if an executive exceeds those hours, they're billed directly for the cost of using it. You love paying taxes. So a little bit more for our tax junkies out there. What do you got for us? Nah, this is kind of dense. I got to take out my old paper here. So if you really want me to go there, Ben, under SEC Regulation SK, item 402. I know you thought it was item 401, but it's actually, it's a little bit higher. Any personal use of a corporate jet by a named executive officer, an NEO, like NEO from the Matrix, is legally defined as a perk.

9:39If an executive's total annual perks exceed$10 ,000, that's actually pretty low. a company is legally required to disclose the exact aggregate incremental cost of those personal flights in their public proxy statements. Failing to accurately track and report this can trigger federal fraud investigations because the IRS views personal use of a company jet as a taxable fringe benefit. That sounds like it would be a good news headline, although I feel like federal fraud investigation is a kind of a tongue twister, weirdly. It's a tongue twister, and it's a niche of the internet that I spent all too much time in.

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13:37Have you heard of this company called Gulfport Energy? I'm going to guess that they have something to do with energy in the Gulf. And you got to fly in and out of the Gulf, Ben. You really do. Unless you're going to take a boat. And I mean, that whole like Florida thing that points into the ocean, it takes a while to go around. It comes to light in 2021 that the CEO and his wife were using the corporate jets to fly in and out of Las Vegas for high stake poker tournaments into Napa Valley for wine tastings. That sounds like a little bit different than things that I would maybe expense on my Brax card.

14:09It was$650 ,000 plus corporate expenses that the board found was just quietly shoveled underneath travel expenses for business purposes. I don't think that that's that chill, but cool. So the SEC actually stepped in. It wasn't just like, hey, corporate governance thing. We should can this guy. They actually pressed charges against him. He was able to plead no contest on his way out, but pay a massive fine. And he got fired by the company, which I mean, that's kind of what happens when when you abuse the jet. I got an even crazier one for you. Did you play with Tyco toys growing up? Was it like Fisher Price?

14:47That kind of thing? No. So it was one of the biggest toy companies in the 1980s. A new super turbo train with Daredevil Jump from Tyco. This scandal was all over Wall Street Journal headlines, okay? So it was the CEO, Dennis Kozlowski, who I thought was a character from Monsters, Inc., and CFO Mark Schwartz. They were convicted of this multi-million dollar grand larceny ring, and they were sentenced to 25 years in state prison. Doesn't seem that good and not as fun as Monsters, Inc. But what was fun are the parties they threw. Jimmy Buffett was flown in for the music. And guests were treated to a special cake.

15:27So in 2001, Kozlowski threw this infamous Roman Empire-themed 40th birthday party for his wife on the Italian island of Sardinia. Yeah, no, that sounds extremely fun. He flew dozens of friends out to this island and they spent over$2 million on a party and he logged in under a corporate retreat. Yeah, make this stuff up. The execs of Tyco, this wasn't like the first thing that they tried. You don't just go from like zero to all expenses paid 40th birthday party on the island of Sardinia. They were using jets on and off for years to fly mistresses out to Newport, to Nantucket, to have all these crazy events with their friends all over the U.S.

16:11and world. And they were booking it all as business expenses and corporate retreats. Man, if only Sam Walton knew what he was missing out on. Maybe he would have been, you know, a little bit more loose the cash. Kozlowski ended up serving seven of those 25 years in a medium security facility. So a camp cupcake. He was granted work release and paroled in 2014. Schwartz also got out. That was in 2013, a year earlier. But prior to their prison sentences, this is wild. They were hit with massive civil judgments because the shareholders can sue them too. And they were ordered to pay a combined$134 million in direct restitution back to Tyco.

16:45Yeah, that ruling party was probably pretty sick though. I bet they had the big horse that, you know, tries to get into Troy. Well, fraud aside, I do want to talk about when private aviation can be extremely useful. So the first one is security. And this is actually something that's written into the bylaws of a lot of these companies. Apple, Meta, Walmart, the board of directors say like we can't have Tim Cook just traveling through a Tulsa regional airport on foot. That is not safe. People are going to mob him. Who knows what could happen? There's a serious key man risk to all this. But the people want to see their Tim Apple.

17:19You know, they want to get their hands on that guy. The other reason is confidentiality. It would be pretty weird if you were on a Southwest flight and in front of you in the middle seat, you can see Brian Armstrong of Coinbase flipping through docks for a big acquisition. Yeah, I'd imagine you're, you know, using that really shady plane Wi-Fi to try and get some trades out there before they can catch you. Another reason is like the execs probably do deserve some sort of perks here. They're flying all over the world. And how do you get somebody to work this high profile job? Well, access to a corporate jet is a pretty cool perk if it's managed correctly.

17:54And that's both a double edged sword. So the ongoing cost of maintaining it and keeping these planes in the air, keeping them safe and functional, that will hit the profit and loss statement immediately. But it gets categorized by why the plane was flying in the first place. So let me go deeper on that. If it was for a legit business expense, 100 percent of the variable cost, you get your fuel, your landing fees, in-flight catering, that all gets booked under general administration overhead. But if the flight was for the CEO's vacation, that specific portion of the variable cost has to get stripped out and booked as an exec comp expense.

18:26And what if you bring your, you know, Chipotle on board with you? Does that, that, that's just a self-incurred cost, right? You can get that reimbursed using your BrexCard. If the company owns the jet outright, it goes on the balance sheet. It's classified as a non-current asset under PP &E, property, plant, and equipment, for all the people who love ampersands out there. Every year as depreciation hits the P &L, the asset value of the plane shrinks in the balance sheet. I feel like we're getting dangerously close to EBITDA or something, you know, earnings before interest tax jets and appreciation.

18:57Also EBITDA if you lease the jet, Ben. Okay, tell me more about that. This is where it gets funky because if you didn't have this, then a lot of people would be leasing these jets and putting them as off balance sheet items or off balance sheet leases and it could get super sketchy. And this is where the SEC stepped in and said like we need an accounting rule update here and it's called ASC 842 where companies can no longer hide private jet leases off the box. Oh sneaky sneaky I love a good off the balance sheet item. There is a bit of a loophole though. Love me some loopholes. It's charters and fractional ownership here because many modern companies avoid the balance sheet headache altogether of having this$50 million jet by just booking on-demand services.

19:39This can be hard to track because you don't own it, right? You don't lease it. You're just renting hours on it, much like you could pay for software. You could pay for rent in an office, something like that. And that is a lot harder to track. So it's almost like they're paying for Uber jet rather than buying the car or buying the jet. Yeah, I mean, close enough. They're paying a pre-negotiated rate for a number of hours on board. And sometimes they're doing it by buying, say, 250 hours at a time. Or other times they're doing like, hey, I got to go from Vermont. I don't know why you're in Vermont to Florida.

20:14So in that sense, like a$50 ,000 private jet looks identical on a ledger to$50 ,000 for, I don't know, software or something like that. Yeah, and without some forensic super sleuthing, it would be extremely hard to figure out which of these companies are using the money that they have to pay for execs to fly places. Hey, thanks for listening. We'll be right back after a word from our sponsors. Today's episode is brought to you by Anrock, the sales tax platform behind companies like Anthropic, Notion, and Vanta. Here's a fun way to totally ruin a Tuesday. Open a letter from a state you've never set foot in telling you that you owe back taxes you didn't know existed.

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23:31They'll use data tools to audit what companies are actually spending on flight hours. And the first one is IFR flight registries. So what they'll do is they'll cross-reference the tail numbers that belong to these fractional providers like a NetJets or Wheels Up. And they'll also look at the airports situated near corporate headquarters and executive residences. I had to get a prop for this one. I think I'm ready for some super sleuthing. I'm glad we're going to super sleuthing. And this is where the power of crowds comes in, because there's been so much on the artist formerly known as Twitter of people using these flight registries to basically figure out who's flying where around the country.

24:10Right. Yeah. You can see like where where Elon Musk is going or Taylor Swift is going. And that's what this student Jack Sweeney did at the University of Central Florida. He became an icon because he basically wrote this code that would track whenever Elon Musk's plane left somewhere. And he would show where it was going and how many flight hours and how much of the environment it was killing. And in 2021, Elon got fed up with it and he messaged him and he said, can I just pay you$5 ,000 to stop doing this? And so Sweeney famously countered the balls in this kid. He said, can I have$50 ,000 or a Tesla Model 3 to help pay for college?

24:44And then crickets. Elon never got back to him. I guess maybe doing something like that gets you some unearned attention, maybe on the other side as well. By the way, this was also the same guy who exposed where Taylor Swift was flying and he pissed off all the Swifties. Let's stick to business. We don't want the Swifties in our DMs. I want to talk about how much some of the major corporations of today are spending on corporate aviation. So companies like Walmart or Meta, let's say they operate these tier one mega fleets. They'll spend in the ballpark of 30 to 50 million a year to operate the aircrafts.

25:14And this doesn't even count the amount that they're spending to purchase them. Do you happen to know what the largest private fleet of aircraft there is in the world? It still seems to be Walmart today. There is a tier lower. And this one, I think, is a lot more interesting because you get into the domestic intricacies of flying people from certain locations where you do work. So Netflix in particular, they fall into this second tier here. and they're known to shuttle multiple planes per day, Ben, between San Francisco and LA. And people joke and call it the Los Altos commuter. Man, I can only imagine what some companies would do just to fly from Burbank to Los Angeles.

25:54This category costs between 15 and 30 million a year to play in. And the third category, and this is where the gray areas come in, are those relying upon fractional and on-demand services. So they split between leasing them, which is a balance sheet item, like we said, in chartering, which is purely a P &L item. And that's going to run you between $5 ,000 and$15 ,000 per hour, depending on how big the plane is. So how do you decide where to play? Is it just driven by usage? It's totally driven by hours. So I'll try to give you my layman's definition of this, and I'm going to block it by hours.

26:24So let's say it's between zero and 50 hours. For that, you're going to get on the phone and you're going to do individual charters, right? So you're calling in one trip at a time. Once you get to 50 to 200 hours, that's when you're going to start trying to get a little bit better pricing by purchasing jet hours. So it usually starts at a 50-hour block, and that'll cost you minimally probably$150 ,000. And you're getting a pre-negotiated number of hours at a fixed price, which allows you to have better forecasting for your business. After that, this is where we're going to move from the P &L to the balance sheet.

26:56This is where you get into leasing and fractional ownership. So this is 200 to 400 hours in past 400 hours a year. That's when you start to think about we should just own this thing outright. Because once you're flying more than 400 hours, you're amortizing or spreading out the cost of owning the jet over a larger base of operations. And the variable cost of flying the planes drops significantly. I'm still not really getting how this is cheaper than, you know, booking flights. You will never be able to math your way into this being cheaper. What it does address are security concerns, opportunity cost, and the ability just to have an exec that is not burnt out.

27:32Like you do not want to have Jensen Wong on stage falling asleep during a major keynote because he's changed time zones three times a week. I think I get it. So why haven't we talked about depreciation here? Is that a benefit? I love depreciation, Ben. If my middle name wasn't footnotes, it would be depreciation. There is one big accounting benefit of owning that makes it more attractive sometimes to own than lease. And it's called bonus depreciation. It allows you to immediately deduct up to 100 % of the purchase price in the first year. So think of that as a cost you can put on the P &L to increase your cost base and therefore decrease your earnings.

28:08Therefore, you pay less taxes against it. I think I've done this with like video cameras before, but those are like only maybe$1 ,000. So it accelerates the financial math in favor of owning because you get this immediate massive cash flow subsidy from the government. Because remember, it's a non-cash expense. You still get to keep the cash coming out of the business. And this tax rule almost died. It was scheduled to phase out in 2027. But the One Big Beautiful Bill Act brought it back from the brink of extinction, helping rich people everywhere. Now you can still have 100 % bonus depreciation for qualifying plans.

28:42Thank goodness. That was a close one for rich people. I'm glad we got another loophole. There are guardrails around this, though. If they find out that 50 % of the trips are not for business usage, they will throw you in depreciation jail, just like that guy from Tyco. I feel like you might love depreciation jail because, you know, you want it to be your middle name so bad. Sounds a lot better than debtor's prison. So it all begs the question, should we care if execs are using corporate planes or not? I've seen a lot of analysis, armchair analysis online saying, well, a CEO's time is worth this much if you put in the stock-based comp and everything else.

29:16Therefore, it makes sense. But I think that's like a super simplistic view of like the ROI of these things. I think there are three different angles to review here. And the first one is corporate governance. There have been studies that show corporations who allow their executives to use planes for non-business purposes underperform their comps by 4%. Do they not have Wi-Fi in planes or something? It's a great way to decrease your return on investment for shareholders. So jet use is just correlated with bad decisions all around, sounds like. That's what the study implies. It's saying that if you're allowing your CEO and CFO to fly around for non-business purposes using the jets that were purchased ostensibly for a way to increase shareholder value, there are probably some bad decisions elsewhere in the corporation that are being decided.

30:05The second angle is opportunity cost because if a tech CEO uses the jet to fly from one place to another and it costs 20 grand, but they close a$2 billion deal, like, hey, I will take that math all day. Or if it's a retail founder like Sam from Walmart, he physically can't drive to all these places and be as useful. So there's the cost element to it, but then there's the opportunity cost and upside element to it, which I feel like we don't consider enough. Being a CEO is hard, especially if you're making these massive decisions. You would probably want them making those decisions with a clear mind, right?

30:41You don't want to have potato brain when you come back from a trip in China. Now you have to sit down in Dallas and decide how many people in the company should be working in certain departments. I remember I used to fly from L.A. to Boston, red eyes, and they just go straight to work. And let's just say I pushed a couple of deadlines when I was doing that. The third angle here is size. So if you think about a company like Google or Walmart, they call it$50 million to have jets per year. It is statistically a rounding error. It does not matter for these companies, right? If you're a mid-cap software company, though, and let's say your valuation is only$2 billion or something like that, you start to get into a territory where it doesn't totally make sense on your P &L.

31:26and spending millions of dollars per year on corporate aviation is actually chewing away at earnings per share. Come on. I mean, I didn't bring this magnifying glass out for nothing. You got to give us one more example of going too far. If you're going to push me there. So this is my favorite one I kept in my back pocket. Have you heard of General Electric? The electric company, right? So Jeffrey Immelt, the CEO back in the mid 2010s, he would fly a private plane to all his major meetings and have a second identical empty plane follow him around. Like the president? He had a shadow jet. The shadow jet, it was an unwritten corporate bylaw that it would follow him place to place just in case the first one had any mechanical issues.

32:10Oh my God, the short sellers must have had a field day. That's exactly what happened because there was this fund called Trian Fund Management. They found all this flight data. He tried to hide it at first. So whenever they would land in one place, he'd make sure that the second shadow jet would go on the other side of the runway. So people couldn't put the tail numbers together. But eventually they caught onto it and started to track it. And he ended up getting a ton of pressure from short sellers because this was a time at GE where they were spitting off business units and trying to increase profitability.

32:39So he was up on stage talking about we're in a cost cut here. We're going to be more profitable. But he's also flying two identical jets all around the world. That's absolutely insane. But I feel like you should bring it back to my favorite guy, Alex Karp. For Palantir, who cares, right? If the board wants to keep their CEO off a commercial concourse where some rando could film him reading defense contracts and seat 14B, then$17 million per year on flying is a steal. That's not the jet spend that should worry you. I'd be more worried about the ones who say one thing and do another, right? So if you're a$2 billion market cap company, what does it say about your decision making in ethics if you're using shareholder money to fly around the country.

33:19This has a lot of airplane peanuts. I'll tell you that much. I can't believe I'm going to say this, but like much like any financial calculation, it comes down to the net present value to say, is this going to make the company better off or worse? Because private jets don't fit cleanly into any sort of model. They're actually even hard to find on a financial statement, let alone. But I think you have to gut check the opportunity cost to say, is this worth it? And if only we knew where EBITJA was so we can make some sense of this. I got to know what Ja Rule thinks. The decision to spend money on private jets is very much a test as to how you make decisions throughout the rest of the company, because for CEOs and CFOs, the job is resource allocation, whether those assets are on land or in the air.

34:01Run the Numbers is a mostly media production. Yelling an intro by Fat Joe. Artwork by Meg D 'Alessandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me, a guy who feeds his dog way too much ice cream and has a history of net operating losses, LOL. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day. Peace.