The Man Who Could Prove Warren Buffett Wrong About Aviation Warren Buffett did not get to be Americas second richest man by being proved wrong very often. Still, Thomas Flohr is having a shot at it. One of the Sage of Omahas most famous quips is that investors in aviation might have done better if they had shot Orville Wright at Kitty Hawk in the early 1900s, so unprofitable have commercial airlines been over the years. Typically starting at $9,500 for an hour of flight time, Flohrs VistaJet company is in no way a mass consumer airline. But its achievement of striking profits in each of its ten years of existence is still notable in a highly-volatile industry. VistaJet claims to be the worlds fastest growing private aviation company in a market that includes Buffetts own private jets investment, NetJets, part of Berkshire Hathaway. Last year, VistaJet placed what it claims is the biggest order in business aviation history - a $7.8 billion agreement with Bombardier for 56 aircraft and options on a further 86. VistaJet now employs 500 people at its headquarters in Zurich and bases in London, Frankfurt, Beijing, Moscow, Lagos, Dublin, Hong Kong, Malta and New York. It has 42 planes, all painted silver with a red stripe. Still 100 per cent owned by Flohr, the company does not issue detailed turnover and profits figures but he says turnover increased by 27 per cent last year, when VistaJet carried 27,000 passengers on 11,000 flights to 137 countries. Flohr does not recognise the Buffett allusion. I dont know whether Warren Buffett said that, he muses as he sits on a Bombardier-built Global Express jet from London to Berlin. Commercial airlines are a very mature industry. When I entered this industry, I entered it out of frustration that there was no product available which was simple and physically available on a consistent basis anywhere in the world. I didnt feel that whatever was available in the marketplace gave value for what you actually paid. I was a user of private jets and really saw the business benefits. I could be in three of four different cities in the morning and having lunch and dinner somewhere else but I was frustrated that you would not know what you would get when you chartered a plane until you arrived at an airport. I thought that didnt make any sense. Swiss-born Flohr, a former asset finance executive, tried to join the fractional aircraft trend but says he never got a satisfactory answer on what the share in a plane would be worth at the end of the agreement, while journeys in such jets always felt like commercial flights. You got coffee in Styrofoam cups served out of a coffee machine, whereas my friends were drinking espresso or cappuccino, he complains. You got people serving cheese platters on plastic trays when you were paying $30,000 for a flight. There was so much more background noise. So at the end of 2003, he bought his first aeroplane and started hiring it out when he wasnt using it. A second plane followed. Flohr asked financial analysts to look at the industry and had his instincts confirmed. This was a very non-industrialised industry, he says. Everyone was one-off. Maintenance would take three to four times as long as for the same job on a commercial aircraft five times the size. There was no consistent product around the world and no simple business model. Flohr went against industry logic by opting for his planes to have no home base. Instead, they are maintained at 40 Bombardier service centres worldwide. Pilots who fly VistaJets have to take commercial flights back as all VistaJets flights are one-way only. The pilots were surprised about that, he says. People said: Youre not from this industry. You dont know how it works, but I kept asking these questions. I wanted to disrupt and change this industry. I couldnt comprehend why nobody was challenging the industry model. Flohrs timing was good. Globalisation was in full swing and emerging markets were demonstrating heady growth. He bought three more planes. The company expanded rapidly, he recalls. Every airplane I took delivery of was immediately fully booked and I worked hard in changing all the disruptive elements I had observed. We had very simple contracts and the products were consistent on a global basis. In 2008, VistaJets bought the Skyjet International fractional ownership business of Bombardier, widening its footprint to cover all global markets, except the US. Then the financial crisis arrived, just after Flohr had placed a $1.2 billion order for new jets with Bombardier,. He reduced prices and deferred delivery of some of the planes. Nevertheless, he says, VistaJet was still able to grow revenues by 16pc in 2009. What was key was that we were in emerging markets that were still growing, says Flohr. Nobody else in this business was in emerging markets and a lot of the little charter operations disappeared. NetJets withdrew from the Middle East, which was at that time my strongest market along with the former Soviet countries. We started to operate more in Asia and ventured into Africa, a big growth market that was very under-served. Like with fractional jets, VistaJets business model offers guaranteed availability. After that, Flohr says there are significant differences. With fractional jet ownership, if you want to fly 200 hours a year you have to buy 25 per cent of an aeroplane, he says. If its a $30m asset, you have to pay $12.5m. Then you pay for the operation and the management. With us, you pay one simple price per hour and pay as you go. If you fly 200 hours per year, you pay a quarter of a year deposit like youre renting an apartment and you pay quarterly in advance so your cashflows are completely different. And clients dont have an asset risk. Thats the fundamental financial difference. People have learned their lessons. Thats why were enjoying consistent growth rates of 20-25 per cent a year. The new jets are aimed at growing the business even further. Theyre going to fly to the remotest locations on earth, says Flohr. He tested the concept by flying personally in a VistaJet plane to 27 cities including Ulan Bator, Mongolia, Vladivostok, Russia and Luanda, Angola in 24 days. We said: Were going to show the world that this is the product to conduct business with, in the most efficient way, he recalls. When you see the $55m asset of a major company sitting in a remote airport in Norilsk, Russia, or Ubon Ratchathani, Thailand, its not because somebody is on holiday, its because a captain of industry, chairman or chief executive is considering a major investment. That creates jobs and is good for world trade but responsible CEOs do not invest in remote locations unless they have tested themselves hope they can get there and back in an efficient way. You can take a commercial flight. Its probably going to be a four or five-day trip, versus 36 hours with us. Its all about using your time in the most efficient way. From this summer, all VistaJets planes have high-speed internet, while the food menus have been developed by Nobu restaurant chefs. Its an office in the sky and we have true global coverage, says Flohr. We have a head start on anybody else. This year, VistaJet entered the US, the worlds biggest aviation market, through a hosting deal with Jet Aviation, part of General Dynamics. We started in March and the first month was a success, says Flohr. Were being received as the best quality product in the marketplace. People are blown away by the quality of the interiors the service and the attention to detail. Now Flohr is planning a similar entry into China. Were flying in an out of mainland China but have no local traffic rights yet, he says. Its something were working on. Overall, Flohr believes VistaJet has a fair chance of continuing to grow at 20-25 per year for the next three to four years. Thats a realistic target, he says. Such growth has attracted merger and acquisitions interest but Flohr says he is not interested for now. Investment banks and private equity have been knocking on our door since 2011 when they saw we actually survived, he says. But I believe that in this strong growth phase its a differentiator that you can take fast decisions. There are no politics in the company. We do what we think is right. We dont take quarterly views on things. At this point in time its still right to own 100 per cent. Will that be the case over the long-term? I think it will just not be natural anymore for one individual to own a company of this size. But it would have to have a strategic element and have the same moral and ethical values. I think we have a winning concept. I want to be the best in every corner of the world in what were doing. forbes/sites/andrewcave/2014/06/04/the-man-who-could-prove-warren-buffett-wrong-about-aviation/
Posted on: Sat, 21 Jun 2014 07:09:34 +0000
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