The Inefficient Private Jet Hypothesis

Welcome to the twelfth edition of Private Jet Insider.

When I started writing, I wanted to get my thoughts on the internet and maybe some people would read. I usually summarize a weeks worth of conversations with fliers and industry people and distill it down to something I think is digest-able. The typos and the spelling errors tell you that ChatGPT didn't write it, and the off-putting sarcasm and cynicism towards an industry that I love proves that I'm not doing this as a puff piece. I hope that you enjoy the wanderings of my thoughts, and sometimes it'll be good and sometimes it'll be mediocre. Today, I hope you enjoy it.

Private Aviation is utilized by some of the most intelligent people in the world. These are the market makers, including publicly traded Fortune 50's and investment bankers that take companies public. They're creating the efficient markets. And speaking of creating efficiency in finance, you should check out today's sponsor.

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A touch of housekeeping...

Business Aviation lost a member on the tragic American Airlines flight to Washington D.C. on January 29th, 2025. Casey Crafton was the Technical Services Manager at Guardian Jet, and clients, coworkers, and industry members loved him. He leaves behind a wife and three boys. If you want to help, Guardian Jet has set up a GoFundMe for Rachel and the boys. You can donate here.

The Inefficient Private Jet Hypothesis

If you went to formal business school, you'll be familiar with the concept of the "Efficient Markets Hypothesis." While the idea started in 1900, it gained legitimacy when Eugene Fama formalized the theory in the 1960's. His argument was that stock prices always reflect all available information (whether public or private), so no investor can consistently outperform the market over the long term.

There's three "forms" of this efficiency:

1. Weak Form Efficiency – Past prices don’t predict future prices (sound familiar from ad reads from your favorite finance podcast?)
2. Semi-Strong Form Efficiency – Stock prices instantly reflect all publicly available information.
3. Strong Form Efficiency – Even insider information is baked into stock prices (someone tell Nancy Pelosi)

The idea of Strong Form Efficiency has long-since been disputed, as seen by insider trading scandals. The insider information does move markets and can affect stock price, therefore you can't trade on inside information (unless its inside the halls of Congress!).

But access to data is what drives so many hedge funds and commodity's traders mad so that they can get alpha in the marketplace. Michael Bloomberg built a giant business on this (great autobiography on this, by the way). Data drives market alpha, and therefore is an incredibly valuable part of the equation.

Yet, in private aviation, data is lacking.

Definition of Inefficient Markets

According to Investopedia, inefficient markets exist because of:

1. Information Asymmetries (aka lack of data)
2. Lack of buyers and sellers (low liquidity)
3. High transaction costs
4. Market psychology
5. Human emotion

Warren Buffett would argue that 4 and 5 are easiest to overcome, which is how Berkshire has positioned themselves to become a $702,xxx+ per share stock.

A fun aside. Had you forgone the Lear 31a in 2000 ($6.3m new) and bought Berkshire stock instead, you could buy a G700 ($76,271,167 today's value of stock).

Private Aviation is the Definition of an Inefficient Market

Now we're done talking finance and going to talk private aviation.

There are three main buyers of brand new aircraft: fractional, corporate flight departments, and UHNWI, in that order by volume.

First, and largest, is the fractional providers (Netjets first, Flexjet second, then a lot of others). They buy new at wholesale, sell pieces at retail and run the aircraft hard. To put into perspective, NetJets signed an order for up to 1,500 Cessna Citation jets over 10 years (a combo of 100 Citation Ascend, Latitude, and Longitude aircraft). Flexjet just signed a massive deal with Embraer for some $7b.

Second is corporate flight departments. Fun fact: Buckle Jeans (like, in the mall) has a corporate flight department (they fly CJ4's). As does Clayton Homes, many trucking companies, and every Fortune 50. These companies have fleet planning and specific cycles they buy-and-sell on.

Last is UHNWI. They probably own businesses so they can write it off, but they are the last type of buyer for new aircraft. They may cycle through aircraft over a period of time or they may hold them for 13+ years, but they buy new airplanes.

After the new transactions, those aircraft hit the secondary market through a variety of sources, but usually by-way of brokerage houses. This creates a market for secondary buyers, and where a bulk of transactions take place.

This is where the market inefficiencies start.

Information Asymmetries

The lack of pricing in private jet transactions is almost comical.

Here's 4 listings on controller.com. 3 out of the 4 are "Call For Price". Every good brokerage knows the asking price on any given serial number for specific markets, but no one, not even the software providers, have all the data on ask price.

Oh yeah, and all sales data is self-reported, meaning there's no "MLS" or tax record for public purchase price for airplanes. Only the buyer, the seller, the title company, and the bank on any transaction knows what it actually sold for. But even the top performing brokerage only saw 79 transactions in the last 365 days.

Now, lets analyze how disparate the transaction game really is.

Here's a Pareto Chart that shows the number of transactions by firm in private aviation. Each little blue line represents a company in the dataset, and the red line represents a percentage of the total.

If that's not shocking enough for you, here's a table of the top 31 firms by transaction volume according to JetNet which are the only firms reported in the double digits on transactions. Now, this only represents those marketed for sale, and does not account for buy-side brokerage, but you can see how fragmented the market is.

And this data only represents those transactions that hit the "public market." Many transactions go off-market, which means their pricing is known by very few parties whatsoever.

There's a serious case of information asymmetry when it comes to purchasing a secondary private jet.

Lack of Buyers and Sellers (Low Liquidity)

When you look at the entire ecosystem of business jets for sale, there are 1,798 classified "business jet" for sale worldwide compared to a fleet of 24,658 including fractional and shared aircraft. This is 7.29% of the fleet.

But, this macro market is subdivided into very small slivers, which shows the true "market" for any make/model or specific aircraft type.

For instance: there are 28 Phenom 300 and 300e's for sale. This doesn't mean there's 28 in the same price range as there are buyers.

This creates an inefficient market. There's no infinite amount of buyers and sellers on any given market in any given price range. Therefore, the market has to be made by bringing together the right buyer for the right seller.

High Cost of Transaction

Private Jet transaction costs are usually representative of their size and complexity. When buying, assembling the right team will actually save you money overall (see: Hidden Costs Article). My friend Greg Sydor with Guardian Jet LLC broke it down beautifully in this tweet where he puts a range of $100k to $1m+ for transaction costs.

Trading in-and-out of private aircraft can get expensive and cost 4-6% of the transaction every time you turn it over. This cost of transaction means that people hold on to their aircraft for 3-8 years.

Market Psychology and Human Emotion

I would argue these two points are the same. There seems to be a general market sentiment right now around 100% Bonus Depreciation and the advantages that it is going to bring. This is simply an outlook positivity, and doesn't necessarily change the market as a whole. If you can afford the jet, you can afford the jet whether you take straight line depreciation over 5 or 7 years or you take bonus in the first year.

This sentiment drives the market, and creates inefficiencies.

As more buyers make the justification based on emotion or market psychology and sentiment, the prices will ultimately fluctuate by bringing more people into the market of aircraft ownership. This creates some liquidity, but also skews the market.

If you can find a team that will help you keep your emotion in check and keep you from buying into the Market Psychology, you can avoid a lot of the market inefficiencies. Having a broker say not to buy an airplane despite how much you like the pictures? That's worth whatever you pay them.

My Take

I had a lunch today with a friend who asked my opinion the market.

I think we are at risk of a lot of the #4 and #5 re-entering the market, which are factors Buffett says to avoid. The market cooled after the post-covid craziness. But, there is optimism in the economy and 100% bonus depreciation coming back.

My take is that the 25+ year old airplanes will likely continue to suffer from severe market illiquidity. The delayed retiring of many of those airplanes will continue to shake its way through. You cannot be rid of the macro-economic force that those aircraft should be retired. When you're spending 15-20% of the acquisition cost in annual operating costs and maintenance, the numbers don't add up compared to a nicer and newer aircraft that will hold its residual value.

I think the best value remains in the 10-20 year old airplanes as they did before the pandemic, and will hold true after today. You aren't the last owner of the aircraft but can utilize the tool and sell it after the useful life to you ends.

This is one guy's opinion. Trust the experts. And if you're looking for one, I am happy to make an introduction.

Until next time,

Preston Holland

P.s. forward this to a friend who is either buying or selling an aircraft, and remind them that you went to business school and are very familiar with the concept of the "efficient market hypothesis." Your friend will think you're smart, and they'll get value out of this newsletter.