For over a month before this week’s announcement Delta Air Lines had reached a definitive agreement to merge its Delta Private Jets with Wheels Up, a deal that will make it the largest shareholder in the New York-based start-up, rumors were swirling.
It was a story I was chasing and badly wanted to break. It would be big news in a space I write about – business aviation, and even bigger news in that it involved one of the world’s largest airlines, a Fortune 100 company, a globally recognized name.
I understood there were other suitors for Delta Private Jets. I also understood that Wheels Up might be looking at other operators as well.
I had a decent number of pieces from the jigsaw puzzle, but they just weren’t fitting to where I felt comfortable I had it nailed.
Knowing how these deals get announced, sometimes early in the morning, I pre-wrote two stories, one for this website and one for my site, Private Jet Card Comparisons, a bit more granular for jet card junkies.
A year ago, I woke up at around 4am on a September morning and luckily checked my email on the way back from the bathroom. Thomas Flohr and Vista Global were buying XOJET.
Just this past June I saw Kenny Dichter, the Wheels Up CEO’s name pop up on my iPhone. In 30 minutes he was landing in Elkhart, Indiana and would be announcing that Wheels Up had purchased TMC and its 26 light jets. Drop everything. Scramble to write a story.
At the time, I quoted The Who’s Eminence Front, writing, “Won’t you come and join the party. Dress to kill.”
I thought the deal showed Wheels Up was transitioning from a highly recognized brand and niche operator of King Air turboprops to an important player in the broader market that could join Kenn Ricci’s Directional Aviation and Flohr to challenge NetJets.
This time I decided I would be better prepared. My assumption on Delta Private Jets deal was Ed Bastian was getting out of the business aviation market. I had even chosen Linda Ronstadt’s Different Drum as my theme, Delta’s farewell to its private jet business.
As CEO of a company with over $44 billion in annual sales and more than $5 billion in pre-tax profits, private jets are truly an ancillary business, and not one that seemingly had the potential to churn out meaningful profits.
There isn’t much transparency as all the major business aviation solutions providers (not including OEMs) are either privately held or like Delta Private Jets a subsidiary, where financial figures aren’t broken out.
From time to time, one gets a glimpse, such as when VistaJet had to refinance bonds earlier this year.
Anyway, it was easy to see private aviation as a high-risk, low-return proposition at Delta for multiple reasons.
As I pored through Delta news clippings and financial filings, clearly Bastian had the view to focus on his core passenger airline business.
Last November, Delta spun off its ground handling business, although he kept a 49% interest. That should have been a clue.
Reuters also reported he was trying to do the same with a refinery business as well.
Delta plunked down $1.9 billion in September to take a 20% stake in LATAM, South America’s largest airline. Delta already holds a similar stake in Aeromexico.
It also bought a small stake in Korean Air, a key partner providing connections for customers throughout Asia.
Virgin Atlantic, in which Delta holds a 49% interest, is part of a consortia that recently snapped up struggling British regional carrier Flybe.
It will rebranded as Virgin Connection and help feed important transatlantic routes in Bastian’s fight against the American Airlines alliance with IAG, parent of British Airways, Iberia and Aer Lingus.
The forest was in front of me, but I could only see the trees. After all, foreign entities are often restricted to be minority owners.
I didn’t see the AGS deal as a template for Wheels Up.
When I asked Delta on Nov. 12th about a possible sale, I was given the standard, “We don’t comment on rumors.”
Well, it wasn’t a denial.
The Wheels Up folks, who know I have good sources, wouldn’t deny it, but also warned me that I might have it wrong.
There is a big difference between talk and deals. In private aviation, there is probably more talk than deals, which makes one all the more careful to make sure what they are writing is accurate.
On Sunday night I received a text that a deal was going down. It didn’t make sense to me. Thursday was Delta’s Investor Day. Who announces they are selling a small subsidiary on Investor’s Day?
With my stories ready to go, I couldn’t figure it out. Then on Tuesday I received a call that I should be available Wednesday afternoon for news about the deal. After a brief call, where I agreed to receive a release under embargo, a standard practice, I got the news, and it still wasn’t entirely clear.
The release had lots of PR speak, but it didn’t talk about a sale. It used words like partnership and combining. Instead of talking about getting out of the private jet business, it spoke about extending Delta’s reach into the market.
One of the quotes from Dichter was about worldwide expansion. I’m still not sure if it was a throw away, however, I updated my two wrong stories to take out that Delta was selling.
I then turned on CNBC’s Squawk Box as I was told to do (I watch it most mornings anyway) where Bastian as promised broke the news at 7:05am. He referred to it as a merger. He spoke about unleashing DPJ’s potential by moving it alongside the mothership instead of underneath as a subsidiary.
The release said Delta would take an equity position, but how much? I was told a number by a third party, a significant number, although like the AGS deal, a minority stake.
When Dichter got on camera he dropped the bomb. When the deal closes Delta Air Lines will be the largest shareholder in Wheels Up.
While one report positioned the deal as a graceful exit for Delta and another person I asked, described it as “kicking the can,” the more I thought about it, the more I believe it could also be quite different.
Why would Bastian make the Wheels Up deal a key part of his time on Squawk Box, a full three minutes right after talking through growth expectations and the LATAM deal? Why would he have Dichter on-site in Atlanta for a follow-up?
In a presentation by Pat Gallagher, the president of NetJets, also at Corporate Jet Investor, he shared research showing the UHNW population growth is significantly outpacing private aviation.
Could it be Delta is doubling down on private aviation?
If that’s the case, Ed Bastian becomes one of its most important players.
It’s no secret without mass orders by market leader Berkshire Hathaway’s NetJets, several aircraft programs probably wouldn’t exist.
Ricci’s billion dollar order from Embraer and its Praetor program for his Flexjet fractional fleet is likewise a critical boost for the Brazilian OEM.
Vista Global’s order and options for 30 of the $75 million Bombardier Global 7500s helps support the manufacturer’s sales of single aircraft.
It’s not expected that Bastian will be joining Warren Buffett, Ricci or Flohr in making orders for new private jets, at least right now.
In fact, Dichter has said much growth will come via accommodating customers on the aircraft of third party operators it verifies for safety and standards.
In other words, Wheels Up becomes a Good Housekeeping seal of approval. Only founded in 2013, Wheels Up is neck and neck with much larger NetJets as being the most searched private aviation companies, according to Google.
Just like when you book a flight with Delta Air Lines, you might end up on Air France, Aeromexico, Virgin Atlantic or Korean Air airplane, Wheels Up becomes not just an operator but an aggregator of demand.
It’s something both Directional and Vista Global have plans for as well, so the concept is not new.
And like Wheels Up, both are investing heavily in digital. Flohr snapped up JetSmarter surely exclusively for its technology, apparently judging that the brand’s troubles were worth it. So far, the move seems to be paying off.
Ricci, who while not widely know outside of business aviation, is considered one of its shrewdest executives, bought PrivateFly, a digitally forward charter broker last year. In October he launched Tuvoli, a B2B platform that addresses some critical payment issues involved with charters.
Now with Delta behind Wheels Up, there is a myriad of opportunities one can speculate about.
Dichter on Squawk Box talked about how Wheels Up can fly Delta customers the last mile. His fleet of King Air 350is can get into smaller airports not accessible to jets.
Also at Corporate Jet Investor, Dichter said his recently launched digital platform has already generated over $5 million in bookings over several months.
Still, compare that to Delta. Its passenger airline business generated nearly $200 million in revenue on the Sunday after Thanksgiving.
However, if your annual sales are around $400 million, as Wheels Up’s are, that type of money looks a lot different.
Dichter believes there is an addressable market of two million U.S. consumers who have the resources to spend at least $10,000 on private aviation.
That might come in part via shared flights or even scheduled shuttles. Earlier this year Wheels Up launched a new membership tier designed specifically for jet-sharing.
Wheels Up has also scheduled flights where it sells individual seats around college football games. The idea is there are at least eight people in the New York City area that want to fly to Syracuse for the day to tailgate, see old friends, and watch the Orangemen, yet be back home the same evening for date night.
Delta could be an important channel to reach them.
As of 2013, Delta said it had 93 million members in its Skymiles program, most who have opted in to get news about promotions. Millions of its frequent fliers have its app on their smartphones, the 21st Century’s Main Street or Rodeo Drive, take your pick.
Imagine you live in Atlanta. Every Saturday in the fall there could be flights to the football meccas in Athens, Baton Rouge, Tuscaloosa, Auburn, Clemson, Knoxville, Gainesville, you name it.
No more multi-hour drives and then the search for parking. In some cases, there are commercial flights, in others no, but either way, what about showing up at the airport 15 minutes before departure and being halfway home when you would still be waiting for the train between concourses at Hartsfield-Jackson Airport?
If you are in Skymiles or have the Delta app, knowing about those flights might now just be a text message away. Click and book!
For Wheels Up, adding 40 or 50 trips like that on a Saturday when private aircraft often sit parked on the tarmac could have a material impact.
When the deal closes, Wheels Up will have access to those customers much as Air France or Aeromexico does. Of course, there could be more.
Why stop at Athens, Georgia? What about Athens, Greece?
While running a private jet company and scheduled passenger airline are in many ways as different chalk and cheese, building a worldwide footprint is even more challenging.
Only VistaJet to date has been able to build a global private aviation brand, something Flohr said he now wants to do with XO, like he does in the U.S., combining owned aircraft with third party operators to fulfill customer needs.
Going into far away lands and setting up an operator and then creating awareness is no easy task. It has taken several years and two acquisitions to prepare for Flexjet’s big push into Europe, expected next year.
Bastian pointed out that Delta Private Jets was never able to get enough traction to justify a marketing budget to generate enough awareness.
It’s a challenge other successful airlines have had. Ask the German flag carrier about Lufthansa Private Jets.
Yet there are synergies in there somewhere. Dichter says 90% of his customers also fly commercial airlines, mainly first and business class, and mostly on lucrative long-haul flights, where premium cabin passengers are the Holy Grail for airlines.
At the same time, a strong, globally known private aviation brand alongside a widely recognized national carrier like Air France, Korean Air, Aeromexico, or Virgin Atlantic opens up a world of possibilities.
Those airlines bring in-house talent, recruiting power, particularly with pilots, office space, leases at airports, relationships with government regulators, local marketing savvy, and relationships with both premium fliers and big companies, all which could grease the skids for a Wheels Up Europe, Wheels Up Brazil, or Wheels Up Mexico.
In any of the cases, Wheels Up could just be a digital brand, or perhaps an operator that is part of a consortia between the Delta partner and outside investors, based on whatever that country’s rules regarding foreign ownership are.
Delta’s intentions are unknown at this point. Both parties said they will offer more details when the deal closes early next year.
For private aviation, which is so important to the economies it serves, creating business opportunities in communities that would have otherwise have been left behind, having Delta backing a key player can only be a good thing.
Bastian told CNBC Delta plans to be an active investor. For the industry, it adds a potentially game changing dimension not seen since Berkshire Hathaway bought NetJets in 1998.