Tuesday, October 20, 2009

Can Corporate CEOs justify private jet travel?

The Washington Post had a story today about CEO perks at rescued banks. Among the most common, of course, is the use of a private jet for private purposes. But this begs a more fundamental question: is it possible to justify the use of private jets for business purposes?

I picked one CEO at random to try to figure it out. Dieter E. Zetsche, the CEO of Damler Benz, gets paid about $3 million per year (which actually seems reasonable to me, in light of his responsibilities). Let's say the typical CEO works 60 hours a week, 50 weeks per year. This means Zetsche earns about $1000 per hour.

I am going to take as a given that it is worth upgrading the CEO to first class on a commercial flight--it is hard to work while flying in coach, so on a round trip cross country flight, giving the CEO a reasonable environment for work is worth about $10K. The marginal cost of round trip first class tickets is a lot less than that.

Most of the time saving from flying a private jet comes at the airport. I got to fly on a corporate jet once (confession: it is fun). One drives right up to the plane and walks on--no ticket counter, no security. So let's say time saved at the airport on both ends of a round trip is 4 hours: $4000. According to one source, the cost of flying a private jet ranges from $1800 to $5000 per hour. Let's just use $2500. It takes about 5 hours to fly from LA to New York, so round trip, that it $25,000. Let's say the CEO take someone with him/her. Now the cost is down to $12,500 per person.

I just checked on Kayak, and first class airfare from NY to Los Angeles is $2250 on Virgin and Delta. So the marginal cost of the private plane is about $8,000, and the benefit is around $4,000. And of course the cost benefit calculation for the second person is even worse.

I do understand that CEO's on occasion need to go places without commercial airports, and that the time spent driving from a commercial airport to these places might make the private jet pencil out. But they could use shared ownership, or net jets, to take care of those cases. Most of the time, they should fly with the rest of us.