What corporate jets can tell us about a company’s fortunes

Corporate bicycles allowed. EPA/Faccundo Arrizabalaga

The news that Tesco took delivery of a £31m executive jet, bringing its fleet of such aircraft to five, brought fresh embarrassment to the troubled supermarket. Ordered in early 2013 under the aegis of the former CEO, it has rapidly been put up for sale by the new one. But given the company’s recent poor performance and admission of accounting irregularities, the purchase of a new airborne chariot for its executives has gone down like a lead balloon.

Buying a new executive jet during a moment of deep corporate crisis may seem like a quirk, but it seems to be a surprisingly common move. In July last year, Blackberry took delivery of a US$20m jet. This happened almost precisely when the company rapidly lost market share to Samsung and Apple, had seen its share price tank, issued profit warnings and announced plans to fire 40% of its global workforce.

Tesco bought a Gulfstream 550 last year. RHL images, CC BY-SA

The decision to splash out on such a luxury when the company is floundering inevitably raises questions about how these businesses are being run. The actual cost of a jet is relatively small compared to Tesco’s recently announced billion-dollar losses. But the decision screams that senior managers seem to be more interested in comfortable executive travel than getting their company in order.

One defence that has been mustered was that the decision was made in better times. Others have pointed out that executive jets are vital business tools that allow overstressed executives to use their time in the most efficient and productive way.

Perhaps the most generous interpretation is that the new jet was needed in the global mission to divest in many of its far-flung foreign operations. But to most it looks like evidence that the executive team were not focusing on crucial issues. Instead they seemed more interested in enjoying a comfortable ride while the company crashed.

Part of the CEO package

The revelation throws light on the wider issue of corporate jet ownership. Corporate jets were once the preserve of senior executives at only the largest companies. Now they are widely seen as a standard part of any CEO package. Corporate ownership of jets has actually soared following the financial crisis. In the US, corporate jet ownership was at a low of about 500 jets in the mid-1990s and went up to about 1,800 in 2010.

Proponents of the corporate jet suggest this is a good idea because it makes the best use of precious executive time and energy. The argument goes that the cost of running a fleet is insignificant when compared to the value that a fresh and focused CEO can provide. Supporters point out that CEO time is one of the most precious commodities in a corporation, and private jets help to make the most use of it.

Others have pointed out that executive jets are a relatively good way to incentivise CEOs. The cost of running a jet that a team of executives share is relatively small when compared to the hefty cost of many senior executive compensation packages.

Bad for business

But recent evidence indicates that corporate jets may do more to destroy shareholder value. Ownership of an executive jet actually seems to be linked with a company’s share price underperforming the market by about 4%. When firms announce the purchase of an executive jet, their share price dips by 1.1%.

Corporate jets also tend to be more prevalent when the owners of the firm do not closely monitor the business. Privately owned firms, which tend to be more closely monitored by their owners, tend to have fewer executive jets than similar firms which are publicly listed. When publicly listed firms are privatised and become subject to closer owner scrutiny, the number of jets owned by firms tends to plummet.

This suggests that executives take advantage of the fragmented ownership and relatively lax attention given by owners of publicly listed firms to award themselves perks such as executive jets. And, if you were in any doubt that executive jets are just an efficient business tool, one final fact about executive jet ownership might be interesting. It seems that if the CEO has golf club memberships far from the headquarters, then use of the executive jet skyrockets.

What jets can tell investors

Executive jets might enrage investors, employees and the broader public, but recent research suggests that by paying attention to where these jets travel may provide investors with some forewarning of big news announcements. A study by David Yermack, professor of finance at New York University, found that executives frequently use their jets not just for business trips, but also for vacations.

By tracking these vacations, it seemed that CEOs tended to fire up the executive jet and head to their vacation home just after they had announced favourable news to the market. Then, when on holiday, the companies tend not to release much news to the market. When the company jet collects them and returns the refreshed CEO to the office, the volatility of the company share price increases. It seems that CEOs, like the rest of us, are less likely to go on holiday when they have a greater stake in the company or the weather at their chosen destination is bad.

In an age when corporations are under continued pressure to not only return value to shareholders, but also show their merits to the wider public, it seems that executive jets are not such a smart choice.