AIN Interview: XOJet’s Paul Touw touts virtues of two-model fleet

 - March 31, 2008, 8:46 AM

Paul Touw had barely finished high school when his entrepreneurial spirit started paying dividends. Enrolled at University of the Pacific in Stockton, Calif., and short on tuition funds, he noticed that the physics department lacked good lab books.

“So I wrote one on one of the first Macs and took it to a printer,” Touw recalled. “I sold it for $25, and 400 students bought it every semester because the physics department approved it. So I would net $7,000 or $8,000 every semester. I would walk from the book department to the tuition department and pay my tuition.”

Such ingenuity–and a bit of luck–helps to explain Touw’s rapid rise in the business world. When he applied for his first job after college, Westinghouse apparently misread his résumé and hired him for a position that required 15 years’ experience. Then, after prospering there and at several other companies, he got the idea to create software to help businesses manage their purchasing processes internally and via the Internet. That idea became Ariba, which today employs 5,000 people and serves about 75 percent of Fortune 500 companies.

Touw, meanwhile, has moved on to his next project, XOJet, which he founded at the beginning of 2006. He claims it is the world’s fastest-growing private jet company, based on revenues.

Why did you leave Ariba?

The company became huge and a very different animal, and I wanted to do something in the more traditional industrial space. Aviation had always been an interest. And it was shocking to recognize that private aviation is a third of what U.S. consumers spend on travel. It’s huge.

Both XOJet and Ariba appear to be about eliminating inefficiencies.

Yeah. The fractional model just seemed like a great idea whose time had passed. Because, in any business, what’s critical is optimizing and managing pricing and availability of supply. And fractional was the only model in the world where the supply is fixed and the price is fixed. Just like the airlines were back in the 1950s when you had the Civil Aeronautics Board. I had to apply for a route and then I got approval to charge $575 every day for that route whether it’s Christmas or the middle of the summer and nobody’s flying. The fractional concept is identical: 800 hours of capacity [per aircraft per year] and the price is always the same. That just didn’t make sense to me. The fractional model also had 18 or 19 airplane types. It was a model designed to sell airplanes, not be the most efficient.

How would you describe XOJet’s model?

We’re optimizing all the parameters. It’s not limited to 800 hours. I charge the price I want to charge. I change my commitment levels. So it’s not locked down like the fractionals, where you’re really selling the equipment with a series of agreements.

Where does that 800 hours number come from?

[NetJets founder] Richard Santulli did some statistical analysis in 1981 or 1982 and came up with that and 800 hours became the magic number going forward. I’m thinking, “Did anyone ever question that? Is that written in a physics book somewhere?”

Why are you using only Citation Xs and Challenger 300s?

There was no way I could make short-hop airplanes price out. For a 45-minute hop, statistically you’re going to do about a 45-minute reposition, so your deadhead rate is 50 percent. With longer-range airplanes, coast to coast, your deadhead rate is still about 45 minutes–you’re gonna reposition to the closest airport for a pickup. So you really want those coast-to-coast trips. Anything short of that just killed your numbers. [And with super-midsize aircraft] your fuel burns go down and you get highly efficient use of your pilots. All the stats go in your favor.

How about even larger models?

Few flights go beyond coast to coast in the U.S., so when you have a larger airplane, you just become less efficient. So you don’t want anything more or less than super-midsize. And our typical passenger load is 2.2. Forty percent of our trips have one person on board. You don’t need 13 more seats for one person.

Your brochures say, “first company to provide a complete range of travel solutions,” but I’ve heard that before. What really sets you apart from your competitors, aside from your concentration on just two models and the sale of only full and half shares?

The maniacal, scientific focus on efficiency, which gives customers a better product that’s more reliable for less money. We price out somewhere between an Ultra and an Excel for a brand-new X, versus an old airplane in the NetJets fleet.

It’s not for lack of trying at NetJets. It’s just that they’re bound by this model–800 hours and the same price every day. We’re flying [each jet] 1,240 hours a year. That makes you more efficient. Also, about 67 percent of their flights are revenue-bearing. Ninety-seven percent of ours are.

How can someone verify your claim that you’re more economical than traditional fractional operators? You don’t have management fees and some other charges that they do. But a half share of a Citation X costs about $10 million from you and several million less from some of them.

The cost per hour is what you need to look at. There’s a substantial tax benefit
if you can take it; the jet almost pays for itself if you can. Then you have about $1 million in fixed fees [with traditional fractional operators]; those really burn
a hole in your pocket. That’s pilots, hangars, maintenance, insurance, all that. In our program, you don’t pay that.

And you buy the aircraft back after five years?

We have the right to but not the obligation. And customers don’t have the obligation to sell it to us. They can sell it to anyone or they can keep the airplane. Or they can renew in our program.

A half or full share in a super-midsize jet isn’t right for everybody. Someone may want just 25 hours a year.

The problem with the 25-hour card guys is they suck up all your capacity on peak days and make your 300- to 500-hour fliers upset. Those are the ones who fly exclusively on private. So their demand is very even. The demand of the 25-hour guy is on the peak days, the days he can’t get charter.

How big is the market for whole and half shares?

Three or four times bigger than [the] fractional [market].

What part of your market do you think you have now?

A pittance, because there are 10,000 business jets in the U.S. We’re 20 jets, going on 127. Fractional is about 1,200 business jets, so they’re less than 15 percent of the market and dropping because the prices are higher than buying
a jet. The number-one competitor to fractional is two guys getting together
and buying a jet. And the other big chunk is people buying one airplane. So that’s why we did half and whole, because I’m gonna capture all those people who are graduating out of fractional.

You’ve said businesses always say they’re focusing on customer service but they miss two other key elements–attracting great employees and providing results to investors. It seems to me lots of companies focus on all three.

When was the last time you saw a company do a marketing campaign to their employees on why this is a great place to work?

What about Apple, for example? Don’t they do that?

Absolutely Apple does. By Silicon Valley standards, we’re run of the mill.
I’m just saying airlines and hotels and older industries preach that they’re all about customer service. And they’re not. But companies like Apple, Hewlett-Packard and Cisco Systems paved the way; we’re just copying them.

What about Richard Branson and Virgin Atlantic?

I think he’s a huge believer. I read something about Branson to the effect that it starts with the employee, not the customer. You’ve really got to think about the employee first. Most companies call their employees “labor.” It drives me nuts.

Where do you see yourself in five or 10 years?

Oh, I’m at XOJet. I just may not be here; I may be in Dubai or Moscow or
Singapore. There’s an opportunity that’s large in this field. It’s more stable than technology. It’s harder to penetrate. It’s capital intensive. It’s harder for competition to come in. Particularly when you’re growing at the rate we’re growing.

You’re in the charter business. What are your thoughts about the FAA’s shutdown of AMI? [Last October, the FAA suspended and then revoked the license of AMI Jet Charter, which at the time was partly owned by TAG Aviation USA, a unit of Geneva-based TAG Holding.]

I feel bad for TAG. I think they were definitely in violation of FAA regulations. Here’s the problem: the entire industry is operating this way and then the FAA says you need to have operational control just like the airlines do. The fact is, in the whole charter industry, somebody else owns the airplanes and the pilots really believe they work for the owner, not the management company. So what does the FAA do? They pick on a couple of big guys and it’s a lot easier to pick on one with foreign ownership than on Richard Santulli.

But while the suspension was about operational control, the revocation was for foreign ownership.

Yes, but it was also for horrific handling of the press. When government regulators come after you, the last thing you should do is get into the newspaper and say, “Those guys are really stupid and they shut us down for Mickey Mouse stuff and it’s unfair.” I don’t think [the FAA was] planning to revoke. But that happened the day after all those articles came out criticizing the FAA. We read them and thought, “They’re just asking for trouble.”

Why It’s Called “XOJet”

“After spending $150,000 with a naming company,” recalled XOJet founder and CEO Paul Touw, “we were about four days from launching and all the names were just so bad. So I’m sitting in a restaurant and I see a bottle of Hennessy XO. I’m thinking that’s interesting, because the XO of an aircraft carrier is the executive officer. And Hennessy is a high-end brand. And we’re sort of the XO for commanding officers; we execute the order. Then I thought about the exosphere, which is the outermost atmosphere. And by the way, the reaction inside a jet engine is an exothermic reaction. And all the wives of the CEOs that fly XOJet love the hugs and kisses. So we had a name, thanks to a little drink I had at the bar.”