Flying Smarter: Bizjets for Everyone?

 - April 5, 2019, 11:48 AM

JetSmarter CEO Sergey Petrossov has often said that private jet travel’s future lay in “social scheduling,” letting program members organize flights themselves on the per-seat charters his company popularized (a significant number of those seats free), with community demand determining when and where they flew.

After its recent pivot, JetSmarter is doing just that. Gone are the free rides and membership requirements from the company’s original business model. Anyone can now create a crowdsourced flight or buy a seat on a flight someone else created. Yes, some “Confirmed” shuttles—largely confined to New York-south Florida routes and seasonal hot spots—do fly regardless of the number of seats sold, and memberships proffering discount per-seat rates are available. But without charging an initiation or recurring membership fee, a future more democratic than even Petrossov preached is here.

However, the calendars displaying the global schedules of crowdsourced flights on JetSmarter’s app and website hint that relatively few customers in the U.S., Europe, or the Middle East are taking advantage of this brave new world.

Moreover, the pivot comes amidst a wave of negative attention that’s large even for an enterprise that seemed to court controversy in lockstep with its expansion, beginning with the fawning “likes” from celebrity customers who didn’t disclose commercial ties to the company in apparent violation of consumer protection statutes, and the ongoing heavy-handed efforts to silence critics and strong arm positive media coverage. More recently have come a spate of lawsuits; the infamous in-flight video of an unstable, threatening passenger on a JetSmarter shuttle flight; and a critical CNBC investigative report that brought what had been a business aviation story into the mainstream.

JetSmarter’s Changing Business Models

Launched in 2012, JetSmarter first styled itself as a tech-driven discount aircraft charter brokerage that enabled customers to find a jet anywhere in the world using its revolutionary app (introduced in 2013).

For their initiation and annual fees, members received even bigger discounts and deals on empty legs from the company’s charter operator partners, many of them top-tier providers. At the end of 2014, Petrossov said the company had facilitated more than 1,000 charter flights. “People say, ‘Wow.’ They can’t believe you can book a private jet through an app,” he said at the time.

In 2015 JetSmarter created shuttle flights on high-traffic routes, offering free seats to members along with perks like free helicopter transfers to and from airports in some markets.

In JetSmarter’s all-membership model, if the limited number of free seats were taken, members could buy seats. The per-seat shared flights became JetSmarter’s signature offering and a key source of anticipated profitability. As Petrossov explained then, the company’s technology enabled it to identify potentially profitable shuttle routes, and the free seats were designed to introduce the offering to members.

“This is what you have to invest,” he said. “We put in starter routes to get the market going. [But] the third, fourth and fifth flight—that is not going to be us [paying for it]. That’s our go-to-market strategy.” He added, “Traditionally you have a private airplane with one passenger paying. I have 10 passengers paying. I can collect from 10 different sources. That’s the basic economics: I’m charging more people for the same product.”

Fueled by early investors including the Saudi royal family and Sean Carter (aka Jay-Z), the company, headquartered in Fort Lauderdale, Florida, opened offices in Dubai, London, Moscow, Saudi Arabia, and Zurich. A Series C financing round in 2016 raised $105 million, putting the value of the company at $1.5 billion. The funds would finance new routes, after expanding its New York-Los Angeles; and Los Angeles-south Florida flights to two-per day by 2018.

That same year JetSmarter made nine-figure deals for long-term lift with multiple providers in the U.S. and Europe, including a $350 million, seven-year contract with Jet Edge for up to 35,000 flight hours on large-cabin jets.

Meanwhile, JetSmarter became the prima facie case for the viability of the long-derided and previously oft-failed per-seat charter model. As the books closed on 2017, Petrossov said the company “grew over 100 percent for revenue and over 150 percent for passengers flown” and expected “to double in size again in 2018.” He predicted to Corporate Jet Investor that within five years, at least 75 percent of charter flights “will be in some form of shared flight format.”

In fundraising presentations, JetSmarter projected growing from fewer than 6,000 members and $124 million in revenue in 2016 to more than 100,000 members and over $2 billion gross income in 2020.

Losses Mount

According to CNBC, JetSmarter had been losing up to $5 million per month in 2016 and 2017, and favorite benefits—including the free helicopter transfers and catering—were restricted or dropped and new fees added, while new flavors of shared flights (Custom Shuttles, Shared Charter, VIP Shuttles, JetDeals) were introduced. But the free-seats pitch remained constant until June 2018, when the company eliminated the benefit for new members. JetSmarter had allowed existing and prospective members a chance to renew or join and grandfather in (retain) existing terms before the policy change, even offering multi-year memberships at discount rates.

In another surprise June announcement, JetSmarter opened its flights to nonmembers, allowing them to buy seats on its shuttles or create shared flights of their own by purchasing a minimum number of seats. Petrossov explained the change would accelerate market expansion, while the difference between nonmember and member discounted rates would keep membership attractive.

More major developments came that August. California-based Clearlake Capital and Leucadia National (now Jefferies Financial Group) came onboard, reportedly investing about $75 million for a third of the company, putting JetSmarter’s valuation at some $225 million—less than 20 percent of its prior year’s worth.

Petrossov also that month announced forming a fleet of branded VIP JetSmarter Gulfstream GIVs—five in hand and 25 more expected within months—as well as release of its first jet card by year end. At the time, the three-tier annual memberships cost about $9,000 for Simple, $15,000 for Smart, and $50,000 for Sophisticated, along with a $2,500-$3,000 initiation fee. The different levels provided increasingly greater access to free seats—allotted by a token system—and other benefits.

Also in August 2018, JetSmarter affirmed that existing members could renew under the terms they initially purchased. Meanwhile, lawsuits from former members allege JetSmarter had already stopped providing free seats to grandfathered members. (See sidebar, “JetSmarter Legal Matters.”) The suits suggest the JetSmarter sales force was hearing from many customers complaining about what some termed fraud and bait-and-switch tactics.

Public Relations

JetSmarter had policies in place to limit member grumbling and complaints. The membership agreement forbade customers from publicly making negative comments about the company. Some who were denied membership renewals said they believed the blacklisting resulted from negative comments they posted on chat forums. The non-disparagement clause is gone from the current membership agreement, but JetSmarter “reserves the right to terminate and cancel the Member's Membership at any time and for any reason,” according to the current contract.

Today fewer members seem to fear banishment. Recently Yelp had 43 JetSmarter reviews, 11 five-star, 31 one-star, and a single two-star rating, and many of the posts are long and impassioned. Issues of online reviews credibility aside, the last five-star review is dated May 3, 2017, prior to the elimination of free seats. Since then, 16 one-star reviews have been posted, the most recent this January.

Trying to control the media side, a boilerplate contract for a press demo flight presented to a reporter from The Verge stated he’d be charged $2,000 if the publication failed to produce a positive account of the experience within five days. The Verge refused to sign but did publish in early 2017 a critical article in which Petrossov, champion of democratic flights for the masses, said about member discontent, “It’s kind of trivial, you have wealthy people complaining about private jets. It’s a bit crazy in the whole scheme of things.”

When AIN asked Petrossov during an interview that year about the attempt to compel a positive story from The Verge and about suggestions that company personnel patrol chat rooms looking for members who violated the company’s non-disparagement clause, his media representative cut in, saying written responses would be provided. Two follow-up emails seeking the responses went unanswered.

During CNBC’s preparation for its report, JetSmarter’s general counsel demanded the company “immediately cease and desist” from contacting current and former employees, labeling it tortuous interference with contractual relationships. JetSmarter then made access to Petrossov contingent on the broadcaster not using employee interviews in its report, terms it declined to accept.

JetSmarter’s basic answer to member complaints about buying or renewing a membership based on a promise of free flights is to point them to its membership agreement, which reads in part, “JetSmarter reserves the right to change, suspend, or terminate any of the Services or benefits at any time, including, without limitation, changes, suspension, or termination of any routes, types of aircraft used and/or operators that perform flights, and changes to (or imposition of new) fees or other charges for services or benefits...” The agreement also advises prospective members to be sure they have “not relied upon any representation, warranty or disclosure made by jetsmarter [sic] or any other person on jetsmarter's [sic] behalf, except as specifically provided in this agreement.”

But JetSmarter didn’t send a contract for clients to sign; it’s on the company’s website, under the Legal tab. Using the app constituted agreement with its terms, according to the contract, which also mandated that disputes be individually settled by binding arbitration.

Security and Privacy

Along with other benefits, JetSmarter has touted the networking and social opportunities membership provided—one never knew who they might be sharing a cabin with. In September 2018, the downside of that fact became manifest after a video of a mentally disturbed passenger cursing and threatening fellow passengers on a Las Vegas-New York shuttle flight became public. (The passenger, Maurice Paola, was removed from the aircraft by police after the jet made an emergency landing. Before boarding, he had tweeted, “From a jail cell to a private jet lmao they can’t stop me.”)

A YouTube video that Inside Edition posted has drawn little more than 150,000 views, but the CNBC broadcast and other Web postings have likely exposed the video to many times that number. CNBC reported that the FAA, as a result of the video, is “looking into” the company’s operations and said the FBI is asking industry executives about the company amid reports from members that large amounts of cash and perhaps drugs were transported on JetSmarter flights. (The FBI declined to comment, CNBC said.)

Of course, charter operators, not brokers, are responsible for operation and security of all flights. Nonetheless, JetSmarter’s website highlights its rigorous protocols, stating: “Tom Ridge, the first Secretary of the U.S. Department of Homeland Security, serves as a JetSmarter board member and assisted in the design of a proprietary safety and security infrastructure on the ground—the only one of its kind in the aviation sphere.”

Privacy is also a critical concern for many private jet travelers, so members may be surprised their agreement allows JetSmarter “to use Member's picture, including photographic, motion picture, and electronic (video) images; and voice, including sound and video recordings created while Member is utilizing the Services of JetSmarter, and grants JetSmarter the rights in perpetuity to use those images and recordings in any way it wishes without approval and without compensation.” The permission “shall continue forever. Member acknowledges and understands that he, she, or it may not enjoin any exploitation of the activities as described above,” the agreement reads. The member also “waives the right to receive any payment for granting this release” and “waives any right to inspect or approve” how the material is used.

JetSmarter Today

JetSmarter provided a statement to CNBC during its investigation—in lieu of a Petrossov interview—asserting that the company is “more positive about the health of our business than ever.” Meanwhile, JetSmarter has been mum on its plans, such as its branded fleet of GIV-SPs. When introduced in August 2018, JetSmarter said the aircraft were purchased by private buyers, leased to JetSmarter, and operated by Jet Edge—the presumptive operator of the Paola flight.

In January, after the CNBC story aired, Jet Edge CEO Bill Papariella wrote via an e-mail blast: “In light of recent media reporting regarding shared flight services, we feel it important to clarify our existing policy. We believe the shared ride model has value, potential and benefits to the greater whole of private aviation. However, Jet Edge does not now do business with shared service providers, nor do we intend to do so for the foreseeable future. This decision was made several months ago in 2018 as an effort to focus on providing the best service to our core customers.”

In a 2015 promotional overview, JetSmarter highlighted the “halo effect from the JetSmarter brand” that partner operators enjoyed. Jet Edge declined to speak with AIN about JetSmarter or the Paola flight.

JetSmarter has a list of contracted operators—more than 80—on its site. Not all operators on the list are still providing lift, although Jet Edge’s name is absent.

There has been no news on JetSmarter’s planned jet card or on increasing the frequency of flights on established routes or expansion into new ones as had been announced. South Florida-New York is the only route where confirmed flights are regularly scheduled, and these are far below the target of some 250 to 300 flight per week that Petrossov spoke of in late 2017.

The reported number of JetSmarter members has varied recently from around 8,000 to 10,000; Petrossov has used the lower number. But membership figures are downplayed today in favor of talking about a global community of users.

Current Operations

Today it appears that potential members can’t know what they’re buying or getting for their money.

The only individual membership shown on JetSmarter’s official agreement, the Starter membership, which provides access to just six flights during the annual membership period, is no longer offered, according to sales personnel. The real current membership, according to them and described on the website ($2,500 annually, no initiation fee), provides access to discounts on the per-seat rates and guaranteed access to private charter flights (a term that was redundant before JetSmarter) among its benefits.

A brochure that describes the program is available via email. This seems to suggest the only agreement being sold doesn’t exist, to take JetSmarter at its own admonition that members accept only its written agreement as definitive, regardless of what its agents say or what appears in print or other form elsewhere. Because the company reserves the right to change any and all rules unilaterally, the fine print raises questions about what is being purchased.

The membership agreement also features a group membership plan, Signature, which is also said to be defunct. This plan has a complex rebate program, which seems to limit the utility of accumulated credits, even as the company again asserts its right at any time to change the redemption policy and structure or raise the credits required or limit their application toward benefits or services. (Credits are also a benefit for individual members now, according to the sales staff, though the agreement specifies that individual members under the Starter program get no credits.)

Those who choose not to renew, need to plan ahead. Memberships “will be conveniently renewed automatically and you agree to be charged the applicable annual membership fee for the subsequent Membership Term(s) unless you provide JetSmarter a written notice not to renew at least thirty (30) days prior to the expiration,” the agreement states.

But it is not necessary now to join to use the service. JetSmarter lists more than three dozen U.S. and more than 15 international origins/destinations for its flights (not all interlinked). Available routes and crowdsourced flights currently proposed for each are displayed on its website and app. The great majority of routes have relatively few crowdsourced flights available, and most on the calendar seem destined never to leave the ground.

A crowdsourced flight needs a minimum number of passengers to be confirmed, i.e. scheduled to fly. The creator has to pledge to buy a set number of those needed seats (the charge held via credit card; nonrefundable should the creator’s plans change). If JetSmarter sells enough seats to make up the difference between the creator’s allotment and the minimum, the flight goes. The creator can also let JetSmarter market any seats between what they actually need and how many they had to commit to buying to create the flight. That’s why only one seat is shown as sold on many crowdsourced flights, even though the creator had to buy additional seats. (JetSmarter recompenses the creator for the allotted seats it sells for them in various forms of credit.) If the minimum isn’t reached, the flight is scrubbed and the creator gets their money back. But that means the creator doesn’t go anywhere, nor do most would-be jet setters who sign up for a single seat on a crowdsourced flight. Perhaps JetSmarter hoped its free-seat offering would build the critical mass of dedicated per seat flyers needed to create and sustain a network like this.

As for JetSmarter’s founding argument, that its proprietary technology enables it to access lift for prices far below traditional charter brokerages (“Incumbent companies have zero experience in next generation mobile technologies,” the company said in 2015), the rates it charges are comparable to those available through a number of providers. No one should shop charter by price alone, but JetSmarter touted that as its primary benefit. Meanwhile, its cancellation, schedule-change policies, and callout times are less attractive than many providers’ offerings. Cancellation charges within three weeks of a flight start at 30 percent and become 100 percent nonrefundable within three days of flight time. Any cancellation of a reservation for travel on more than a dozen peak travel days are 100 percent nonrefundable.

The Route Ahead

Whatever JetSmarter’s fortunes, the concept of per-seat charter that it revitalized continues to find expression and fuel hope in the charter access world. In February, New York City-based membership program Wheels Up introduced its Connect Membership, a flight-sharing program. In November, Florida-based MemberJets, which arranges shuttle flights between Teterboro, New Jersey and Miami, launched Sky380, which it calls “the first B2B private aviation seat marketplace.”

Appropriate for the issues surrounding JetSmarter, the most recent news of the company appeared first in the tabloids rather than the aviation press. In February, the New York Post reported JetSmarter was in play, with the current valuation among potential buyers—the Vista Group most prominently—of the one-time unicorn as low as $20 million. In a written statement following the Post’s report, the company said, “[JetSmarter] has clearly been the subject of a targeted and fabricated campaign. Our digital private and shared charter solutions are taking market share from all the largest players in the industry and causing some to engage in unethical competitive practices.”

One may ask which is more unbelievable: That a provider would offer free seats on private jets and airport transfers via helicopter, or that members would expect such an operation was sustainable? Yet, expanding the market for private aviation means reaching many would-be consumers who know only what they see on a website or in a celebrity profile. When they’re told that massive inefficiencies and inflated prices are the reason private jet travel is expensive, and that someone has solved the problem, how are they to know better?

The lesson for consumers is two-fold, said Shaircraft Solutions’ Butler: “You need to review carefully and get expert advice with respect to any contract of this nature. You cannot rely on the fancy brochures and the fact that there’s a cool app that allows you to schedule a private jet like you hire an Uber. It’s not. It’s a private aircraft on a flight at 30,000 feet. The fact that a company has a celebrity name in its marketing material or someone on its board means next to nothing in terms of credibility or the company’s financial wherewithal.”

The second lesson “is the same as it’s been forever,” said Butler: “If it sounds too good to be true, it probably is. If the promises made to you and others seem impossible to be financially and economically viable, something is probably wrong.”

Meanwhile, a number of senior executives at top aircraft management companies say that charter rates, relentlessly driven down by brokers fixated on selling by cost, are nearing economically unsustainable levels. Aircraft owners, they say, will conclude their 15 percent cut isn’t worth the wear and tear on their airplanes, while management’s portion of revenues can’t support rising salaries for pilots, safety programs, infrastructure, and other investments. If per-seat charter is to gain traction and sop up any portion of the excess capacity it’s designed to exploit, customers will have to understand and accept its true costs. Marketing based on the proposition that charter is overpriced, or that it can be had at first-class airline rates, or that volume can drive down the cost is, on evidence, highly questionable.

JetSmarter’s Legal Matters

JetSmarter’s membership agreement stipulates that complaints be resolved individually through binding arbitration in Broward County, Florida, site of the company’s headquarters. The Supreme Court has generally upheld binding arbitration agreements for such adhesion, or non-negotiable contracts, like those between securities firms and their clients, according to aviation attorney James Butler, principal of Shaircraft Solutions.

But at least eight lawsuits have been successfully filed in state courts by JetSmarter members for claims including breach of contract, unfair trade practices, and fraud, asking for judgments ranging from some $75,000 to more than $3.4 million. Other suits have been dismissed, apparently settled, or withdrawn for other reasons. The courts accepting the JetSmarter cases may have felt JetSmarter’s contract wasn’t valid, negating its stipulations, Butler said: “If one side has the option to change all the material terms, then arguably there is no agreement.”

The lawsuits describe similar experiences: plaintiffs allege they signed or renewed memberships based on verbal assurances they would have access to free flights on business jets. Some plaintiffs claim being told they could lock in grandfathered benefits by joining before a planned elimination of free seats.

When Florence Zaborkritsky complained that her free flights were eliminated after she paid some $9,000 to renew her membership in March 2018, her JetSmarter representative simply said free seats were no longer a “viable business model,” according to the suit she filed for breach of contract and fraudulent inducement in U.S. District Court, Eastern District of Pennsylvania in January. Zaborkritsky had joined in 2016 and renewed, despite cutbacks in service and imposition of additional fees and costs JetSmarter imposed, the suit says, because of promises that her free-flight benefits were grandfathered. Her complaint cites additional costs of some $2,000 for a seat to Miami from New York and $3,500 for a seat from New York to Los Angeles by way of example of the monetary damage she suffered in the contract breach. She asks for damages “in excess of $300,000.”

Jennifer Worthington also re-upped last spring with two co-plaintiffs, each paying about $9,500, but said in her suit that by last summer free seats were no longer available. In reply to her complaints of underhanded sales tactics, her JetSmarter representative wrote, “There was no bait and switch. As discussed, it was a business decision to pivot the business model...If you show the contract you executed to the attorney it would state the company has the right to modify memberships, which is what happened.”

Her action, filed in U.S. District Court Southern District of New York in January, alleges violations including fraud and unfair trade practices. Based on the value JetSmarter put on the flight services they were allegedly denied, the plaintiffs ask for $2.3 million in damages.

Leonardo Galvez, who joined in 2015 for an annual fee of about $8,500, said even before his renewal was due in 2018 he was offered a Sophisticated membership ($50,000 annually) for a three-year term at a discounted rate of $97,500. His suit, filed in the Southern District of New York last November, says he borrowed the full amount and paid his membership shortly before all free flight benefits, including his, were terminated. Based on the “benefit of the bargain” JetSmarter represented, Galvez seeks more than $3.4 million in judgment and damages for the three years of missed flight opportunities.

The allegations notwithstanding, “It’s unclear what damages people really suffered,” Butler said. Plaintiffs would need to cite “specific examples of a flight that couldn’t be taken because of the change in rules and the alternative flight booked and paid for,” according to Butler. “Not being able to take a flight because the rules changed wouldn’t suffice.”

The possibility of a class action arbitration in Florida has been raised, and a draft of such a filing made on behalf of several plaintiffs can be found online. The two law firms named as counsel on the document declined to respond to inquiries from AIN. Impediments to a class action are twofold, with JetSmarter’s stipulation of individual arbitration the first. Additionally, said Butler, “For class action, people have to be in similar situations. If you start to have variance—when they signed up, what flights they took, what contract was on the website when they joined—then they may get pushback from an arbitrator” in seeking a group action.

The possibility of a class action arbitration in Florida has been raised, and a draft of such a filing made on behalf of several plaintiffs can be found online. The two law firms named as counsel on the document declined to respond to inquiries from AIN. Impediments to a class action are twofold, with JetSmarter’s stipulation of individual arbitration the first. Additionally, said Butler, “For class action, people have to be in similar situations. If you start to have variance—when they signed up, what flights they took, what contract was on the website when they joined—then they may get pushback from an arbitrator” in seeking a group action.

Butler noted that even if plaintiffs’ suits were successful, “the trough may be shallow” in terms of collecting judgments. 

Nevertheless, according to an early April CNBC story, a preliminary agreement is in place between JetSmarter and some members to settle their lawsuits. The agreement is slated for a final approval hearing in June, according to CNBC, and would cover members between September 5, 2014, and June 19, 2018. The settlement would include $3 million for payments to JetSmarter members and possibly free memberships and flight credits, according to CNBC.