BlackJet and the Political Economy of Disruption

On Friday, it was reported that one of the VCs behind StumpleUpon and Uber, Garrett Camp, has taken collaborative consumption aloft.  Camp’s new company, BlackJet, hopes to transform upmarket air travel in the same way Uber revolutionized high-end terrestrial transportation.  And the company is not short of high-profile backers of both the Hollywood and Silicon Valley variety.  Initial investors include tech celebs Marc Benioff (Salesforce) and Matt Mullenweg (WordPress) and hollywood stars Ashton Kutcher and Will Smith.

The company, which will start with limited routes, will use technology and the Internet to fill up unused space in private jets.  As VentureBeat explains, the market inefficiency that Blackjet is trying to reduce–and profit from–is considerable:

A third of private jet flights, Camp says, are totally empty as planes are shuttled around the country, and most of the remaining two-thirds are partially empty.

BlackJet, like Uber, ZimCar, Airbnb and similar tech startups, is harnessing the power of the Internet and prevalence of mobile devices to improve the efficiency of the market.  Everybody wins. (Well, except for the airline industry establishment, which I will get to in a sec.) The owners of the jets make some extra spending money (it’s a recession, people!) and a slightly larger swath of the upper class gets access to the luxury of private jet travel.  Okay, so it’s not Mother Theresa stuff — and I imagine the BlackJet PR people might want to put something about energy savings or something in their press releases — but it is applying a tried and true disruption formula:  assess market, look for inefficiencies, apply technology, scale and take a cut of the savings.

From a DisCo perspective, what interests me is contemplating the response of the traditional airline industry (incumbent response to efficiency-enhancing, tech-enabled business models is a frequent theme here).  There were private-charter operators that sold space on private jets before, but I would imagine that last-second nature of many of these empty flights coupled with the hassle of doing proactive research among the many competing agencies meant the transaction costs prevented these services from offering much in the way of real competition to airlines.  Now, if a well-funded startup compiles a comprehensive, up-to-the-minute database of empty flights, uses scale to achieve lower prices and sufficient inventory, and allows users the convenience of booking these flights at the click of a button, they might be onto something.  So, pretending I am a big wig corporate exec that had an urgent meeting come up across the country on short notice — and the PR department took away my corporate gulfstream — I searched Kayak for a last-second, first-class jaunt from New York to Los Angeles.  The lowest price: $3450 (but most prices were between $5,000 and $8,000).  On BlackJet, the price: $3500 ($7,000 for a round trip) – and I don’t have to deal with long security lines or the proletariat.  Plus, I still get to scoff at those people who fly “commercial”.  Sold.  Although this might not sound like much of a problem for airlines, don’t forget they operate on incredibly tight margins.  Usually somewhere between one and three percent.   And that’s the profitable ones!  (In fact, the average profit margin for the global airline industry over the last 40 years is a miniscule .3%.)

So, it is pretty clear that the premium tickets mean the difference between profitable and not profitable for the major airlines.  Therefore, it does not portend well for the airline industry if BlackJet can scale at a similar rate to Uber.

So, if the political economy of disruption has taught us anything, threatening the business model of established, highly regulated incumbents leads to a concerted effort to marshall political and legal resources to put said disruptive entrants out of business. (And if you don’t think that BlackJet is gunning for the Airline establishment, check out the second ever tweet from the company’s official twitter account.)  Furthermore, regulated industries — even ones with low profit margins — tend to have robust lobbying and political operations (partly out of necessity because they have to deal with federal regulators frequently on all those regulations).  So, it should be no surprise to learn that the U.S. airline industry does indeed have a robust lobbying operation.

To make matters more difficult for disruptive entrants, regulatory capture is commonplace in highly regulated industries.  I mean, where else are you going to work after a stint as a staffer on the House Aviation Subcommittee and the FAA (like the Air Transport Association’s SVP for Legislative and Regulatory Policy).  And the revolving door is not one way.  The Chief of Staff and COO of the FAA both come from large commercial airlines.  (Note: I am not impugning anyone’s motivations or integrity.  The truth is, when you spend your life specializing in Aviation Law and Policy, the FAA or the Air Transport Association are probably natural fits.  It’s just a fact of life.)

Given that BlackJet is but a few days old, there has been no discernable response from the airline industry.  And there might not be, especially if the company never really takes off (pun intended).  However, if BlackJet does prove to be successful, I would bet on a similar  response by airline incumbents that we have seen in other industries:  aim to saddle the disruptive company (or companies) with many of the same rules and regulations that apply to the traditional industry–whether or not they make sense in the case of the disruptor.  Or just make their lives difficult in general without even bothering with a coherent rationale.  One thing for regulators and Congress to keep in mind though–“it’s not fair” should not be the standard that new regulations are judged by.