Despite its recent layoffs, DayJet is standing by its business model saying its members and the number of frequent flyers have proved the model, but the condition of the capital markets have forced it to slow its growth for at least six months. It made the point to say that it was not contracting its already extensive network of 33 DaySpots and 12 DayPorts in the Southeast.
The layoffs, numbering about 100 employees from both its current staff and those hired in anticipation of its planned growth, was precipitated by the company’s failure to raise the $40 million needed during the first quarter to continue its expansion. Right now DayJet is delaying the delivery of more of the reported 1,400 Eclipse 500s it has on order, according to CFO John Staten who cited the chaos in the capital markets which forced a need to “right size the business.”
DayJet is reportedly the largest customer with over half of the 2,500 Eclipse 500s on the manufacturer’s order book. The delay in equipment acquisition, means Eclipse will have early delivery positions available either to adjust delivery dates for other customers or for new customers.
Interestingly, while many assumed it was the run up in fuel prices that forced the slowdown, Staten indicated it was not. “We are very fortunate,” he said, “Unlike the airlines we are using the Eclipse which is very fuel efficient. Fuel, as a percentage of overall operating expenses, has only risen 16 percent. Revenue has grown 40 percent month to month. Is the service catching on? All the metrics say we are on to something. We have new members and new travelers. Fifty percent of our members have already flown once. Another 40 percent booked again. Some customers have flown 53 times, others 20+ times. Once they fly with us, they book again within six to eight days. There is a pent up demand for easy transportation, especially in the secondary markets. This is nothing more than a capital constraint issue we are dealing with.”
Last week, President and CEO Ed Iacobucci said in an email the company was scaling back its 2008 growth plan, reducing its employee base across most business areas.
“These changes were caused by external economic factors and are not a reflection of a weakness in the underlying DayJet business model,” he said. “In fact, our first phase of operations, the ‘Proof of Concept’ phase, has gone exceptionally well. Response to our ‘Per-Seat, On-Demand’ service during this first phase was very consistent with our expectations and we answered many nagging questions: Yes, customers will fly in a small jet; Yes, customers will embrace the per-seat model; Yes, customers will pay a premium for tangible value; Yes, the technology works as planned; and most importantly, Yes, we can find these customers. All in all, we have signed over 1,500 members, more than 550 of which are active travelers, and nearly 200 are frequent flyers.
“Unfortunately, a proof of concept is only the first step to profitability,” he continued. “The next step is equally important – growing the network to a density that generates operating margin. Our projections have always indicated a network of 30-50 ‘line’ aircraft serving 20-30 fully developed DayPort markets was needed to reach critical scale. More importantly, this required a $40M infusion of operating capital in the first quarter of 2008. I won't dwell on this point, but suffice it to say that given the current state of the U.S. capital markets, the timing of our planned financing could not have been worse.”
The company had projected a network of 30 to 50 aircraft, serving 20-30 fully developed DayPorts was needed to reach critical mass. “Without the growth capital required to open new markets, the company must scale back to a size that is consistent with the demand of our existing customers and service region,” Iacobucci continued. “DayJet's business model….requires investment ahead of growth. We hired and trained a number of employees in anticipation of future growth and always planned for additional capital investment at this stage. And when the capital markets recover, then we would expect to resume the growth forecast in our original plan.”
“One of the great unknowns when we launched in late 2007 was the absorption rate,” said Staten. “Some markets are going gangbusters and others have had a much slower start but are about where we thought they’d be at this time.” He cited Pensacola as an example saying at startup, the company knew it was facing an uphill battle despite its key role in its growth strategy. “We knew travel there was north and west and not south and east so that has come along slower. But Naples, Tallahassee, Gainesville, which Continental is abandoning, and Boca Raton are doing great. So, we are not changing any cities or services. We are just adjusting the mix. We didn’t realize that the capital markets were going to melt away the way they did. So we’ve chosen to take a conservative path as we work through these market conditions.
DayJet has 28 Eclipse 500s aircraft is currently making adjustments to its delivery schedule. “Eclipse is working with us. Overall, the number and the contract remain intact. For Eclipse this is an opportunity to bring those on its long waiting list forward.”