0:02
I just interrupt you before we started recording.
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0:04
I wanted you brought up your talking about the addiction of flying privately and and and and I um I have three children and they're six years apart.
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So there's 12 years from the oldest to the youngest.
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And when I was building the business and of course remember I started the business I was flying too.
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So I would fly and run the business.
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When you raise a child you start on braille and you start to figure out like you know what's the relationship going to be like? Did I spend enough time?
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Did I miss little league games?
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But I decided I was going to give them a love of travel.
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So I had them all skip eighth grade and we traveled during their eighth grade year and we didn't leave for for the whole year.
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We'd go on six three-week trips and during that time I would homeschool them and I'd make them build a curriculum around where they wanted to go and we didn't take them to Paris and London.
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I mean we took them to places around curriculum who wanted World War II, who wanted to go to India, who was fascinated with Asia.
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So we built these curriculums around.
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Actually, the two places I made them all go was Awitz and North Korea.
1:00
So, I'm probably the only person that's been three times to to North Korea.
1:03
But, you know, life changed.
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So, starting 2005 to 2017, think of the the the 12 years between the youngest one who when he did his trip in 2017, I realized had never been on an airline.
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And I >> an you mean a private jet? >> No, no, no.
1:22
He never been on an airliner because life for me had changed.
1:25
>> Never been He never flown commercial.
1:25
He never flown commercial.
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And so I decided that's a bad way to raise a child.
1:31
[laughter] So I decided his name's Austin.
1:31
So I said to Austin, um, we're going to go we're going to go commercial. We were going to Tokyo.
1:37
And we get we we go to the airport. Never done this before.
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We wait in line, check our baggage, uh, you know, wait for our seat to be called, you know, sit down.
1:46
Don't take your shoes off.
1:48
But but all the things you do, right, security and so on.
1:50
We sit down and finally we're getting ready to take off and I look over at Austin.
1:54
I go, "Austin, what do what do you think?"
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He goes, "Hey, Dad, there's people on this plane. I don't know."
2:00
So, what he didn't get was like the commercial the public part of of commercial transport.
2:06
>> It's funny that you you we were talking about this right before we started recording.
2:09
I was like, "We got to hit play cuz I'm so interested in like you started talking about, you know, a lot of people that build successful companies like you do.
2:15
Uh they're there's just this huge doubt in their mind like I, you know, I'm hugely driven.
2:21
I have a goal in my life, but like there has to be things that are sacrificed for that goal.
2:24
Obviously, time with the children is one thing that that people do, but one of the things you didn't even know I was going to ask you first was I heard you talk about something that's interesting to me.
2:32
That is you you decided to share your wealth with your kids, not when you die, not when they're older, but right now.
2:40
You have a very interesting perspective on this.
2:43
Can you explain what you're doing?
2:45
>> I became to believe that we have the wrong perspective on raising children.
2:49
And we seem to think it's about this time we spend with them.
2:51
So therefore, we kind of raise this helicopter mentality, right?
2:54
We go everywhere with the kids.
2:56
We don't let them out of our sight anymore.
2:58
When I was growing up, I left at 9:00 in the morning on my bike and I just had to be home for dinner.
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And mom didn't chase me around Cleveland, Ohio. Right? Those days are gone.
3:08
We tend to think that we put time into them. That's the essential.
3:10
When what we really need to put with them is we need to show them that we trust them and they can trust us.
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Think about wealth transfer and if you don't tell your kids about their financial arrangement, you're saying you don't trust them.
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And uh I I told my wife grow, you know, when the kids were young, I go, you know, we're thought we're thought as parents to talk more about sex than we are about money.
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And the reality is money will get you in a lot more trouble than sex will.
3:36
So I had three observations about wealth transfer.
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One is that um there's a whole cottage industry around trusts and the management of generational wealth transfer and there's big money in it.
3:51
The system wants you to think you have to control wealth because that brings in the trustees that brings in the law firms and the banking firms and all those necessary professionals to kind of skim away your your wealth.
4:01
Second of all, the Chinese have a saying the the the the son of a lion is a lamb.
4:06
And so, uh, the, uh, I think people that create a lot of wealth, particularly if it's entrepreneurial wealth, tend to have they're very they're lions.
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And lions are control things.
4:19
And so, why not buy into the system where you control your children?
4:24
And so, this this is why these trusts are set up. At 25, they get this. At 35, they get that.
4:28
At 45 we get they get this. Right?
4:31
And this is kind of a a way to control from from the grave or for the patriarch or matriarch or the wealth to still be influential even when they're not around because >> they're used to being they want to be in charge.
4:45
They want to be important.
4:45
They don't want to lose their their relevancy.
4:47
And then finally, there's the most bizarre one to me is if we tell our kids, if we give our kids wealth and we tell them about wealth and they know about this, they'll become lazy.
4:56
Well, man, does that say you were must have been an awful parent if that was the one thing that that that flips the switch.
5:04
You couldn't parent through that.
5:04
So, I decided a past number one, most importantly, I love my children and I love watching them be happy.
5:12
I want to watch them spend their money.
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I want to watch them be wealthy.
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But most importantly, I want to help them.
5:17
I know a little bit about re about wealth.
5:20
I knew a little bit about now I'm accidentally wealthy.
5:23
I didn't get here with some strategic, you know, some monetary plan, financial plan. >> Hold on.
5:28
We're going to we're going to dive deeper on that.
5:29
But give me some background.
5:31
Did you grow up middle class, poor?
5:32
Like, what was your childhood like?
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>> Oh, my father was a grade 12, worked for the US government. He's actually a spy.
5:39
Uh he had a fascinating background.
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He came out of World War II, worked in the OSS, worked in naval intelligence, and then um had a uh uh the in the 60s, early 60s, Bobby Kennedy set up the OCD, the organized crime drive through the Treasury Department.
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And my dad was a part of that part of that that group at that investigated uh investigated domestic mostly um mafia, mostly organized crime in those in that era.
6:04
His undercover name was Richard Dill.
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Don't get he was investigated in a lot of cases Italian. He was Italian.
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They changed his name to D.
6:10
Think of that's that's the government at work.
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I remember [snorts] one time he, by the way, he only in 17 years of undercover work, he only worked on three cases.
6:19
So, shows you the time it takes, right, to be in to work.
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>> So, his undercover name was Dick Dill. >> Richard D. Dick D.
6:25
[laughter] >> Richard's always Yeah. Yeah.
6:27
He was investigating the police chief of Lincoln, Nebraska.
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and ties to the organiz I'm 7 years old at the time.
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I don't know much about it, but but I knew that I knew that we had to go live in Nebraska for 2 months cuz he was there undercover as a family.
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This was the greatest time of my life.
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We stayed at a holiday had a pool.
6:47
I'd never been any place where they had like a pool outside your so that hits on.
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It's like middle class somewhere around there. Didn't have a pool.
6:54
The reason I wanted to start on this and I'm going to still pull on this thread if you don't mind is because my I have this other podcast called Founders.
6:59
I read biographies of history entrepreneurs.
7:03
People struggle with this all the time.
7:05
It's in these books for going back 200 years.
7:07
They're like, I was essentially the the the problem is I was the son of a poor man.
7:10
My kids are the son of a rich man. What do I do here?
7:12
And so I had the the luck of a lifetime to be able to go and have dinner at Charlie Mer's house right before he died.
7:19
Probably 6 months before he died.
7:19
And one of the questions I asked him with is because me and him had run he read, you know, hundreds of biographies. I was doing the same.
7:25
doing the same. That was the the the my my like craft and the main before I started the show like all I was focused on and I was just like what's the your answer to that like you read the same books I do what what's your answer you know he grew up he wasn't poor but they were in mall it was like a normal life and he goes you give them the money and
7:41
you know cuz monger is just no straight to everything and I go why he goes cuz what he goes they'll hate you if you don't and he goes what's the point of building a relationship and making all this money and then at the end of your life your kids hate you and that was his very simple way of looking at this >> fantastic fantastic fantastic insight, right? Like I said, I want to watch them
7:56
Like I said, I want to watch them enjoy their wealth.
7:59
>> He did say one funny thing though cuz somebody I think I I may have asked him to follow up either me or somebody else to follow up and I go, "Yeah, but won't that make them a little less ambitious?" He goes, "Yes."
8:08
[laughter] >> And in his case, I think he gave he gave a couple hundred million to I think nine kids or something like that.
8:13
And he's like, "Yeah, some of them have $250 million and they're not as ambitious." Like, so what? >> They're different. Every kid is different.
8:20
In fact, one of the things we have these family meetings once a year where we talk about wealth and one of the things I start out with each project because when I look at why families rip apart over wealth, right?
8:28
It's really in two areas.
8:30
One of them is that they feel somehow they're entitled to be equal, but they're not.
8:35
I have a child that started inheriting wealth 12 years before the youngest one.
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You don't think his estate, you don't think what he has appreciated at different rates than the youngest one?
8:44
So, I start every meeting.
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I go, "Look guys, you're not equal.
8:46
It doesn't mean I don't love you.
8:47
doesn't mean it's just it's just how things are.
8:50
And the sooner you get over that fact, the happier you'll be.
8:52
It's just like it wasn't set out that way.
8:56
>> So, have you already given all the wealth you're going to give to them or that you keep how do you like how >> Well, um Well, yes, pretty much so because we gifted shares of a family limited partnership when they were very young.
9:08
>> Did you get this idea from Sam Walton?
9:09
>> Uh no, not >> you know that's how Sam Walton avoided a lot of he didn't do it to avoid estate tax.
9:14
He wind up He's like, "Well, if you want to avoid estate tax, you give give your kids the asset before it appreciates. It's so logical.
9:19
The crazy thing is he did this, his father-in-law gave him the idea.
9:23
I've read every single book on Sam Walton and his father-in-law gave him the idea.
9:27
They did this when the value of Sam Walton's company was like I think the shares that he gave to his four kids were $5,000 each. Ditto. Okay.
9:34
I started the family purchase in 1990.
9:37
I have my first child in 1995.
9:39
So, I have the vision of what it's going to do 5 years before it happens, right?
9:45
And as soon as I could, as soon as I could, I gifted shares.
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When they were born, I gifted.
9:49
It's a family limited partnership.
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So the general partner, which is me, still can, you know, I have all the flexibility in the world to make distributions.
9:56
It's a phenomenal vehicle. So Walton had it right. It's a great vehicle.
10:01
So they're not created equal.
10:04
I want to watch them happy.
10:06
I want to watch them use their but but also I want to guide them.
10:08
I want to be here alive when they're making stupid decisions with their money or making good decisions with their money.
10:15
I've made stupid and I've made bad decisions with money, too.
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But so, so why can't I be the one to guide them?
10:22
Otherwise, assuming they they still love me when I'm dead.
10:25
They tend to love you more when you're dead.
10:27
But in any case, assuming they still love me, well, they're going to go, "What would dad have done?"
10:32
Well, isn't it better to like be here alive when they ask you what what should I do, Dad? found it.
10:38
So I think sometimes we want to rule from the grave.
10:41
You have this trust environment that's there and then if you're going to spo this is going to spoil your kids, then you really weren't that good of a parent.
10:47
If that was the one thing that did it, they couldn't handle this.
10:50
Or maybe the the alternative is it's all the more reason to give it to them when they're alive so you can guide them through it, right?
10:56
As opposed to when they're dead and you can't do anything when you're dead and you can't do anything about it.
11:02
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13:11
Have you seen any downsides to this decision? >> Not one. Not one.
13:15
In fact, I've seen many things I didn't really I didn't think would happen.
13:19
think would happen. So for instance, I asked them go now remember this is going back when they're young I started talking to them about money now at 5 years old 6 years old now we're not talking about tax effective or compounding interest but what I taught him early on was giving I so our early
13:36
family meetings were all about who should we give money to and why loved animals my son loved Catholicism uh and my youngest son when when I remember the first time we were giving he was maybe 6 years told he always wanted to give it to Disney and I was like well us and
13:53
Disney is not really a non forprofit like [laughter] >> they're doing okay >> they have they have their own methodology so I taught them first to give >> then before we started really diving into the estate and I really went into that when the youngest one was around 16 where we really started going through
14:09
like every year we go through a spreadsheet where's the money how does it transfer who has control of it where's the bank like like all the stuff you need to know everything but before we did that we did a we did a personality test and everybody reported on their personality cuz kids are different. Who who thinks leftrain, who
14:25
Who who thinks leftrain, who thinks right brain.
14:28
So I wanted the kids to understand how they could get along. So I started with that.
14:32
So then we started talking about money, how it transfers, like what we would do with it. Two surprising things.
14:38
Number one is that it creates this trust and I have these I have this amazingly trusting group.
14:46
Now the kids in the group of five, my wife and I and the three children, they report.
14:50
They show us their estate and what they spent money on and we share this.
14:55
>> How old are the kids now?
14:57
>> So 37 uh 20 uh 31 and 20 and 25. >> Okay. >> Yeah. Okay.
15:02
So it's been going on for it's been going on for a while.
15:04
But the other thing like I you know I mentioned I'm accidentally wealthy.
15:08
You have to realize that even when we were talking about this, we weren't talking about it that the volume we're talking about say I mean my personal net worth has accelerated in the last 6 years along with Flexjet which is the asset I own and you know one of one of the largest assets I own and and and and protect.
15:25
>> One of it's got to be the largest asset.
15:27
>> Well, it's the largest one.
15:27
But uh >> what else you got that I don't know about?
15:30
>> Well, I I mean I'm I always say I'm an inch wide and a mile deep.
15:32
I've made a lot of investments only in aviation.
15:34
And I probably know more about the area of aviation. I've invested it.
15:38
I own SIMCOM, which I sold to CAE.
15:40
I owned I owned what is today um uh uh Atlantic Aviation. >> Hold on.
15:45
Let's so let's this is exactly so I want to start talking about the business because I think I understand the what you did on with their kids and why you did it.
15:52
And I think again anybody's wealthy has to think through these things.
15:54
I think discussing them openly is service to other people. >> Oh, I'm sorry.
15:57
Let me finish what I what I learned. Go. Okay.
15:58
So number one, this amazing trust that they got amongst themselves, right?
16:01
They started investigating and reading about biographies and families that blew it and they came to realize that the third transfer of wealth, the third generation is the tough one.
16:12
And so they've started to talk about >> sleeves to share sleeves in three generations something very durable through human history.
16:19
>> So they've come together to talk about the next passing of wealth and generational and two two things that they they've come up in the last year.
16:25
One is they decided not to include spouses in these meetings.
16:27
They decided that each one of them, two of them have spouses, one doesn't.
16:32
They decided in these meetings that each one of them will decide how to share financial information in their own family.
16:38
That this isn't a group share.
16:40
This is us five and we've been doing this for 10 years, 12 years, and it's not something we're not going to toss people into the middle of it because we don't know their personalities.
16:49
We didn't have 10, 12 years of grooming to to get them to this point. So that was number one.
16:54
Number two was when they look at generational wealth transfer and why families come apart.
17:00
One of the things that happens other than they all feel like they weren't treated equal.
17:03
They're mad at the patriarch for not treating them all equal, which we've gotten over.
17:06
But the other thing that that that happens is one of them does really well, takes the money and makes a great investment and the other ones do less and then there becomes a little jealousy amongst them.
17:19
So they decided they came to the idea that any investments they all make they're going to share and the person who has the investment three kids the person that has the investment can put 60% of it in but has to offer but not required 20% to each of the other siblings and they can participate or not thereby alleviating the the opportunity for them to be jealous.
17:42
Look I gave you the opportunity to come in you came in or you didn't or we share the upside together.
17:47
That was their idea, not my idea.
17:50
>> That's really interesting.
17:50
Okay, so let's go to the source of the wealth. You were a pilot.
17:52
Okay, >> take me back to like first of all, how old were you when you learn how to fly planes?
17:57
>> You talked about my upbringing with my parents a little bit.
17:58
My dad was a government employee and um I went to a a Jesuit high school, St.
18:03
Ignatius, and they sent at the time in the 70s, they sent 30 people to Notre Dame.
18:07
They moved them right from there to to Notre Dame. And I loved it.
18:10
I wanted to go there and I was uh I got I got I got admitted and then I'm going up for a visit.
18:15
And I grew up and you know houses have 2x4s. Ours had 1 by twos.
18:19
So I could hear my parents.
18:22
I'm an only child and I could hear my parents talking the night before I'm going to Notre Dame and they say you have to tell him we shouldn't let him go because what if he goes up there and he likes it and then he wants to go and we tell him we can't afford to send him.
18:33
My mom was saying I wouldn't let him go and my dad would go let him go maybe he doesn't like it and then he comes back and says I don't want to go anyhow and then we don't have to have the subject.
18:44
But I knew going up for that class visit that didn't matter how much I liked it.
18:48
I knew what was coming when I came home and said whether I wanted to go or not.
18:51
So I was inclined not to go and put my parents in a bad position.
18:54
When I get there I ask them on campus, is there a um is there financial aid event?
18:58
Like well you missed the deadline. This is March.
19:02
But the Vietnam War, this is 1974.
19:04
The Vietnam War was still very ripe, very raw.
19:08
And uh people did not like the military.
19:10
And so they said, "If you're willing to go into ROC, they're always short of the candidates.
19:15
They never fulfilling their quota."
19:17
So for some reason, don't ask me why, I decided I wanted to be a Navy pilot.
19:21
Maybe I like the double breasted suits, whatever.
19:24
So I go down to the ROTC building and there's no cell phones and I'm looking through the glass window.
19:31
I'm trying to read upside down on the phone what number to call on Monday morning to tell them they had a new naval aviator.
19:37
>> Why did you pick aviation?
19:37
You had never flown a plane or anything.
19:39
>> No, I had to go in the military.
19:39
I know I had to go out with DC.
19:41
I figured if I got to go into the military, flying looks like a lot of fun to me.
19:44
I'm copying the number down and somebody taps me on the shoulder and they said, "Can I help you?" And I said, "Yes, sir.
19:51
I'm an incoming freshman at Notre Dame and I want would like to join the Navy because I want to fly."
19:55
And he said, "You've been admitted to Notre Dame." I said, "Yes."
19:59
He goes, "I'm shocked because they usually admit smarter people than that."
20:02
[laughter] He said, "The Navy has ships and the Air Force has planes. I'm Colonel Mueller.
20:09
I'm head of the Air Force detachment and I'm enrolled in the Air Force.
20:11
And I never heard I never knew how my parents reacted, but I came home >> cuz then they'll pay for school. >> Yeah.
20:19
I don't know that I've ever told the story.
20:20
It was the first time I learned how to defraud the government.
20:23
>> It was [laughter] I I'm a freshman at Notre Dame. I'm enrolled. I've got my hat. I got my uniform.
20:27
And um and and the the the sergeant who administered that said, "Now, I know you I know you're a plea here, but here's how here's how you you get a $100 a month stipen for general expenses."
20:37
He goes, "But there's other income."
20:39
He goes, "Here's what you do. You go to the bookstore.
20:42
You buy all brand new books.
20:44
You bring me the receipt.
20:44
I'll reimburse you for the new books.
20:47
You take them back to the bookstore and then you buy the used books."
20:49
[laughter] So like my first my first interaction with the military is I was taught like how to take advantage of the US government.
20:55
Do you take time off from Notre Dame to learn how to fly like? >> No, no, no. You learn it concurrent.
20:59
You you you you you one day a week and this was the tough one.
21:03
One day a week you have to stay in uniform and and believe me at that time post you know that that p that Vietnam war era that was not an easy task because people did not like the military at all at that time.
21:15
So you know you have all these courses around the air force in the summer you go to whatever your summer program was your summer school and so on and then so that's where I learned to fly.
21:25
So what kind of planes do you fly the first?
21:28
>> Oh, you know the Cessna 152, Cesna 172.
21:32
>> They're not putting in like the F-16s.
21:34
>> No, that comes after [laughter] grade. >> No.
21:36
In fact, you know, when you graduate, what happens then you go to general flight training which is done like in T at that time was done in T37s and T-38s and then you get assigned, you know, it's a year and a half before you get control of a jet in the Air Force.
21:49
There's the primary training, then there's the training you you go into. >> Okay.
21:52
So you you mentioned, hey, I'm an inch wide, but I'm a mile deep.
21:54
All my businesses focus on the this we mentioned Buffin and Munger.
21:58
I don't know if we said on the show if we were talking before, but like we me both mentioned Buffin and Munger a bunch of times and their whole thing is like know your circle of competence and just stay inside that circle.
22:05
So that sounds like what you did.
22:07
Your first >> I always say my portfolio of investments is is unbelievably diversified. It's cash and airplanes.
22:12
That's my [laughter] diversification strategy.
22:16
>> So what's the first business you do in aviation?
22:20
>> So first of all, I don't I don't I don't think of myself as a businessman.
22:22
In fact, I I'll often say there's two people that are very successful in business.
22:27
One is a person that just gets business.
22:29
They could run a yogurt store.
22:31
They could run a steel manufacturing plant. They just get business.
22:33
They understand how they're connected.
22:35
They see market strategy and business is just very clear to them.
22:39
And the other ones that are just passionate about what they do.
22:42
You're passionate about your podcast.
22:43
You're successful in business because this is what you love to do.
22:45
I'm successful because I love to fly and I learned everything. Right.
22:50
that that's what put me here.
22:52
But I didn't I never had a goal to become wealthy or to build a business.
22:56
So >> that's the accidental wealthy part you're talking about.
22:59
>> Of course, in many ways, right?
23:01
Accidentally that I even formed a business.
23:02
Accidentally that uh you know that when I go into private aviation there's only 5,000 jets in the world and today there's 35,000 jets.
23:10
So part of my luck >> wait say that part again. >> Yeah.
23:15
>> When you started >> So 1985 figure by >> there's only 5,000 jets.
23:19
>> 5,000 jets in the world.
23:19
And today there's 35,000 private jets in the world.
23:23
So part of my part of my luck was just to be when this industry grew up.
23:26
I entered an industry because I could have been an airline pilot.
23:30
I could have gone into I could have stayed in the military, but I I was attracted to private aviation. It was more free to me.
23:36
It was more it was more spontaneous. It was more interesting.
23:39
Uh the people you would meet that there's no cockpit door.
23:43
I could have conversations with passengers and learn from them.
23:45
So, who knew in 1985 that private aviation would be this unbelievable growth industry in the next 40 years, right? Didn't know that.
23:54
So, that's that's part of it.
23:54
But but what I'm really doing is flying.
23:57
I leave the I leave the military.
23:59
I become a cargo pilot flying air freight.
24:01
Then I go to Northwest Orient.
24:04
I'm at Northwest Orin in a very brief period of time. They have a furlow. So, I lose my job. >> So, wait.
24:09
Northwest Orient doesn't exist anymore. >> No, they aine. It was an airline. Yeah.
24:14
It was it was you know the airlines were Panam, TWWA, Northwest the the airlines that flew all around the globe.
24:19
They were the good air they were the airlines that were the prestigious ones. >> Okay.
24:24
So you're in Northwest uh Orient.
24:26
You said you got furled which is another term for I don't have a job.
24:28
[laughter] >> So I came back to Ohio.
24:31
Ohio birthplace of the Wright brothers.
24:35
>> Well not that's in southern Ohio but >> yeah but I think Dayton right something like that.
24:39
>> But my my father was he he didn't see it as a very stable career.
24:43
He he said, "I know a lot of piots and they're all airport jockeyies.
24:46
They just kind of move from place to place and they end up taking whatever job they can.
24:50
It's just not a stable industry."
24:51
So, it was at that time that I I I went to law school and uh really um >> So, you love flying and pilots.
24:59
Your dad's giving you hindsight bad advice considering what your life has turned out.
25:06
[laughter] >> Uh and you're going to do something you don't love. >> Correct. Correct.
25:11
>> For prestige or money.
25:11
said you needed something to fall back on in case this aviation thing doesn't work out.
25:15
Well, the aviation thing worked out. Okay.
25:18
But >> did he live long enough to see it?
25:21
>> You know, he died in 1991, so kind of. >> Okay. >> Kind of.
25:25
Uh he saw me he saw me have a business. He saw me fly.
25:28
He flew on one of my first lure jets. Loved it. Okay.
25:32
But he never I mean, no, he would never he never saw this coming. Got it.
25:36
>> The only job I can have in law school is a part-time pilot.
25:38
So, I'm a fill-in pilot for a company called J&J Aviation.
25:43
And J&J Aviation was a was a fraud.
25:43
I mean, I'm just an employee there.
25:46
But what they did was in the early ' 80s, they had investment tax credit of 10%.
25:52
And if you bought an aircraft, you got an immediate 10% credit.
25:54
So, they would sell these citation jets for $750,000.
26:00
So, they had about a fleet of about six airplanes.
26:02
And then they they'd sell these citation jets to investors on the West Coast, a long way from Cleveland.
26:09
And they would they'd get the $75,000 investment tax credit.
26:12
And then they pay the $750,000 for the plane.
26:14
And then the head of J&J was a guy named Jeff To.
26:18
And every month he would pretend that these aircraft were on lease, but they weren't.
26:24
The aircraft didn't even exist.
26:26
He would make up a dummy statement.
26:26
He would say, "It flew 40 hours this month.
26:30
The revenue was was $90,000.
26:30
the expenses were 78,000.
26:33
Here's your $12,000 check.
26:35
So, he simply put the 70 the million5 the two aircraft.
26:38
He put the million5 in the bank and kind of dribbled out the interest in a fake statement.
26:44
Well, finally after about a year and a half, the owner said, "We got to see our jets."
26:48
And they were never they were always in the air. They were never around.
26:52
But one day, they they caught him and he flew the coupe.
26:53
So, this little company J&J Aviation had like three employees, you know, a secretary, a dispatcher. >> Is it just charter?
27:00
What's it like was using these managed airplanes or these these phantom airplanes, but there were six of them.
27:07
They were Navajos and these little tiny piston engine aircraft.
27:09
And the dispatcher dispatcher there, Rick Michaels, calls me up and he says, uh, he said, "You know, nobody here wants to do this and and I don't have I'm not smart enough to do it, but but you seem to know a little about aviation.
27:22
You should buy the company." So, I called my dad.
27:26
>> And you're how old at the time? >> 26.
27:29
>> And you never thought you were going to be an entrepreneur?
27:30
No, in fact, I didn't even buy this company to be an entrepreneur.
27:33
I bought it so I could still have a job.
27:34
Like, I needed to make sure these airplanes didn't go away so I could keep flying.
27:37
I mean, that was the whole goal.
27:39
And Rick said he could do it by himself.
27:41
So, I left I kept I knew I had to employ the dispatcher and run what it ended up two of the planes left.
27:47
So, I had four airplanes when I started.
27:49
And I called my dad and I said, "Dad, I I'm going to I want to buy this company uh J&J Aviation.
27:53
I'm actually going to name it Corporate Wings." And he goes, "Oh."
27:56
He goes, "Um, I go, it's it's $27,500."
28:01
And he said, "Well, how are you going to pay for it?"
28:02
And I said, "Well, the company has $27,000 in the bank, so I think I can just use their own money to buy them." And he goes, "Oh."
28:08
He goes, "Well, what are you what are you doing for the other $500?"
28:11
I go, "Why do you think I called you?"
28:12
[laughter] So, that was really how I bought corporate wings and that company's still here today.
28:17
Explain how you get from corporate rings to flesh jets.
28:22
>> Right away, I decided where is the where is the niche for this corporate wings?
28:26
like everybody has a charter plane like but how do I get bigger niches and so on and I you know life is timing I met into I I met someone who worked for Chapman Freeborn I don't know if you know this company they move all the rock stars around >> so they move the freight you know every rockstar comes with a stage and part of that stage can go on the land part of it has to go in in big aircraft depending
28:46
upon what but the it's a cargo moving system and along with it they had this ancillary business to move the star to move the celebrity I >> I'm watching this documentary on eagle the eagle host the band the Eagles and they're >> they have a bunch of success early on and one of their favorite things about being in a band and being a rockstar is that they have this private plane. >> Absolutely. >> Absolutely.
29:04
>> It's like little like turbo prop. >> Yeah.
29:07
The big groups went in those turbo props cuz they needed 15 18 seats.
29:09
It's the single performers that went in the corporate jets. Okay.
29:13
El I flew Elton John, Brian Adams, uh Bruce Springsteen, uh Tony Bennett, Barbara Stryand.
29:19
Those were the ones those were my clients.
29:22
So with Chapman Freeborn, whenever they would get a cargo movement and they needed to move the Celebrity, I made a deal with them to do that.
29:30
And that was how that that was really your initial niche.
29:34
>> But it was really cuz I wanted to fly and I thought it'd be >> Oh, you're you're piloting them. >> Yeah, of course I am.
29:38
[laughter] Of course I am. Sure. And you know what?
29:39
It was a good gig because you um when you flew those celebrity tours, say a pilot at that time got 7,000 a month.
29:46
If you flew a three-month tour, you would get 20,000 a month.
29:50
Of course, you had no you had no work for that.
29:52
And it was kind of perfect cuz I could fly the tour for 3 months and then have the rest of the time I'd work on the business or or you know, kind of learn the business and fig and figure it out.
30:02
So that I'm building the business concurrently with doing these celebrities.
30:06
Then I have these big planes.
30:07
So I start to go more international.
30:10
I fly, you know, I I take up I flew Richard Branson for a year and a half. I live in London.
30:14
Best flying because I got to learn the world. >> Wait, wait.
30:18
So you're flying Richard Branson now.
30:19
This is a corporate private jet, >> correct?
30:21
And you're just >> Well, but remember to get the celebrities, I had to go to to people that wanted to buy a large like a GFream, a Gulf Stream 2 at the time. Okay.
30:29
And I had to tell them, you used the aircraft.
30:31
I'm going to lease it out 3 months a year, which will pay for the aircraft for the whole year. >> Mhm.
30:36
>> And so I got people to give me airplanes on that financial agreement.
30:40
>> They're putting up the money. >> Yes. Correct. >> That's how Okay.
30:42
So that's how you're doing this very limited. >> Correct. Correct.
30:44
I'm doing it without without any there no ken capital at this point in time.
30:47
I don't even have I got the $500 from dad.
30:48
So now go into the '9s and along concurrent with building this business once you have the large cabin filling in the rest of the fleets kind of easy cuz people think if you can do the big stuff if you can travel the world handling my airplane.
31:04
So we is is you must be qualified.
31:06
So we start to build a managed fleet of aircraft till it gets to in the low 20s.
31:10
And there's, you know, when you build businesses, there's these steps, right?
31:14
Like without any other help, I could run three airplanes myself, you know, but then if I want to run 15, that's kind of the next step.
31:20
I need 17 people to run 15.
31:23
And then I need 17 till I get to 30.
31:26
And then when I get to 30, I need 35 people.
31:28
There's these steps of infrastructure.
31:31
So I'm about where I need to be.
31:33
about where I need to be. and early and so in the early '9s um we don't even realize this today but today big manufacturers Gulfream Bombardier Cessna they pre-ell their aircraft and they don't build them if they're not sold but going back so going back to the '9s they
31:52
looked at it like the car industry Cesna had a dealer network where people to be a dealer you had the level of dealer if you bought three single engines and one twin engine you were this level if you bought four twin engines you got this commission structure and you were a larger dealer. But when the business
32:06
But when the business didn't sell, there were all these whitetails >> and so what's that? >> A white tail.
32:11
So a white tail is a plane that doesn't have an end number on it >> because they don't know who to title it to cuz it's not sold. >> Okay.
32:18
>> So it was like the the auto industry.
32:20
They kept building kept the manufacturing run going and if they couldn't if sales couldn't keep up then they just parked them in a lot and called them whitetails.
32:26
Well, the Gulf War I happens in 1991 and it goes ahead that these whitetails Hawker has these whitetails and Richard Sanuli who was the founder of netjets goes to Hawker and says you can't sell the airplanes.
32:41
I'll take 20 of them and sell them on consignment fractionally.
32:46
>> Is that the first >> This is how fractional >> that is the invention of >> that's the invention of fractional ownership.
32:51
Rick Rich Sanulie, brilliant, uh, realized that the average company flies an airplane 300 hours a year.
32:56
A plane wants to fly 1,200 hours a year.
33:01
So, why don't we get f four people to share them?
33:04
>> What does it mean a plane wants to fly 1,200 hours a year?
33:07
>> Well, because if you look at a lot of things, number one is an airplane doesn't like to sit around.
33:10
They break when they don't fly.
33:12
The the fluids leak out and they so they want to fly. Number one.
33:16
Number two, they had the capacity to fly a thousand,000 to,200 hours a year.
33:21
So an average corporate owner at that time was leaving the plane in the hanger five days a week.
33:25
And so why not utilize that debt asset?
33:27
That was his that was his vision.
33:29
And so he initially thought, well, if I get four people to each put 200 hours on the plane, that's kind of the perfect.
33:36
So, I'm going to shell the sell the planes in quarters, which is why if you see NetJets's end number today, it still ends in QS quarter share >> because originally they only sold 200 hours.
33:48
Now, today you can buy 100 hours, 75, but that was his vision.
33:50
And he sold these whitetails, these consignment aircraft.
33:55
So, he never put up any capital.
33:56
He said, "If I sell them, I'll I'll give them back to you."
34:00
>> So, all of a sudden, now this becomes invogue.
34:02
And where is he stealing customers from?
34:04
me the charter operator >> because in the charter business at that time if you took my plane and went to Florida I had to charge you to return the plane back to Cleveland otherwise how did I get it home? >> Yeah.
34:16
>> He had the idea of this floating dispatch.
34:18
I'll drop you in Florida and then the next client I'll figure out how to get them from here to there.
34:22
Well the the that was attractive to a lot of different companies.
34:27
And so he was starting to steal business. I got a little nervous.
34:31
So between 1993 and 1996, I'm watching this unfold and I say, "Well, he's selling these brand new assets because he's getting them from the manufacturers on consignment.
34:41
I'm going to go into the used market and I'm going to buy them used, pre-owned, uh, previously enjoyed, I like to say, and I'm going to go ahead and I'll have the exact same airplanes he did."
34:54
So whatever NetJet had, if they bought brand new Hawkers, I had a used hawker program.
34:58
If they brought brand new citations, I just emulate them.
35:00
Had a used citation program. That was my vision.
35:05
I would be buying them used at at half price.
35:08
So the service is the same. It's still you can fly.
35:11
You only pay for it when you're on board.
35:12
It's just the buy in is is going to be 50%. That was my vision.
35:17
But unlike him, I couldn't buy these on consignment.
35:20
I had to have capital to do it.
35:22
So in 1996 I put together the this is my first time really starting to look at a business.
35:29
It's the first time I kind of understand the debt that I have to present the presentation how you know looking at cash flow and projections and I go out to different banks probably 35 or 40 of them with this idea of fund me the amount of money I need to start the business.
35:44
I think I needed 30 or $40 million of borrow. I wanted to borrow it.
35:48
And they look at me and the banks are like, "We don't get it."
35:50
Like, where's our collateral?
35:52
We have the tail of the airplane. You're selling out.
35:55
Like, how do I have a quarter of a plane?
35:57
So, none of them were a buyer.
35:57
I think at the end of of of 12 months or 15 months of being on the road, I had maybe 7 million of opportunities if I put up assets equivalent to 7 million.
36:09
It was the worst financing ever.
36:09
In June of of 1998, Warren Buffett buys NetJets for $750 million and he christens the industry and I just happened to be the guy who saw the banks last.
36:21
And that summer I got almost $300 million of debt financing.
36:28
So again, accidentally wealthy >> because they're like, "Well, Warren is doing it's a good idea. >> Had a good idea." Yes. >> Yep.
36:36
And all of a sudden, Bombardier Capital, Boeing Capital, Fleet Bank, all 50 million here, 50 million there gave me these lines of credit that allowed me to buy the initial fleet, which I went active October 13th, 1998.
36:50
>> But what is the company?
36:50
Is it still corporate wings?
36:52
>> No, I phoned a I I I branded that product Flight Options.
36:56
>> Okay, that was the brand.
36:58
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38:11
>> So that's flight options.
38:11
You start with how many planes with flight options?
38:14
>> Well, once I get the financing probably 25. >> Okay.
38:17
Why'd you pick a number like that?
38:18
>> There were three different fleets. Okay.
38:21
Two two light jets and a and a medium jet.
38:23
And you need about eight aircraft to be your core fleet.
38:26
In other words, if if you and me are both going to buy a share of an aircraft, we recognize there can only be one because if you and I want to fly the same day, who gets the plane?
38:36
So, you had to show the potential prospect that you had a fleet.
38:38
And eight was about the number that people Well, oh, you have you have eight citations, I'll buy one.
38:44
And then you have you can service us.
38:47
>> So, if you had 25 planes to start out, how many customers like what when do you hit your limit?
38:51
Like, oh, we had 100 people's too much.
38:52
Like what's the >> No, because remember these are core fleet.
38:56
These planes never get sold.
38:56
What I do from this point on is if four people buy a buy the citation, I buy another citation. >> Okay?
39:04
>> So these 24 aircraft are awesome.
39:06
>> You don't stay with 24 25 for >> and you know what that kind of that's still a model we use today.
39:09
If we look at our fleet of 365 aircraft, we would tell you that about 70 of them are core fleet. They don't get sold.
39:15
They're just there to support your our customers ownership in a share of a jet. >> Okay. >> Yeah.
39:21
because we need that because on peak travel days we're going to have more demand than there's just not enough airplanes to go around.
39:26
So we still have that core fleet model. >> Okay.
39:29
So but this is called flight options. >> Yes.
39:31
>> How do we get from flight options to flesh jets? >> Okay.
39:33
So uh there it's a little longer than you probably hoped but $100 million in sales between October and December.
39:41
400 >> away first three months of >> David.
39:43
This was the most amazing thing I've ever seen in my life.
39:45
People thought it was such a great bargain that they would send me a check.
39:48
I think the buy in at that time was like $800,000.
39:53
People would send a check for $800,000 and say, "Send me the paperwork. I want to fly tomorrow."
39:57
In other words, they loved it so much they knew they couldn't fly till I had the money.
40:00
They'd send me the the checks and they'd go, "Send me the paperwork.
40:03
We'll get to that stuff later. Just let me fly." >> Yeah.
40:06
>> So 100 million in the first 3 months, 400 million in the next year, and now all of a sudden I have no I've got a tiger by the tail and no clue, right?
40:16
because a business that grows that fast is immensely complicated particularly for cash flow.
40:19
And I think at that time I didn't really realize that you know in capital intensive industries particularly like aviation the balance sheet is the whole game.
40:27
It's not the income statement it's the balance sheet you know forget income forget EBID it's free cash flow and well how strong is your balance sheet that that's what drives that business.
40:36
I didn't know I didn't know that in 1998 I hadn't figured that all out yet.
40:40
I'm in my early 40s when this is happening.
40:42
And so then I bring in I bring in an equity partner.
40:46
So now I have some equity partners around the table.
40:47
2000 we have the dotcom bomb.
40:51
>> So I've been through I've been through four recessions.
40:52
That was that was number three.
40:54
So now the business is struggling a little bit.
40:56
Cash flow struggling not volume struggling.
40:58
And we decide you know when a business is in trouble you there's there's two things you can really do.
41:04
Well three things I guess you could close it down.
41:06
Two is that you can sell it for a song.
41:08
Or or three, you you you you strategically change direction.
41:13
So you you go to the bankers because your problem is always the credit markets.
41:16
It's always who's who's out there for you.
41:18
And you say, "I have a new strategy.
41:20
I'm going to merge with this company. Here's the projections."
41:22
And you buy yourself time to see if you can put these companies together. Acquisitions.
41:28
Mergers are incredibly difficult. I hate them.
41:30
I don't do them very often.
41:32
I think they're immensely culturally they're damaging. Why do you hate mergers?
41:38
>> I I hate them for me because for me I think they're a sign of weakness because you can't build your business on your own.
41:44
You can't whatever this company is offering you in terms of let's say it's market share.
41:49
Let's say they have a part of the market.
41:51
You have a part of the market and you say gosh we'll capture the market.
41:54
Well do you really need to spend 12 10 times cash flow to grab the market?
42:00
Would you invest that money yourself and get grab the market share or do you not have a good enough product to do it?
42:06
So I think we don't analyze enough what it costs for whatever your logic is for bringing that in.
42:11
Give me the logic for why you're doing that.
42:14
And I would tell you 90% of the time you could probably do this yourself without the acquisition.
42:20
Now once you do the acquisition culturally if you have a business build on culture which is essential for me it's essential for us it's impossible building a c bringing in you know you can integrate a culture if 10% of the workforce is being added adding 30% 40% culturally impossible and then you're going to destroy your culture.
42:39
So you probably had you probably overpaid you I don't know if your business if the business reasoning is sound and you you really put your culture at risk so that's why I don't like them. >> Okay.
42:49
So, but you were this was the the >> I'm in trouble.
42:51
I'm in trouble financially.
42:53
>> So, you have to >> Yeah.
42:54
I haven't figured this out yet.
42:55
You're You're asking me this was this is 26 years ago.
42:57
I have knowledge that's accumulated since [laughter] then.
42:59
Um so, we merged with a company that's also in trouble called Traveler.
43:03
It's a division of Rathon and we do the we slap it together 50/50.
43:09
>> Are they in the same business? What are they?
43:10
>> Yes, they have a company called Traveler that has a a brand new product line >> but also fractional ownership. Okay.
43:17
Henrian owned Beachjet at the time, Beachcraft, Beach Aircraft.
43:19
And and they had merged it with Hawker Beach. It became Hawker Beach.
43:24
And so they were trying to see they had Travel Air as a distribution channel for their aircraft.
43:31
So they it's not making money.
43:31
It's losing $30 million a year.
43:34
They they slap it together with flight options which was marginally breaking even on.
43:39
We were making money but not free cash flow.
43:42
>> So we put these company consolidate, get rid of the back office.
43:44
Uh uh Rathon wants to focus on missiles and submarines and in the concept of putting these two together 50/50.
43:50
We come up with shareholders roulette.
43:52
Are you familiar with that term? >> Yeah.
43:55
Where you have to >> you have to make an offer to buy >> buy or sell it >> at the same price.
43:58
So I had 18 months to underwrite the transaction. I go to Warberg Pinkus.
44:02
I need I need an outside I need an investment partner to do this. They see the model.
44:07
They value the business at 360 million.
44:08
I go running up to Lexington, Massachusetts to go into Rathon to tell them, "I'm here with your $180 million.
44:16
This company was a piece of and now I'm here.
44:18
I figure, where are you putting the Ken Ricky statue that I found like I found all this money for you?"
44:24
And they looked at me and they thought I was stealing the business and they bought me out. >> Oh. >> And I'm gone.
44:29
2002, I've lost my throne.
44:33
It was the worst day of my life. I had I was passionate. I love this business.
44:35
My friends were in the business. Right. >> Hold on.
44:39
We got we got to pause here cuz this is very interesting.
44:40
How much of the 180 come to you personally?
44:44
>> You hit the nail on the head.
44:44
You have you have a knack for asking the exact right question.
44:46
I own 16% of the company. >> Okay. Fast forward today.
44:49
The punch line's going to be I bought this company back and now I have a controlling interest.
44:54
So, who thought the worst day of my life?
44:57
>> But still, like you thought, let's go back to like you were you learned how to be a pilot when you're in college.
45:01
You grow up, you know, middle class in Ohio.
45:06
Now you have millions of dollars and you just said it's the worst day of your life.
45:09
This is really really important because the whole point of this show is like I usually talk to people that do things for a very long time and there's like this new industrial like entrepreneur ecosystem and it's driven by investors and they tell they give the worst advice to founders ever.
45:21
They're like start scale sell.
45:22
It's like I've talked to all these investors or excuse me these entrepreneurs that sold.
45:25
They all talk about like this.
45:27
If you sold something you loved they they're like yeah but your uh uh Travis uh from Uber >> Yeah.
45:34
was in that chair and he made billions of dollars and lost Uber. Yeah.
45:39
Ask him how he felt when he had four or five billion dollars dropped in his head.
45:41
He didn't give a >> Didn't give a about it.
45:42
Absolutely didn't give a about start scale. Get a new investor. >> It's crazy. So, okay.
45:48
So, worst day of your life.
45:50
Let's take take me to that.
45:51
You were like, I thought I was going to have this company. They bought you out.
45:54
>> First of all, no one was going to be more passionate about building that business than me.
45:57
I don't care who Rathon put in there.
45:58
It was never going to you know, these businesses are small margins.
46:02
They're they're highly technical.
46:04
It's uh there's not an MBA program at Harvard on how to run private aviation.
46:08
At least there wasn't at that time.
46:10
It's become a lot more popular now.
46:12
>> You're in your 40s at this point? >> Yeah. 42.
46:15
>> Married with ch with children? >> Uh yes, at the time. >> How many kids?
46:17
>> Uh two children at the time. >> Okay. Yeah.
46:18
So, you got you got a couple, you know, tens of millions, whatever the the number is.
46:23
>> What's your what's your thought process?
46:25
Like where Well, first of all, I I always say it was the worst day of my life. I lost my throne.
46:29
I lost my passion for living. I lost the vision.
46:31
I didn't have any vision like what am I doing now?
46:34
And then you know when you do this it's horribly conflicting because you don't want the company to succeed without you, right?
46:41
You you had to be the binding force.
46:43
So you really don't want it to succeed.
46:45
But on the other hand, you don't want it you don't want it not to succeed. You built this baby. Your friends are there.
46:50
If it doesn't succeed, then your whole idea was for So it's very conflicting.
46:54
And I got so tired like of being in Cleveland and at a restaurant. What happened?
47:00
people wanted to hear this story because at the time, you know, there's there's 800 employees, so all in mostly in Cleveland.
47:07
So, I decided I was going to move.
47:09
>> This is what we were talking about before.
47:10
I was like, where where do you live? You're like, Arizona.
47:11
Like, how the hell did you wind up in Arizona?
47:13
>> I just decided I was going to go west of the Mississippi.
47:15
I was going to be in a big town.
47:17
It was Denver, LA, or or Phoenix.
47:19
And uh LA was a redeye to get back east.
47:22
So, I decided and Denver was a little cold.
47:25
So, I ended up in in Phoenix and been there since 2003. So now nothing to do. I'm in Phoenix.
47:30
At least I'm not being asked what the hell happened.
47:34
And Warberg Pinkis obviously took a liking to me.
47:37
That's why they backed me.
47:38
They said, "We want to get more into this space.
47:40
We'd like to give you $250,000 a year.
47:42
You'll be our executive and residence.
47:45
You'll find deals for us and we'll give you a little piece of the action of whatever you do in private aviation."
47:52
And I was like, "Well, wait a second.
47:54
Like, why would I do that first?
47:54
Why don't I go find the deals and then decide who I want to bring in?
47:58
Like why would I just line up with Warberg?
48:02
Because then they get to say yes or no on a deal.
48:04
In other words, I come to buy your company and I have to call Warberg and go, "Can I buy them?"
48:09
>> Whereas if I just do this myself, I could come in, make the deal, and then go find the capital.
48:13
So that's when I started directional capital, which was a company met again an inch wide, a mile deep.
48:19
We put our our our website went out.
48:21
We only invest in an area we know a lot about.
48:23
I knew people in the industry who needed capital at the time and they came to me because they knew they didn't have to explain to me what was our cost per hour, what was dispatch availability, what was, you know, what was occupied rate.
48:35
>> You knew the ins and outs of the business already >> and they trusted me and then >> and you're getting equity in return for cash.
48:40
Is that what you're doing?
48:41
>> Well, you mean when I >> Absolutely. Absolutely. It's venture.
48:45
It's it's private equity, right?
48:45
And then they always liked my story.
48:47
Well, Ken, what what mistake did you make that helped me finance my company?
48:51
And don't make that mistake. I I played on that.
48:55
You know, I look, I I can tell you where the where the the bodies are buried.
48:58
>> And lo and behold, I was working two or three different deals.
49:01
My my partner Mike Rossy, who came in with me in the early '9s when I kind of transitioned out of pilot into starting to work more on the businesses.
49:09
Um we get approached by Allied Capital who there was a company called Mercury Air Centers based mainly on the West Coast.
49:16
They're in default on their debt with Foothill Capital, a division of Wells Fargo.
49:20
And we buy this company for $80 million in concert with Alli Capital. >> What does Mercury do? >> They FBOS's.
49:27
They own only FBOs, fuel fuel, you know, private fuel facilities for private jets.
49:34
>> A lot of people are buying up FBOs right now is what I hear. >> It's horrible. >> Why?
49:37
>> Well, here's the problem. I started the industry.
49:39
So I in in many ways I created this monster.
49:43
>> Well, because they're only going to private equity.
49:44
And we could get into whole my whole philosophy on private equity.
49:47
I don't think it's really good.
49:50
Sybans Oxley changed in 2000, right?
49:52
Those Sorbane Oxley rules made it so hard to be a public company.
49:54
But even those companies that are public still, if you read their if you read their annual reports, they have some master besides greed, they have environmental policies, they have social policies, they have policies regarding their employees and their leadership.
50:09
Private equity has to disclose none of that.
50:14
They are solely based upon a return to investors.
50:16
So they're solely about greed.
50:18
And so they've taken an industry and just tried to monopolize it.
50:20
It's a duopoly now in the FBO industry.
50:22
Again, I started it because I sold the business to Atlantic Aviation as which is one of the duopolists.
50:29
They're just pushing the envelope and what's the most amount of money we can abscond with from these wealthy people that buy jets and they have this new thing called event fees which they make up in the morning.
50:39
A lunar eclipse, let's charge an event fee.
50:42
Uh, you know, I mean, it's just it's just horrible.
50:44
And I think there's being a real rep repercussion into the industry now. But we digress.
50:50
>> But you buy it in early 2000 Mercury Air Center, these FBO chain the 18 or 19.
50:56
>> What did you like about their business that you wanted to buy it?
50:59
>> Well, first of all, it was in the vertical I knew.
51:00
So I knew how to market to corporate pilots.
51:02
I knew why people wanted an FBO.
51:04
The business made money on the on the spread between what they bought fuel for and what they sold it for.
51:11
So relatively easy business to understand. I had a non-compete.
51:13
I couldn't necessarily compete in the operating side of the business. So, it was available.
51:18
I The non-compete didn't cover fuel distribution or hanger and so on.
51:23
I can see where it was a very fragmented industry. We had 18 FBOs.
51:25
It was the sec one of the second largest at the time.
51:30
And so going out and buying these little mom and pops and giving them 4 million, 3 million.
51:33
We were buying it six times etha at the time.
51:37
Today, these businesses, an FBO business will trade at 15 to 20 times today. Mhm.
51:42
>> Did that bought it for $80 million in 200 and 2005 and then sold it in 2007 to McQuary, which now is called Atlantic Aviation.
51:51
So we built it about doubled the size of it and sold it for 615 million.
51:56
>> Oh, so that's where you have a you're getting a huge chunk of cash now. >> Great.
51:59
I own 20% Alli Capital had 80. Okay. >> Okay.
52:02
So Mike and I >> that's a really good in two years considering you had to do something and you couldn't do what you really wanted to do. >> Right. Right.
52:07
So again, the worst day in my life.
52:10
I don't I you know, let's just have faith in the future.
52:12
I see none of this coming, right?
52:14
I see none of this coming.
52:15
But that's where I get the capital.
52:18
And what do you think happens next?
52:19
Rathon's had enough fund with with flight options.
52:21
They've lost $600 million in the in the years they've owned it.
52:25
The company's become unionized and it's a problem and it's it's going to crap.
52:30
So, who do they call, Ken?
52:30
You want to take this piece of off our hands? And what do I say? Of course I do.
52:35
[laughter] I want my company back.
52:37
I don't care what shitty position it's in. I want my company back. Think about this one.
52:43
Financial crisis happens in September. I buy it in December. So, how dumb am I?
52:48
[laughter] I'm the dumbest guy in the world.
52:48
I buy this company back in the in the the dear of the financial crisis.
52:52
And what do you have to pay for it? 135 million. >> Okay. >> Okay.
52:57
Of which the reality is the because there's li there's payables, there's liabilities.
53:01
We're assuming the reality is it was it was around it was around 42 million and I borrowed a 27 I gave a $27 million personal note and 15 million in cash.
53:14
>> What did you back up that personal note with? >> Just me. >> How did you do that?
53:18
>> The seller took a note for 27 million. Not a long note.
53:20
I think three year a three-year note.
53:22
But I you know there were I had I had invested in a couple other small businesses at the time. I had I had assets. I had a home.
53:29
I had I hadn't >> Did you have to pledge to the home or No. >> Oh, yeah. >> Okay.
53:33
That's where I was getting personal guarantee of everything.
53:36
>> That's what I thought. Okay.
53:36
That's where I was getting. >> Yeah.
53:37
And I did have the $100 million that from the you know, I used some of that, but I had some I had some I had some net worth out there that was that was viable.
53:45
>> Is this the company that becomes Fleck Jets? >> Yes.
53:47
One more step and we're done. >> Okay.
53:49
>> So, I inherit flight options back.
53:49
I decide the the the no capital's been invested.
53:54
I need a new fleet of planes.
53:56
So, I look around the industry.
53:56
Who's got the best fleet? It's Bombardier.
54:00
They have these Challenger 300s which are super mid.
54:02
This is where the market is going.
54:04
There's these eight passengers transcontinental.
54:06
Kind of the perfect fit for the shitty planes I have at the time that are Can I pause there? Yeah.
54:12
Because like you said earlier there's like there was like 5,000 private jets when uh you started in the industry in like the ' 80s or whatever that was.
54:19
Then there's 35,000 today. >> Yeah.
54:22
>> I think I read like almost all of them are in America.
54:23
Like what is America's share of that? >> 85% of the market. >> That's incredible.
54:27
[laughter] Yeah, people always ask me, "What's your what's your strategy for Asia?" Don't need one.
54:33
Don't need an Asian strategy.
54:36
There's three flights a day over there.
54:38
I'm doing 800 flights in the US.
54:38
Like, what are my strategy to get those last three flights?
54:42
I mean, what are you thinking? [laughter] >> Okay.
54:45
So, you need a new flight or you need new planes and you go to Bombardier, >> right?
54:49
So, so what I really want is the Challenger 300, but they have a company called Flexjet and they have exclusivity.
54:55
They only have Challenger 300s. >> Okay.
54:57
of a fleshed is also fractional ownership.
54:59
>> It's fractional same owned by >> by Bombardier. >> Okay. >> Based in Dallas.
55:02
But I caught a good sales guy.
55:04
I caught this I caught a guy who was head of sales that when I told him I wanted to buy 20 Challengers and at the time they were about 15 million a piece.
55:14
So when I came up with $300 million order, he scratched his head and was like, "Am I really going to lose a $300 million order because there's this non-compete with a company we own?"
55:23
So he goes to Pierre Badwen who was run the head of Bombardi.
55:28
The family's own Bombardi.
55:29
The Badwin family's own that that that company for years, still does control it.
55:32
And I had known Pierre through YPO. He liked me.
55:35
And he said, "Well, Ken knows aviation."
55:38
And why don't you, he tells Steve, the head sales guy, why don't you see if he'd buy Flexjet?
55:44
[laughter] So I went to buy planes and they sold me Flexjet in 2014.
55:51
>> Why did they want to get rid of it?
55:52
Well, because again they're in the manufacturing business to be honest with you.
55:55
They were financially struggling after the crisis.
55:57
So picking up I paid 180 million for Flexjet.
55:59
Picking that up was 180 million they probably needed at the time.
56:04
With 180 million came an order to buy 20 more aircraft.
56:06
By the way, with the deal they made me expand the order to have globals, which I had no idea how I was going to pay for.
56:14
I had to buy 15 globals and they were 40 million a piece and I did not have that $600 million.
56:19
So, where'd you come up with that?
56:22
>> Oh, that's a that's again life is life is funny. So, we signed the deal.
56:23
We're going to buy flex jet.
56:26
>> Sign the deal not knowing how you're going to pay for the globals.
56:28
>> Well, I knew how to pay the 180.
56:28
No, I I did not know how I was going to pay for the globals. I did not know how.
56:32
So, with with the buying of 180 million, I place a billion dollar order for Challenger 300s and globals and and actually some Lear Jets, which they owned at the time, too.
56:41
So, I buy the I I placed the order.
56:43
Fingers crossed that we'll ever be able We'll figure out how to pay for those airplanes later.
56:47
I got to get flex in here. They call me up.
56:51
It's We're going to close like in October.
56:53
They call me up in September and I get the By the way, I need to come see you.
56:56
And I'm like, I'm toasted.
56:56
I'm I'm on this deal because they're coming they're coming to tell me NetJets has beating my offer cuz there's only three companies left at the time.
57:06
There's Flexjet, Flight Options, and NetJets.
57:08
These are the or the Citation shares, too.
57:10
But there's three big companies.
57:12
And the number two and number three are about to merge.
57:14
And I figure Warren Buffett isn't going to let this happen.
57:17
He's gonna he's he's in there.
57:19
He's coming in to take my bid.
57:19
So, I know they're coming to tell me and they sure enough they sit down and they go, "We have a problem with NetJets." And I'm like, "Oh, no.
57:28
They had globals there also." And they were not.
57:31
And and Bombardier claims they were not aware that in the contract when they sold the Globals to NetJets, it prohibited them selling them to me.
57:41
So, the message they had to convey was, "We can't sell you the Globals."
57:46
That's not a bad >> Whoa.
57:48
600 million I didn't have to worry about.
57:50
[laughter] And of course I went, "Oh, that sucks. Are you kidding me?
57:53
This destroys everything I needed a vision of."
57:58
[laughter] >> And now fast forward, right?
58:00
Two years later, we do the Gulf Stream and part of that deal we get exclusivity.
58:03
So now we're the only people that can operate Gulf Streams.
58:08
>> Oh, I didn't know this.
58:08
So wait, so so Net uses global to this day.
58:10
Well, see what would have happened if if they didn't pull that card on me.
58:14
I would have had to be committed in each category, light jet, midjet, and heavy jet to buy the Barbaria product. That was the deal.
58:22
They didn't want to lose their distribution channel.
58:23
But they took heavy off the plane, off the tarmac.
58:26
They they took that away because they couldn't sell me the Globals.
58:28
That opened me the opportunity to go ahead and buy the Gulf Streams, which I did in 2017. >> Awesome.
58:36
>> And now we still buy them today.
58:36
I mean, we're the largest GFream operator in the world. We have 85 of them. >> Wow. >> Yeah.
58:40
Yeah, we have more than the US government.
58:42
[laughter] >> That's a great stat. >> So now I own Flexjet. >> Yeah.
58:46
And then why do you decide, okay, I'm going to use that name instead of >> Well, because Flight Options were for Okay.
58:51
>> Flex is a better name.
58:52
>> It had a bad reputation.
58:52
It wasn't paying its bills.
58:54
I bought >> Flight Options because because they had it up. >> Yeah.
58:57
They the the the lost half their customer base because they gave shitty service. The planes lost capital.
59:01
They never invested in the planes. So the seats were torn.
59:04
I mean, it just the name had a bad reput they were unionized. >> Yeah. Yeah.
59:09
>> And it's this bad union reputation and so so Flexjet was the much better way to go forward. >> Okay.
59:14
What year do you are you buying >> 2014? >> 2014. >> Yeah. Okay.
59:17
Takes me the next four years to integrate the two companies including getting rid of the union. >> Why four years?
59:24
>> Well, culturally the companies were different exactly the same size about like 300 pilots each, 600 pilots total between the two customers.
59:31
Remember, you got the shitty hawkers over at Flexjet and you have the nice challengers at Fle I mean the shitty at flight options and the the challengers at Flexjet and the Flexjet customer doesn't want to be on the shitty hawker.
59:44
So the integration of trying to get the systems the the economics of putting the systems together weren't that easy.
59:51
>> It was a lot harder than you expected. >> Yeah, a lot harder.
59:52
Culturally, Flexship was like we hate the union and everybody identified themselves.
59:57
Well, I'm I'm a flight options pilot. I'm a flex ship pilot.
1:00:00
Just think about how do how do you get uniforms to 600 pilots? >> Yeah. >> Right.
1:00:04
What do you have to pick uniform crossover day?
1:00:06
Like so for a while you got two different colored pilots flying and you got the blue pilots and the brown pilots.
1:00:12
I mean it just was it just was very complicated.
1:00:16
>> But even though you're going through this difficult 4-year period and this makes more sense now.
1:00:19
I've got like the whole history of why you hate mergers and acquisitions [laughter] >> and you have a couple experiences that are bad.
1:00:25
I have, but are you still really you strike me as a supremely optimistic guy?
1:00:29
You're just like, okay, I'm going to sell this contract.
1:00:30
I'll figure out where the 600 million is coming later. Right.
1:00:34
>> Do you still have a lot of faith in the fractional ownership business? Absolutely.
1:00:37
>> So, you're like, you're know this is what you're going to do for this is like your life. >> Yeah.
1:00:40
Not not for this program, but if I showed you the the economics of how a charter operator works, how a management company works, and how a fractional company works, and showed you topline, bottom line, and margin, it's the only operationally dynamic model. It's the best model.
1:00:55
Rich San Julie, he invented this model and it was brilliant.
1:00:59
>> Okay, so the 4-year period, now we're in 2018.
1:01:01
Now you're under Flex Shetts.
1:01:01
You have the uniform pilots. >> The union's gone. >> The union's gone.
1:01:06
>> The only time we've ever only time a union's ever voted to to for self-representation in the history of pilots. >> Oh wow. Okay. >> Only time. >> Yeah.
1:01:14
>> Now you have the planes that you want.
1:01:17
>> The kind of planes that you want. Okay.
1:01:19
>> The state of the business there though, I feel from let's say let's say that's 8 years ago. >> Yeah.
1:01:23
Has the business like doubled in size? Tripled like quadrupled. >> Quadrupled. Quadrupled. Okay. It's a private company.
1:01:30
We're not even going to get into the fact that you almost like took it public and that. >> Shoot me. But go on. >> Yeah.
1:01:35
And then you paid like I think $30 million to get out of it. Million dollar mistake.
1:01:40
>> Well, first of all, why why is this so important to you?
1:01:41
Cuz I'm obsessed with like familyowned businesses, private companies.
1:01:43
Like it's just like to me like the ideal situation.
1:01:45
You know, I have a bunch of friends that are public company CEOs. Yeah.
1:01:48
And they all secretly hate it by the way.
1:01:49
[laughter] But like why was it so important to like in addition to let's take away like the reporting and how difficult it is running a public company but like why did you want to keep your company private?
1:02:00
>> Because I believe in a higher being.
1:02:00
I think there's a purpose we have beyond wealth accumulation. Okay.
1:02:05
There has to be I've always struggled and of course I went to Jesuit high school so of course I was of course I have the guilt gene but I've always struggled with the question like why am I here?
1:02:14
It took me till 2018 to really find who I am, why I'm here to all come into alignment.
1:02:22
And it's crystal clear in my life today.
1:02:24
I always struggled with it.
1:02:27
I could go back to conversations in the late ' 80s and late 90s when I was starting the business.
1:02:33
And I'm asking, how does this business serve others?
1:02:35
And I think fundamentally I always knew my life had to be about serving others, but always shied away from wealth because that didn't seem like wealth doesn't serve others. that serves me right.
1:02:45
You can have there's very, you know, wealth seems to be very tempting.
1:02:49
So, it took me a long time to find my life.
1:02:54
>> Before we get to 2018, you're figuring this out.
1:02:55
Take me to some of these conversations where you're like questioning this with like what's your inner monologue?
1:02:59
Are you sharing these thoughts with other people? >> Yeah.
1:03:01
In fact, probably, you know, if you were to ask me like some of the most influence of people in my life.
1:03:04
One of the most influential was Father Ted Hesper who le who led the University of Notre Dame for 35 years.
1:03:09
You know, he ran this amazing institution.
1:03:11
He grew it from going broke during World War II because they had no students to becoming one of the most prominent universities in the in the world today, right?
1:03:20
And he did that over a 35 year tenure as president.
1:03:24
And he had an amazing business sense as well as being a priest.
1:03:29
So, you know, he he was an amazing resource and had amazing insights.
1:03:33
And I remember going to him at a time he he retired from president, so he was very available.
1:03:39
I ran the student government when I was there.
1:03:41
So, I knew him from my days at Notre Dame.
1:03:44
>> And so, you go to him >> and I asked him a question.
1:03:45
I asked him, I said, um, you know, I'm I'm I'm pretty sure that that I'm pretty sure that Jesus was not a capitalist.
1:03:53
I'm pretty sure he had to be a socialist cuz I don't recognize anything in what I was taught about why we are here in the life of capitalism. I don't see that. I I'm not finding that.
1:04:06
And I said that to him and he looked at me and he said, "I have two thoughts for you.
1:04:10
Number one, it can be if it consumes you."
1:04:14
I actually said to him, I said, 'You know, I got a shitty gift.
1:04:18
You know, if I could cure cancer, that would be a great gift.
1:04:21
If I could like heal the poor, I mean, there's a lot of good gifts.
1:04:25
There's a lot of very altruistic gifts. I don't have that gift.
1:04:28
I got the gift for looking at a balance sheet and understanding how the business can translate to the balance sheet. I I understand that.
1:04:35
that that's my special gift.
1:04:36
And he said to me, um, yeah, you can you God thought enough of you to give you that gift.
1:04:43
You're going to be tempted your whole life with being selfish with this gift or thinking about how to continuously use this gift for others.
1:04:51
But God had enough confidence [clears throat] in you to give you that gift. And so run with it.
1:04:54
And number two, he told me, don't overthink this.
1:05:00
He goes, life is really simple.
1:05:00
We want to make it We want to make it so complicated.
1:05:05
To have a life of significance, you only have to do three things. Be true to your God.
1:05:08
Be as good as your parents and champion the causes of underdogs.
1:05:12
He didn't say be a Catholic.
1:05:14
He didn't say be a Christian.
1:05:16
He said be true to whatever you think is why you're here in existence.
1:05:18
Be as good as your parents.
1:05:20
Our parents are flawed in so many ways.
1:05:22
He didn't say be the perfect parent.
1:05:24
But parents come with a genuine acceptance that they want to give life, right?
1:05:29
So he said be be as good as and then champion the cause of underdogs.
1:05:32
Always look around the room, find the underdog and go to them. >> Okay.
1:05:36
So you're having these conversations you're with people you trust and yourself for several years.
1:05:41
And then you said you didn't really figure out why you're here till your two until 2018.
1:05:44
What was the answer that arrived in 2018?
1:05:47
>> You want to know my immediate my immediate reaction?
1:05:48
So remember I'm still doing a little bit of flying.
1:05:50
I'm flying these rock stars.
1:05:51
I'm flying Bill Clinton at the time actually.
1:05:53
And um and and I'm and I'm reading because when you're a pilot you have a lot of time to read.
1:05:58
you're you're waiting a lot and I read a biography about an Indian chief and in order to become head of his tribe to become chief he had to prove that he was worthy of the tribe and that meant giving away all his worldly possessions.
1:06:13
Somehow this sticks with me.
1:06:13
I have the conversation and in 1992 I decide to give away everything to prove to myself.
1:06:20
I saw one of your guests talk about I think it was about um having a a tooth procedure without Novacaane to prove he had courage.
1:06:28
>> Everybody's seen this.
1:06:28
[laughter] >> That clip got tens of millions of views.
1:06:32
>> Okay, that's how I know it. That wasn't my courage.
1:06:34
My courage was to give away all my assets and then to build them back up.
1:06:39
>> Well, it didn't matter.
1:06:39
I I had to prove to myself that my that that that wasn't what ran my life.
1:06:43
That the accumulation of wealth wasn't what wasn't going to be what ran my life.
1:06:48
That I had the courage to use the talent I had, not for self-accumulation.
1:06:52
Okay, so this is kind of what we were talking about before um we recording.
1:06:56
I told you fantastic lunch I had with Samzel and his whole thing was just like he's like I know all the rich guys.
1:07:03
You'd be surprised how miserable most of them are.
1:07:05
They have more money than they'll ever spend.
1:07:06
They trade time which they can't get more of uh doing things they don't like for more money they can ever spend.
1:07:12
He's like there's only one true luxury in life and that's like get to private jet money.
1:07:16
That's what this advice that he gave me cuz he's like you bought everything in the world and he's just like it doesn't matter.
1:07:21
He's like the thing that made him the happiest wasn't his compound in Malibu or his place in Chicago.
1:07:25
It was that every year I think between Thanksgiving and uh Christmas he took his entire family this extended family and everything and he was able it was like 35 people and he would take them to this little village in France for a few weeks and be able to pay and provide that experience for every single person. Right.
1:07:41
And his whole thing was just like you're not like going to be happy on the things that you consume.
1:07:45
It's the thing for other exactly what you give what you give away not what you take in.
1:07:50
>> So so but but bring me to this like realization.
1:07:52
So you did that in '92, but to bring me to this realization 2018 where you're just like now I know for sure.
1:07:58
>> Well, let's let's just say two things, right?
1:08:00
In '92, even though you know, now I'm now I've given away everything.
1:08:02
So I have not, you know, that was a that was a proof of Ken, but I again I didn't have a lot of wealth.
1:08:08
I mean, I had that nice event.
1:08:09
I had the nice event in the mid.
1:08:11
I mean, don't don't get me wrong, I'm I'm I'm wealthy, but I'm not this wealthy, okay?
1:08:14
Uh you know, today I mean it's a factor of 40 compared to what it was in 2006, right?
1:08:19
So but but but well I don't you know that just means the temptation gets greater.
1:08:26
No, no, it's not the temptation.
1:08:27
It's just like one of my favorite lines from the history of entrepreneurship is that it's comes from Henry Ford.
1:08:32
He says, "Money comes naturally as a result of service."
1:08:33
And so his whole point is like you want to make more wealth. That's fine.
1:08:36
Find a way to make somebody else's life better.
1:08:39
And then the way you make more wealth is create is increase the amount of people's lives that you get better. Correct?
1:08:44
And if you just focus on service, the money will come back to you. >> Interview's over.
1:08:46
You just captured everything, right?
1:08:48
I mean, I will tell you, I mean, if you asked me, I would say, look, six things.
1:08:51
Be be passionate about what you do, compassionate about how you do it.
1:08:55
Memories are worth whatever they cost to what whatever they cost to create.
1:08:59
Friendship is a one-way street.
1:09:01
It's only what you do for your friends.
1:09:03
It's not what they do for you.
1:09:05
Don't miss the best five days of your life.
1:09:06
These are these are um you never know what they're going to be.
1:09:11
So, wake up every day with the idea that what a wonderful day this could be. Right?
1:09:14
So, those are the things that that cross my mind.
1:09:16
And by the way, there's no downside in in doing something for somebody you don't like.
1:09:23
Doing something good for somebody you don't like. No downside in that.
1:09:25
>> I think it's excellent advice.
1:09:25
That's a perfect place to close our first conversation.
1:09:28
I really enjoyed meeting you.
1:09:30
I was looking forward I've heard nothing but great things about you.
1:09:31
I will end a little different than I normally do.
1:09:34
>> What I will say about your business is a lot of my friends use flex shets and they all talk about the same thing.
1:09:39
is like you have remarkable customer service and these are highly disagreeable, you know, high-powered entrepreneurs that are not easy to please.
1:09:46
So, you should be very proud of the the business that you've built and one that's growing rapidly right now and I hope you hold on to it.
1:09:51
I know you just sold about 20% of it, whatever the case is, but I think there's good things in the future of flex.
1:09:57
>> Let me say one thing about customer service cuz you brought it up.
1:09:58
Um, one of the keys to customer service is, you know, if there's a problem because customer service is about what you do when things go to hell.
1:10:05
It's not about what you do when things are going well.
1:10:09
Within our organization, there is no approval process.
1:10:11
The person you talk to on the phone when you call and schedule your trip and you say, "We had a breakdown. I got to get this."
1:10:17
That person has all the authority to comp your trip to give you whatever money they need.
1:10:23
They don't have to call a supervisor to say, "David needs help."
1:10:26
So, I empower everyone in the organization at whatever level.
1:10:28
First of all, it says trust, which is the foundation of I trust throughout the organization.
1:10:34
That carries trust to that person.
1:10:36
But this is a person making $80,000 a year that can comp you a $300,000 trip.
1:10:39
So that's how we think about customer service. >> I love it. Thanks. Great. Great.
1:10:46
>> I hope you enjoyed this episode.
1:10:46
Please remember to subscribe wherever you're listening and leave a review.
1:10:49
And make sure you listen to my other podcast, Founders, for almost a decade.
1:10:52
I've obsessively read over 400 biographies of history's greatest entrepreneurs searching for ideas that you can use in your work.
1:10:59
Most of the guests you hear on this show first found me through Founders.