Private jets were a rare pandemic winner in the otherwise decimated travel business. Now that they are coming back down to earth, one heavily indebted operator could give the industry a hard landing.

Based in Malta, privately owned VistaJet grew at breakneck speed after 2019 to become the world’s second-largest flier of private jets. But, through complex financial engineering involving its founder and owner, Swiss entrepreneur Thomas Flohr—who briefly showed up in the Forbes billionaires list in 2018—it also accumulated big debts that could prove unsustainable. The company offers a kind of private-jet taxi service.

Globally, private-aviation flights are still above pre-Covid levels, but they are steadily coming down from their 2022 peak, data by lessor Global Jet Capital shows.

Investors are getting increasingly worried: A VistaJet bond issued last May, which was very oversubscribed, is now selling off. On Friday, its yield closed at 17.23%, the highest on record. This means a price of 77 cents on the dollar and a spread over Treasury yields of 13.18 percentage points. Ratings companies haven’t downgraded the bonds, which have a B-minus sub-investment grade. But only 9% of securities in that category trade at spreads above 10 percentage points, the typical threshold for distress, S&P Global Market Intelligence data shows.

Disclosures related to VistaJet’s bond showed the company’s net loss rising to $139.5 million in 2022, compared with $50.5 million in 2021. Its net debt increased to an eye-watering 23.5 times equity, up from 7.8 times a year earlier. Auditor EY warned in April that “a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern,” the Financial Times reported in May.

VistaJet’s debt load is also an underappreciated risk for Canada’s publicly-listed Bombardier, its key plane supplier, and the whole market for secondhand private jets.

Last year, Delta Air Lines rescued one of VistaJet’s peers, U.S.-based Wheels Up, from a bankruptcy that would have brought 180 planes to the market. VistaJet is bigger. During the pandemic, it acquired rivals such as Air Hamburg and Jet Edge and tripled its owned fleet to 270 jets, including many top-of-the-line Bombardier Globals with a range of 6,000 miles or more.

For now, secondhand jet prices remain sky-high, but some aircraft brokers fear that could soon change. Data from JETNET shows that the number of private aircraft for sale rose to around 1,700 in December, from a low of about 700 in early 2022.

Many of VistaJet’s aircraft deliveries from Bombardier have come via orders made between 2012 and 2015 by Flohr himself through other companies he owns, bond documents show. Export Development Canada, a public export credit agency, financed many of them, though VistaJet was on the hook for the money. Flohr then sold options to buy these planes to a firm now owned by VistaJet. Some were canceled.

How much Flohr profited from dealing in aircraft—that is, from differences in the price paid to Bombardier and what VistaJet paid him—is hard to pinpoint, because there has been a constant crisscross of payments between the firms.

The risks he took in performing the trades may have benefited the plane operator. In its bond prospectus, though, VistaJet was unable to assure investors that it “couldn’t obtain more beneficial terms by transacting with unrelated parties.”

VistaJet’s rapid growth was facilitated by state-backed guarantees. EDC’s transactions with VistaJet amounted to at least 1.7 billion Canadian dollars, equivalent to around $1.3 billion, between 2020 and 2022 alone, official data shows.

Wheels Up and VistaJet share similarities. They made a splash because, unlike Warren Buffett’s NetJets, they don’t require customers to commit a large sum upfront to own a fraction of an aircraft. Instead, the operators own planes and charge members for trips and prepaid hours. VistaJet also argues that a dense network of long-range aircraft can be used intensively across the globe.

Perhaps the strategy could be made to work, but the firm’s deep financial losses suggest that it spent too much on big aircraft. Flohr has said he is focused on improving earnings before interest, taxes, depreciation and amortization, but this isn’t the most important metric for a capital-intensive business that must pay back hefty investments.

VistaJet left its high-growth phase behind in 2023, which will have improved its finances and freed up more cash to pay lenders. But there is only so much to go around: Operating cash flow in 2022 amounted to just 16% of the company’s debts at the end of that year. Meanwhile, soaring bond yields will likely push up the cost of refinancing. A $150 million bond matures this June.

Were VistaJet to sell some of its Bombardier jets to reduce debt, it would put pressure on used prices. If, in the worst case, the company suddenly collapsed, the impact on the market could be nearly unprecedented. The operator has 94 Challengers—almost as many as the 109 for sale in the entire secondhand market, data by broker Guardian Jet shows. Its 18 Global 7500s, hard-to-move aircraft with a price tag of $60 million each, would overwhelm the eight currently available. Adding to high-end supply, the G700 made by General Dynamics-owned Gulfstream could enter the market later this year.

Bombardier makes high margins on these premium planes and could struggle to sell new ones if used prices tumble. Unlike its rivals General Dynamics and Textron, it doesn’t have other businesses to fall back on when the cyclical private-jet market turns down, having sold its regional and commercial plane lines, as well as its train business in 2021.

To be sure, the company’s long order books provide protection. And if the global economy keeps booming in 2024, private-jet values may prove resilient. For now, planes still sell quickly, JETNET data shows.

Bombardier’s stock has gained 241% since it slimmed down. But investors might yet regret that all their eggs are in such a small basket.

Write to Jon Sindreu at jon.sindreu@wsj.com

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