CAVU?

Gil Wolin

I asked Gil Wolin to speak at our Aviation Leaders dinner this year and give us his outlook for our industry.  As Hurricane Sandy caused some to miss and conflicts prevented other from attending, I asked Gil to send me a copy of his remarks.  He told me that he spoke from notes but was in the process of turning the notes into his monthly column that appears in World Aircraft Sales magazine.

(For non-avation readers CAVU is aviation speak for Ceiling and Visibility Unlimited.)

October’s devastating superstorm Sandy not only shuttered the US East Coast and delayed my departure for the NBAA convention – it also highlighted one of the most significant challenges facing our industry today.

For more than a decade, aviation consultant Jim Haynes has hosted The Aviation Leaders’ Dinner the eve of NBAA. I was honored to be asked to deliver the post-repast remarks this year. But after a night of listening to Sandy’s best efforts to reduce to matchsticks the shady glen surrounding our home, I opted to stay put, and wound up addressing the august group from the comfort of my own home – via speaker phone!. 

And that underscores that challenge: face-to-face contact no longer carries the impact or urgency as before, lowering the demand for business jet travel, whether aboard owned, fractional or chartered aircraft.

My first NBAA was in 1973, when 300 new business jets delivered made it a very good year. Today, 700 deliveries is an off-year. Honeywell’s 2012 forecast predicts nearly 10,000 new jet deliveries worth about $250 billion between now and 2022. Projected delivery numbers are flat for the next decade, but the aggregate delivery value increases by 9 percent over the period. 

That’s because, unlike light jets, the demand for larger cabin jets continues to grow, keeping unit deliveries level but increasing in total value. 

That seems counterintuitive. Wouldn’t the largest, most expensive aircraft segment be mostly likely to suffer in a down economy, as travelers seek less expensive ways to travel by business jet?

Two political scientists, Jacob S. Hacker and Paul Pierson, offer some answers to this conundrum in their 2010 book, Winner Take All Politics. Analyzing the increasing concentration of wealth in a small percentage of the population during the past 30 years, they help explain the changing demographic of our industry’s target markets. 

Their analysis goes well beyond the top “1%” to which President Obama keeps referring. Yes, that top 1%, which represents about 1.5 million US households, receives 18% of the total income paid – 23%, if you add in capital gains. No doubt that is a fair concentration of wealth.

But drilling down further, Hacker and Pierson found that the top one-tenth of 1% - about 150,000 households – pull in about $7 trillion annually, which is 12.3% of the nation’s income. That’s an average income of $7.1 million per year per household.

And the top one-hundredth of 1% – that’s the wealthiest 15,000 US households – average $35 million in annual income, up from $4 million in 1974. That’s nearly a nine-fold increase in 38 years. Those 15,000 households represent 6% of the nation’s annual income – they earn one out of every $17 paid.

The Forbes 400’s numbers reflect the same trend. In 1985, their average net worth was a bit more than $650 million – in 2007, it had risen to $3.9 billion. This kind of growth and income concentration in the wealthiest tier – combined with their increased travel to new markets in BRIC and EMEAA countries – creates a market that both needs and can afford large aircraft acquisition and operating costs. 

But what about other business aviation segments?

As before, technological advances in other industries may well dictate the pace of change in all aircraft makes and models. IBM just announced a breakthrough in computer chips that may breathe new life into Moore’s Law: the number of transistors that can be built on a single chip will double at intervals of 12 to 18 months.

We’d about reached the limit on silicon chips – but IBM discovered a way to use nanotubes on carbon chips. And if Moore’s Law is alive and well, so are advances in computerized engine and flight controls, and avionics. These advances will help to drive down the prices on preowned aircraft, as they fall further behind in new generation equipment. 

The cost to update the cockpit – plus the need to train to newer avionics suites – will force even some later-model business jets into early obsolescence.

The good news? The US Presidential election is over. And regardless of their opinions about the outcome, business leaders soon will begin to make commitments on short- and long-term capital spending. That means that flying should begin to increase as we begin to return to business as usual. So as we head into 2013, a few words to the wise are in order:

• SMS is coming, despite resistance among the “old hand” aviation managers. So get ready.
• It’s time to differentiate among the Good, the Bad and the Ugly. The DOT must step up and regulate charter brokers – and eliminate the unreliable and unethical, along with the unsafe.
• Congress must properly fund both the FAA and NextGen. Speak up!

And finally, let’s all stay clear of “Lifestyles of the Rich and Famous” marketing to the 1%. Business aircraft are incredibly effective transportation tools for all leaders – even the President. After all, he spent the last two months using his aircraft to close the deal with the American voting public.

Bad Math

“Lots of folks have bought into the myth that raising $1 in taxes brings in $1 in revenue and that raising taxes on the rich will allow the government to pay down the deficit.  People buy into this flawed [static analysis] naiveté because politicians that believe in big government, and benefit from it, make campaign speeches about it.”  So writes Vaughn Cordle of AirlineForecasts, LLC.  Vaughn is an airline analyst who frequently appears on CNBC and other TV business media, including in The Wall Street Journal.  (Full disclosure, Vaughn is a member of The Aviation Group.)  His recent newsletter to his clients, How Big Government Spending Impacts The Economy and Airlines explains why the current Administration is using bad math and gives an example explaining how the Administration’s tax policy will affect Delta Airlines – their bottom line and their ability to create jobs.

Vaughn occasionally strays from airline analysis but sticks with aviation.  A few years ago he predicted the failures of the very light jet charter companies like Day Jet, and even the Eclipse, the aircraft upon which these failed companies’ business models were built.  He went toe to toe with Bob Crandall, the celebrated retired CEO of American Airlines, debating the dubious outcome of his proposed very light jet air taxi startup Pogo.  Bob had teamed up for this venture with Don Burr.  Remember People Express?

In his newsletter he points out that. “As a group, progressives and liberals are great when it comes to helping the poor and working to improve the public safety net, but they don't do math very well and apparently don't consider [or understand] dynamic analysis, which takes into account how the economy is likely to respond to changes in tax policy.”  He says the current White House's budget proposals would:
•     Reduce the rate of economic growth
•     Result in lower employment
•     Reduce personal savings
•     Reduce disposable income
•     Reduce consumer spending
•     Result in higher interest rates

He points out that “Bush came into office in 2001, the year of 9/11.  Federal receipts, outlays and surpluses or deficits are a function of the economy.  So, it's best to view these variables as a percentage of GDP.”  

Average federal receipts / average outlays / deficits as a % of GDP:
Bush years [2001-2008]: 17.6% / 19.6% / -2%   
Obama years [2009-2012]: 16.1% / 24.6% / -8.5%

As for Delta Airlines, Vaughn says, “If Obama's tax policies are allowed, it would reduce Delta's top line revenue around 1%, operating earnings 12%, but bottom line "net" earnings around 20%. This would result in a lower market value of equity, a higher cost of capital and a big hit to shareholder returns for all of those retirees, shareholder employees and other average Americans that hold stock in airlines.  Effectively, Delta would have less capital to spend and hire new employees because it will be less profitable. This is the same for all other businesses, small and large, that will be negatively impacted by a foolish tax policy designed to support a size of government that the economy simply cannot afford.”

Before he buried his head in numbers, Vaughn could be found in the left pilot seat of a major airline flying international routes.

The Three Year Tsunami

It was in the fall of 2007 when the worst case of prosecutorial excess struck the general aviation industry.  But it was the week of June 7, 2010 that the final nail may have been driven into the coffin of one of the most bizarre and saddest stories in general aviation history.

In 2007 TAG Aviation, USA/AMIJC had become the largest, safest, and probably the most highly respected aircraft management/charter company in the United States if not the world. Aviation Methods, Inc. was founded by Roger McMullin, Duncan Higgins and Jim Markel some thirty plus years ago.  Jake Cartwright, who later would become CEO of TAG Aviation, USA was an early partner of McMullin and company.  In 1998 the company was sold to TAG Aviation, a Swiss company controlled by the Ojjeh brothers, who had been early clients of AMI. Therein lay the rub.  The Ojjeh’s were Swiss citizens.  An archaic U.S. law forbids foreign nationals from owning a controlling interest in a U.S. air carrier.

TAG Aviation USA was a division of TAG Aviation, a global company that today operates the London Farnborough Airport and is actively engaged in aircraft management in Europe and Asia.  For almost ten years TAG Aviation, USA operated under an arrangement whereby AMI, which was majority owned and controlled by U.S. citizens, was the air carrier/charter operator for US-based TAG-managed clients seeking Part 135 charter.  The FAA was fully aware of this arrangement and frequently audited the company’s operations, as did the DOT, which conducted their own audit in 2004. In 2007 an aggressive lawyer at the FAA, decided the arrangement was not legal, and despite TAG’s perfect safety and operations record, revoked their air carrier certificate, and assessed the company a $10 million fine, the largest FAA fine in history.

What was left of TAG Aviation, USA’s assets were sold in early 2008 to JetDirect Aviation, a charter/management roll-up which operated under the Sentient Jet card banner and was directed by Sentient executives. This new amalgamation could not handle the influx of more than 100 business jets to their operations, and sold the Sentient charter division in an attempt to salvage the management business under the JetDirect brand. But it was to no avail, as JetDirect declared bankruptcy in early 2009, stiffing employees, customers, and vendors.  A third resurrection, under the name of Wayfarer Aviation, was attempted by Robert Pinkas of Brantley Partners.  Wayfarer was the name of another highly regarded aircraft management company started by the Rockefeller family.  (The original White Plains-based Wayfarer Aviation had been acquired by TAG in 1999.)  This effort, too, failed, and Brantley investors removed Pinkas from any management of Wayfarer.  

Most recently Arcadia Aviation, a relatively new company, has signed a binding letter of intent to acquire “certain assets”, which can only mean the “10 or more” Part 135 air carrier certificate of Wayfarer.  Arcadia acquired two very small FBOs at, Martinsburg, VA, and Monticello, NY.  Monticello is in the Catskill Mountains near the site of the infamous Woodstock Festival held during the summer of love.  Neither of these are centers of business jet activity.  But Wayfarer’s customers could use some love.  We will have to wait and see if this deal closes.  Is this the end of the story?  Stay tuned.

For more on this disaster see General Aviation Tsunami and The Debacle Story Continues.

The Need for Speed

We now live in the fast lane.  Snail mail is now e-mail.  Fast-lanes for commuters are becoming ubiquitous.  High speed rail, if not yet a reality in the US, is on the tip of our tongues.  But with advent of enhanced security and the scrapping of the Concorde, the speed of air travel has declined.

Bill Garvey in his, as usual excellent, editorial in the June issue of Business & Commercial Aviation, Studebaker Time, reminds us that it has been 63 years since Chuck Yeager pushed the Bell X-1 faster than the speed of sound and became celebrated as the first human to do so.  Except for the Concorde, a technological triumph and an economic disaster, as Bill correctly describes this British and French bird, civilian air travel has been restricted to subsonic speed.  He suggests that a business jet may be the first to make supersonic travel possible in the next ten years.

Behind Yeager’s well-known tale of his famous flight in the X-1, there is a little known story about a man who may have reached the other side of the “sound barrier” before Yeager.  There is substantial evidence that George Welch, a civilian North American Aviation test pilot, exceeded the speed of sound in an XP-86 the week before Yeager did.  My good friend Al Blackburn’s book, Aces Wild, the Race for Mach 1, tells the story of pilots who explored this unknown region of flight in the Mojave Desert in the fall of 1947.

George Welch was an Army Air Corps fighter pilot who shot down at least four Japanese aircraft as they attacked Pearl Harbor.  Some records say that Welch should have gotten credit for six kills that awful morning, but there were no gun site cameras to record the action.  George would have needed only one camera as one gun jammed.  He decimated the enemy aircraft with only half of his weapons!

After the World War II, Welch joined North American Aviation, the company that designed and built 17,000 T-6 Texans.  Almost all military pilots in the 40’s and early 50’s received basic training in the T-6.  The two most successful combat aircraft developed by North America were the P-51 Mustang and the F-86 Sabre.   The latter was the first swept wing jet fighter and dominated the sky during the Korean War.

While test flying the XP-86, Welch would routinely create a ba-boom over the famous, or infamous, desert watering hole, Pancho’s.  All the while Bell engineers and Yeager were furiously trying to get the X-1 in flying condition.  The X-1 was a single-purpose rocket ship that could not take off by itself, but was carried aloft by an Air Force B-29 bomber.  The government had spent millions on the X-1 trying to prove supersonic flight was possible despite the fact that Nazi V-2 rockets exceeded Mach 5 thousands of times years before.  Stuart Symington, Secretary of the Air Force, determined that the V-1 should be the first over the Mach 1 line, directed North American Aviation to keep the gear down on XP-86 test flights.  Welch ignored the orders, proving there was no such thing as the Sound Barrier.

There’s a Trail for That

The Department of Transportation’s mission is to "Serve the United States by ensuring a fast, safe, efficient, accessible and convenient transportation system that meets our vital national interests and enhances the quality of life of the American people, today and into the future."  Under the DOT is the FAA, the Federal Highway Administration (FHWA), the Federal Railroad Administration (FRA), The Federal Transit Administration (FTA), and the Federal Maritime Administration (FMA).  So now maybe we will have under the DOT: FAA, FHWA, FRA, FTA, FMA and be adding FBA, the Federal Bicycle Administration, to that alphabet soup.

Recently Transportation Secretary Ray LaHood, who likes to ride his bike in Washington’s Rock Creek Park on the weekends, has decided that the government is going to give bicycling the same importance as automobiles in transportation planning and the selection of projects for federal money.  A manufacturers' blog called the policy "nonsensical."  One congressman suggested LaHood was on drugs.

Shall we have runways or bike trails?  You decide.  You can vote now at Hangar Talk or next November when it really counts.

Go Girls

I watched Angela Braly’s testimony before Congress and could not help drawing the contrast to the testimony two years ago by the automobile CEO’s trying to explain their corporate jets in a similar setting.  Braly, CEO of WellPoint, a large health insurance company, was there to explain their recently announced rate increases.  She was polite but took a firm position defending her company.  When asked what her compensation was, she answered in detail explaining her salary, and all benefits, never looking at a note.  Her inquisitors, the congressional members, as usual looked foolish trying to be tough and get sound bites for the home town media.

I grew up in an age when the sexes were separated almost from birth.  After third grade and through college, I never had a class with a girl in it.  Now it is hard to find a single sex school or college.  My youngest daughter graduated two years ago from Washington & Lee University, which was all male until the 1980s.  Now I am told there are so many bright girls (sorry, I guess I should be saying women) that apply that the boys/men feel disadvantaged.

So when I see a bright attractive woman, there I got it right, dishing it back to some cranky old men, I say “Go Girls!”

Golfers, Gentlemen, and Pilots

I first met Russ Meyer 30 years ago when I was selling Cessna airplanes. Russ often gave me a ride to Wichita in a Citation when I was picking up a small Cessna to ferry back to Virginia. At one point he told me about his friend Arnold Palmer and how Arnold always bought the first of every new Citation model.

Russ met Arnold Palmer when he was a young lawyer at IMG, the powerhouse sports management firm. You can read more about this long Palmer/Meyer relationship in the February edition of Business Jet Traveler by clicking this link.

This is a great story, but what it doesn’t tell you is that Russ Meyer is a scratch golfer. Both of these men have been my heroes for years and I have dreamed of being on the golf course with them. That will never happen, but being in the cockpit with half the team has and is something I will never forget.

Note: I wrote about Russ Meyer in my Summer 2009 Newsletter when he was inducted into inducted into the National Aviation Hall of Fame along with Jimmy Stewart, and astronauts Ed White and Eileen Collins. Every living astronaut was there to honor Russ and the other inductees.