General Aviation Tsunami

On October 4th the FAA first suspended and eight days later revoked AMI Jet Charter’s air carrier certificate. Immediately a shock wave of tsunami proportions was felt in every sector of the general aviation industry. Until AMI Jet Charter was acquired by TAG Aviation USA in 1996, this company was known as Aviation Methods, a highly successful and highly regarded aircraft management company and charter operator.

Aviation Methods was founded by Roger McMullin and Jake Cartwright 30 years ago. One of the major customers of Aviation Methods was TAG Aviation USA, owned by TAG Aviation S.A., a Geneva-based holding company founded by Akram Ojjeh (1923-1991) and his sons, Mansour and Aziz.

Because of a law that prohibits a non-US entity from owning controlling interest in a U.S. air carrier (a company operating under FAA part 121 or part 134), TAG Aviation USA purchased only 49% of Aviation Methods. Fifty-one percent remained owned by two US citizens. All of Aviation Methods aircraft became management clients of TAG Aviation USA.

One of the reasons for the certificate revocation was the FAA's allegation that TAG, not AMI, was exercising operational control of flights, which would mean it was, in the words of the FAA, "under active control of foreign interests".

The Department of Transportation oversees the ownership issue of all air carriers operating within the United States. The DOT enforces an arcane law (49 U.S.C. § 41101), passed in the 1930s, that prohibits control of any U.S. air carrier by a foreign entity. In today’s global economy this law makes no sense and should be repealed. In September of 2005 the DOT issued an exemption to this law for air carriers providing “assistance in the carriage of freight and people affected by Hurricane Katrina”. Sam Skinner, who was Secretary of Transportation from 1989 to 1991, proposed repealing this law in the interest of bringing more capital into the U.S. airline market. Jeff Shane, Under Secretary of Transportation for Policy, and others have long been advocates of repealing or amending this law, but all such proposals have run into a buzz saw of special interest opposition on Capitol Hill.

At the recent Aviation Business Roundtable meeting I sat across from Mary Peters, the current DOT Secretary. I wanted to point out to her that the largest aviation service companies in the GA industry are 100% foreign owned. Directly on her left was the CEO of BBA Aviation, a British owned company and the parent of Signature Flight Support. Three chairs down on her left was Jet Aviation, owned by a German investment company. At the adjoining table was Landmark Aviation, owned by Dubai Aerospace. Not in the room was the largest (70 bases) FBO in U.S., Atlantic Aviation, owned by the Australian financial power house Macquarie Bank.

So where’s the beef and what harm is there in having foreign ownership of business jet charter companies? Mrs. Peters, or anyone else, please explain this to me.

Footnote:
In researching this article I consulted with my cousin Langhorne Bond. Langhorne’s father worked for Pan American World Airlines. In the 1930s and 40s he set up and operated China National Aviation Corporation which Pam Am controlled. You can read the whole story in “Wings for an Embattled China”. I also found an article, “30th Anniversary: TAG and Bombardier”. Much of this story was related by Bill Juvonen who along with Jim Taylor, Dave Hurley, and Barry Smith helped launch the Bombardier (then Canadair) Challenger. Today Bill Juvonen is a part of The Aviation Group.

Of Vacuum Tubes and Sealing Wax

This week I was part of a six member panel of “elder statesmen” that held a press conference in the Capitol building. I my case they may have had the first part of the description correct but I was out-eldered by Alfred Kahn (above), who is about to turn 90. Kahn, a former Chairman of the CAB and known as the “father of airline deregulation”, is as sharp as a tack and full of P&V. Others on the panel were former DOT Secretary Jim Burnley, and former FAA Administrator Langhorne Bond. Jonathan Howe and yours truly represented the General Aviation industry. Jonathan was a former President of NBAA.

We were on the Hill touting a Statement we had signed onto. The statement called on Congress to look beyond the current squabble over user fees and controller contracts, and to begin the process of completely reorganizing Air Traffic Control. If you are wondering why traveling by air has become such a mess. Read two excellent pieces that appeared in the Wall Street Journal the same week I was on the Hill. The video interview with John Fund is a must watch, and Holman Jenkins’ Op-Ed article A Dream of Air Travel is a must read.

Jonathan Howe pointed out that the General Aviation trade associations, AOPA, NBAA, and NATA, were doing their members a disservice by not getting on the ATC reform bandwagon. He said that when the system reaches saturation, GA will be left waiting as aircraft with large passenger loads, the airlines, will be given priority in the airspace system. It has happened before. Jonathan reminded everyone of the GAR program during the controller strike of the 1980s.

I pointed out two success stories of two freed former government entities. Canada’s air traffic system became NavCanada ten years ago and is governed by a stakeholder Board and operated independently from the government. Costs are down and efficiency is up. My second example of freedom-from-government concerned Washington National and Dulles airports. These airports were once anachronisms - some called them dinosaurs. However, when freed from governance by Congress and management by the FAA, they became modern marvels. Jim Wilding was the manager both under the FAA and MWAA. Once empowered by a free market and with access to the capital markets, he was free to work his magic.

Believe it or not there are still vacuum tubes in ATC radar, and as John Fund points out in the video, there are only 6 programmers left who understand some critical ATC software code. It is indeed Alice in Wonderland.

Others signing the statement were Aaron Gelman, founder of GRA, Inc., Clint Oster, former research director of the Aviation Safety Commission, and James Wilding, former CEO of the Metropolitan Washington Airports Authority.

David vs. Goliath

Over a year ago I wrote about the problem FAA certified repair station were having in obtaining maintenance manuals from aircraft manufacturers, Freedom of Maintenance Information. Instructions for Continued Airworthiness (ICA) in FAA parlance are the manuals required to maintain aircraft in an airworthy condition. The FAA requires anyone repairing an aircraft or an aircraft’s components do so in accordance with the ICA.

I just read the U.S. Southern District Court’s response to Gulfstream’s request to vacate the Court’s decision of a year ago in favor of CAMP Systems. It was amazing to me that Gulfstream would go back to the Court after reaching a settlement with CAMP following the Court’s earlier decision. Apparently the Court was just as taken back, writing in their opinion: If all vacatur does is slave a wounded ego, that would not advance the public’s interest. Granting Gulfstream’s motion here, for that mater would only create a precedent for more motions – thus wasting more judicial resources.

The court did not mention the wasting of company resources. Gulfstream apparently has plenty of resources to waste but almost all repair stations are small businesses that could never afford to take on giant Gulfstream and the other aircraft manufacturers. They all owe a vote of thanks to CAMP, which is also a small business, at least compared to General Dynamics, Gulfstream’s parent.

Incipient Panic

"Incipient panic" is how Look Out, This Crunch Is Serious, an opinion piece in The Washington Post, began. Incipient means “beginning to appear”. From where I sit in Virginia, a long way from Wall Street, it would seem we are past the beginning of a panic. Panic in the credit markets has spilled into the equity markets with all the averages & indexes we use setting new record one-day declines and then record advances, then repeating this extreme up and down cycle a few days later as the next injection from the Central Banks or the collapse of the next hedge fund or mortgage lender is announced in the press. If not a panic, it is the lead story on the evening news and fodder for a full hour recently on Larry King live.

The first question from every analyst who has called me in the last week has been, “How is the meltdown in the credit markets affecting the business jet industry?" So I decided to give myself a refresher course, grabbed my dog-eared copy of the classic Extraordinary Popular Delusions and the Madness of Crowds, the more recent and in my mind classic, When Genius Failed, and sat down for a Sunday of reading. I also ordered Devil Take the Hindmost: A history of Financial Speculation, by Edward Chancellor, the author of the afore-mentioned Post article. I also have calls into some good friends whom I consider the best business jet marketers in the business. I looked through the program guide for the National Business Aircraft Association (NBAA) convention, only a month away, and could not find any seminar on the credit markets. Nevertheless, I will be listening for any tremors while I am at NBAA next month.

Last week I wrote about this industry surviving a perfect storm, and warned of a possible approaching tsunami that would test our industry’s ability to survive an even larger Perfect Storm.

I invite you to read along with me and share your thoughts on these interesting times. Remember as a wise man once said, “In Adversity there arises Opportunity”. My partners and I will be looking for those opportunities.

Irrational Exuberance

Just over ten years ago in a speech to Congress Alan Greenspan proposed that the reason for the rising stock market was Irrational Exuberance.

I have watched the range of multiples paid for general aviation service companies double over the last seven years.

Most of the fundamentals for the GA industry have been strong. Business jet sales have reached new highs almost every year, backlogs are at record levels, and the number of hours flown has steadily increased. All this has occurred in the face of what I have called the perfect storm – the dot-com meltdown, 9-11, and record high fuel prices. More waves from this storm are reaching the shores of general aviation as I write this:

• An antiquated Air Traffic Control System;
• An FAA with no funds or direction from Congress to improve this situation;
• Airlines increasing the size of their fleet with smaller aircraft;
• An airport infrastructure unable to accommodate these changes;
  

And then there are the collapsing worldwide debt markets… Could all this mean a tsunami is approaching?

On the bright side, after 1996 when Greenspan tagged the stock market with Irrational Exuberance, the market set record highs for the next four years until the real irrational exuberance of the dot-com era burst that bubble.

The Barron Killer

This week Cirrus Design announced their new Cirrus Jet. This was a closely guarded secret development project. I visited Cirrus’s headquarters and factory last year. No one would talk about the jet then, but you could just feel that it was there somewhere. Last fall at the NBAA trade show there was a scheduled press conference at the Cirrus booth where most expected the jet announcement, but again no mention of a jet. NBAA took place only days after the tragic accident when a Cirrus prop plane crashed into a building in Manhattan with New York Yankees pitcher Cory Lidle as one of the pilots. Cirrus Design was not looking for attention until they could sort out what happened. (It appears it was pilot error – a poorly planned 180 degree turn over the East River.)

Cirrus is a very credible company and builds great small single engine propeller air planes. In only a few years they out produced and out sold Cessna’s single engine line, which had dominated the industry for years. The Cirrus Jet should not be lumped into the class known as very light jets (VLJs) like the Eclipse, Honda Jet, Embraer Phenom, etc. We have written earlier about the VLJs – most recently Very Light Jets: A Reality Check for Eclipse, and last summer I posed the question, The Eclipse of the Eclipse?. However I predict the Cirrus jet will be a success; but there are bumps in the road ahead.

The Cirrus Jet is a personal airplane and will be owned and flown by individuals. It has a price point at $1 million that makes it comparable to a Beech Barron. If fact it might be the Barron killer. What red blooded pilot who can afford a Barron would not want to go higher, faster, and maybe father than the two engine version of the 60 year old Bonanza? More than 180 of these high testosterone pilots have stroked a check for a $100,000 deposit to make their dream come true.

Certification of a jet is different than certifying a non-pressurized piston engine powered aircraft. However, Cirrus Design has a lot of experience in certifying new and sometimes radical designs.

The silver lining or dark cloud, depending on where you stand, is the airline implosion this summer with delayed and cancelled flights. The traveling public is looking for any alternative to using the unreliable airlines. This mess will certainly sell more general aviation airplanes, and clog our highways and trains. Mix all this in with an antiquated air traffic control system, along with record high fuel prices, and we have a formula that spells trouble for all if corrections are not made.

Wait – User Fees Might Be Good For Us?

Bob Poole, Director of Transportation Studies at nonprofit think-tank The Reason Foundation explained to an AVweb reporter why user fees might not be such a bad thing for general aviation after all. This is a 16 minute interview that is well worth your attention.
POD Click here to download and listen to the interview.

The Airline Alternative

As business jet sales continue to set new records, the lay press is beginning to notice. This publicity is partially fueled by the airline industry. They discovered after 9/11 that their first class cabins were occupied by a large number of non-paying passengers. These seats were filled with frequent fliers who suddenly found that that their, here-to-fore seldom used miles, could be cashed in or used to upgrade. Full paying business passengers were hard to find. It seems they had discovered the advantages of business jet travel.

Now the business jet industry is being vilified by the airlines for the long delays, missed connections, and long waits on the ramp for a gate. The irony is that you can watch the charade in ads paid for by the airline trade association on the CNN airport channel as you wait, sometimes hours, for the flight that was delayed or missed because of the airlines’ own doing.

In the upside down airline marketing mentality the first class cabin is now hard to find – paid for or not. The airlines have downsized to fleets of regional jets holding 50 to 70 passengers. "Regional" is an oxymoron as flights on these stretched business jets often exceed 3 hours and cover well over a thousand miles. It now takes 3 planes or more to take the same number of passengers to the same destination. USA Today’s Business Travel column spoke on The Curse of the Regional Jet. No wonder there is seldom an empty gate when my flight arrives, or I sit in a que on the ramp waiting for takeoff. Heaven help me if my flight is cancelled. An empty seat anywhere is rare, except perhaps on a red eye flight.

The beauty of private jet travel has been discovered. Fractional ownership and jet cards, a debit card for private jet travel, makes it affordable for many more. If you want to own your own jet, major financial institutions have formed divisions ready to lend or lease. The Wall Street Journal recently ran a story, Interest In Private Jets Takes Off. The WSJ points out that large banks - including Bank of America Corp., Citigroup Inc., Merrill Lynch & Co., PNC Financial Services Group Inc., and Wachovia Corp. - have in-house departments dedicated to helping individuals and corporations acquire and finance private jets.

So while the airlines and their passengers suffer, the business jet industry and all the related support businesses flourish.

Summer of Discontent

I just had an experience that I am afraid is what we will all be experiencing at an increasing rate. It was not fun.

On a trip back from the southeast I had to make a connection through Dallas. My flight on a regional jet departed on time, arriving at DFW a few minutes early. We were told that there had been some weather event the night before and planes were leaving the gates late so we waited on the ramp for 30 minutes before finally getting to a gate. I dashed to make my 50 minute connection and missed it by 1 minute.

I was rebooked on a flight leaving four hours later. That flight left the gate on time, but as we approached the takeoff runway, the pilot announced that there was weather to the east and the revised departure route would require departing planes to be placed in 25 mile trail instead of the normal 7 miles. I couldn’t count them all but my guess is that there were over 30 planes waiting ahead of us. We finally took off one hour after leaving the gate.

It is clear to me that these delays were not weather delays but rather a result of a broken ATC system. A system that separates aircraft by 25 miles at low altitudes is not only broken, but ridiculous. I am not sure what caused the late push back and jam up at the gate when I arrived, but I will bet it had nothing to do with weather the previous night. My guess is that regional jets were being held at the gate for the same reason we waited on my second leg. Regional jets can not burn fuel for and hour before taking off and fly 3 plus hours. (Hardly a regional trip but becoming more common as the airlines downsize equipment.)

Unfortunately I am finding this is the norm for airline travel. Sooner or later the flying public will stop believing the controller union’s spiel about the finest ATC system, and become tired of the airline and GA alphabet groups’ whining about user fees and who pays what. Eventually the public will wake up to the fact that it is the way ATC is governed that is causing their pain, and demand change.

I have co-authored, with Jonathan Howe, a guest editorial on this subject in the May issue of Professional Pilot magazine. Click here to read what we had to say.

The Buzz from Orlando

Last month NATA and PAMA held their annual conventions during the Aviation Industry Expo in Orlando. NATA is the trade association representing FBOs and air charter companies, and PAMA is the mechanics’ association. The ground support equipment folks (fuel trucks, tugs and the like) were also part of the trade show. Most of the news worth reporting came from the NATA and PAMA groups.

Jim Christiansen, president of NetJets, the 100 pound gorilla of the fractional and charter industry, painted a very up beat picture. NetJet’s fleet flew 380,000 hours last year and is expecting to fly over 400,000 hours in 2007. NetJets US operations saw a big turn around in 2006 by earning $143 million compared to a loss of $80 million the year before. FBO operators' eyes opened when Jim told the audience that NetJets burned 120 million gallons of jet fuel last year and is expected to use 135 million gallons this year, and 150 million next year. DayJet, the not-yet-started-up VLJ air taxi company, in a futile attempt to sound important, announced that they would use 25 million gallons in their first year of operations. What they didn’t say was when that year would begin. I have a feeling the DayJet speaker was confusing gallons with dollars. I am sure that DayJet will easily burn though $25 million in the first year.

Europe and Asia seems to be the next-big-thing for business aviation. Warren Buffett, writing in the world’s most readable and most read annual report, talked mainly about Berkshire Hathaway’s NetJets increasing success in Europe. In the first five years of operating in Europe, beginning in 1996, NetJets acquired only 80 customers. He said recently that European demand for fractional shares has “exploded”. In the last two years NetJets Europe has added 586 customers each year with a total base of more than 1,300 today. Eastern Europe and the Far East is a vast untapped market with rapidly growing economies. It was reported that a 30 person delegation from Russia alone attended the event in Orlando.

On the PAMA side Jack Demeis, president and founder of Continuum Applied Technology, opened the most eyes. Jack has been a good friend for years and I consider him one of the brightest technologist and futurists I know in this industry. Jack sees major changes in the aviation industry in the next 15 years. He predicted that there would be 9,000 UAVs in civilian use in this time frame. He reminded the audience that civilian orbital and suborbital flight is a reality today with new spaceports in the planning stage in Singapore and elsewhere. Jack told me that software would continue to drive aircraft. It reminded me of the F-22 squadron that was "shot down" by the International Date Line. Everything mechanical is becoming digital. I just picked up my car from the shop and was told the problem was corrected by rebooting the system.

Very Light Jets: A Reality Check for Eclipse

Vaughn Cordle, CFA / AirlineForecasts

The perception of easy (i.e., dumb) money and current anti-airline sentiments are fueling the entrepreneurial spirit to create a better mouse trap out of air transportation. New and improved engines, avionics, and manufacturing processes have resulted in new low-cost aircraft designs, thereby encouraging those who think they have a unique business plan to get in on the game.

Lots of people will try lots of things, most of which will fail, and those who do succeed will become very rich, which gets to the very heart of capitalism and the reason why mousetraps are being improved in the first place.

One of the most interesting experiments now in process is the Eclipse airplane being put together by Vern Raburn. Spurred by an understandable desire to bring jet travel to the masses, Raburn has built a very cheap, very small airplane. He has raised a prodigious amount of money and has overcome many obstacles. Now, even with certification in hand, red flags are popping up all over the place as he seeks a production certificate: reports of high altitude instability when fully loaded; design flaws in the windshield; and avionics problems, to name a few. Also, it doesn't help when reputable companies like United Airlines (pilot training) and Avidyne (avionics) have been replaced – or quit - as key suppliers.

Raburn has a long way to go if Eclipse is to become a credible manufacturer. However, if he can get through his troubles, his price point is going to make the Eclipse tough to beat for very short haul, regional flying of the kind that many air taxi companies are proposing and hoping to finance. Better airplanes will undoubtedly be available for other types of air taxi missions, but it will be very difficult for another manufacturer to approach Eclipse price and cost points. Success, however, is dependent, on getting the plane fully built and subsequently, proving that it can support the high utilization rates on which air taxi economics are dependent.

It is premature to predict the demise of Eclipse since there is no other aircraft that has the potential to lower the price point for private aviation as dramatically as it can. Moreover, as of yet, no VLJ manufacturer other than Eclipse has shown an understanding of the parts and support requirements of air taxi companies.

Embraer has an aircraft that may prove to be the default choice for air taxi use, even though it is heavier, more expensive and costs more to operate. The good news for Eclipse is that the Phenom 100 will not be ready until late 2008. The bad news for Eclipse is that the Phenom 100 is designed for comfort and robust utilization, with a cabin and baggage volume twice that of the Eclipse. More importantly perhaps, the Phenom 100 is designed for 35,000 cycles, which is 3.5 times that of the Eclipse, meaning that resale and residual values will be significantly lower for the Eclipse after a few years of heavy use unless it proves more durable than is now anticipated.

AirlineForecasts has examined the business plans of many of the new upstarts that will use the new, low-cost VLJs. Most are based on unrealistic assumptions of consumer demand and have significantly understated the true cost of providing on-demand air taxi service. Most should not be financed.

Several of the air taxi aspirants may actually get launched, but their success will depend on choosing aircraft that appropriately match demand in the markets they wish to serve, on good management skills, and on the ability to raise sufficient capital.

JetBird and Pogo are two examples of new VLJ air-taxi operators that have the right management capabilities. Moreover, both potentially have the kind of financial capability that will be required for survival of the “surge and shakeout” that AirlineForecasts expect to occur over the next several years.

Mao Tse Tung once described our attempts to innovate by saying “A hundred flowers will bloom,” pointing out that our potential is great but only if conditions are just right. Low cost and abundant capital, combined with a demand for low cost and hassle-free air transportation, results in a market ripe for innovation and entrepreneurship. However, only a lucky few will blossom fully, while others quickly wilt under the searing heat of competition and market realities. It is too soon to tell which type of flower Eclipse will be, but it is certain that Raburn’s ingenuity and doggedness will be sorely tested in the months to come.

Eclipse – Barely Breathing

In the last few days we have seen a flurry of articles in the aviation press about the trouble Eclipse is having getting FAA production certification approval. Only one aircraft has actually been delivered since December when David Crowe took delivery of the first aircraft. Recent troubles became apparent when a week ago CEO Vern Raburn announced the end of Avidyne’s involvement in the program. Avidyne was a key supplier of almost the entire avionics suite. Avidyne is not the first respected subcontractor to be terminated. Williams International, whose engine the Eclipse was designed around, dropped out early in the program requiring a major redesign and delay of production. Last week Raburn said that serious problems have “plagued virtually every aspect of development, design and production.” Within hours United Airlines dropped the Eclipse training program. A type certificate is required to fly the airplane and to my knowledge the only pilots authorized to fly the Eclipse are production test pilots. With no training program, Eclipse typed pilots will be hard to find. I am sure this does not make the pioneering Mr. Crowe very happy, or any of the hundreds of others waiting for delivery. I wrote The Eclipse of the Eclipse? last August, but I did not foresee these problems, nor did I expect to see this company on life support so soon.

I asked Vaughn Cordle, one of my partners in The Aviation Group, CEO and Chief Analyst of AirlineForecasts, and a B777 pilot for a major airline, for a reality check. I will be posting his reply here.

Too Much Money

When too much money chases too few goods, prices rise – Economics 101 – and weak business plans get funded. It looks like that idea is being applied to the emerging VLJ industry. I count 14 manufacturers that have entered this space or have announced they will very soon. Seven air taxi business plans are being circulated amongst the investment community. There seems to be no shortage of capital waiting to be wasted away on this dream that has yet to fly a single commercial flight and, so far, has only one viable aircraft (the Cessna Mustang) capable of flying a paying passenger. I have no doubt that VLJs will be produced in quantity, but far lower than almost all forecasts. I feel equally strongly that the VLJ air taxi models will fail and the manufacturers that are basing their production plans on these models will be sadly disappointed. Most of these manufacturers will also fail.

2006 was the best year ever for business jet manufactures. Backlogs are high and the outlook for 2007 is very promising. But with the exception of Embraer, Cessna, and Honda, the VLJ companies are skating on very thin ice – ice being capital. The ice supporting the VLJ air taxi companies is even thinner. A hiccup in the economy or a VLJ accident could cause big problems for the under-capitalized companies.

At the moment there seems to be plenty of ice. It is 19 degrees outside my window. Watch out - warmer days are coming.