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.