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.