U.S. service centers face new challenges

 - January 29, 2007, 9:57 AM

While the business aviation industry continues to show signs of a steady recovery, U.S. companies are facing new market challenges, one in the form of a dollar that is weaker than the euro, and another in the tougher visa regulations implemented after 9/11.

Nowhere is the weaker dollar more apparent than in the European Union, where the currency exchange market in mid-January was hitting a new low as American visitors discovered that $1 would buy only €0.74–a considerable change from early 2002, when $1 bought €1.16.

But bad news for tourists and travelers to the 25-nation European Union may be good news for business aviation suppliers in the U.S. as cheaper dollars make U.S. products and services more attractive than those same goods and services in the EU. According to the Federal Reserve Bank of Chicago, U.S. exporters benefit from a weak dollar as U.S. goods and services become less expensive for foreign consumers, who typically will take advantage of the lower prices.

“We’re always talking about outsourcing and how jobs are disappearing, but this suggests that [trend] may be going the other way,” said Susan Sheets, president of the National Aircraft Resale Association.

Gore Design Completions in San Antonio, which expects to open its new facility later this month, is ramping up to meet demand prompted by an improving economy. And according to executive v-p Kathy Gore, “There are a few jobs for which we hope the exchange rate will make the difference.”

Certainly the OEMs will benefit. Market analysts are forecasting that 20 percent of deliveries of new business aircraft will be to European customers.

French-based Dassault sells Falcons in U.S. dollars, and the company’s sales picture in Europe has benefited. While the stronger euro has increased Dassault’s manufacturing costs, the sizeable percentage of U.S.-built components in its business jets (engines, avionics, APUs and so on) and the fact that most of the aircraft are sent to the company’s Little Rock, Ark. facilities for interior completion offsets some of those costs.

Andreas Kaden, general manager of Lufthansa Bombardier Aviation Services, recently confirmed that some European customers are opting to have maintenance, overhaul and mods done at Bombardier’s U.S. service centers to benefit from the higher buying power of the euro against the dollar. However, he added, this is economical only if the customer can combine the work with a planned trip to the U.S. In other words, taking the airplane to the U.S. just for the work is not always cost-efficient.

Savannah Air Center v-p Jeff Zacharius is in no doubt that his maintenance, mods and interiors shop is benefiting from the weaker dollar in terms of actual contracts. “We’re doing full interior completions, avionics upgrades and maintenance–even some exterior paint–for European customers,” he said.

“I wouldn’t say we’re being inundated by European customers,” said Joe Carfagna, v-p of sales for Leading Edge Aviation Solutions (formerly Wings Aviation International) with offices in Franklin Lakes, N.J.; and Grapevine, Texas. “On the other hand, we’re seeing them where we didn’t before.” And not without reason. Carfagna noted that, “Even though current prices of used aircraft are slightly higher than they were a year or so ago, the dollar is much weaker, making it an attractive market for a European buyer.”

Closer to home, Canadian buyers have been buying more goods south of the border as the greenback, relative to the Canadian dollar, has declined over the past several years. That’s good news for Canadian companies such as Bombardier Aerospace, which traditionally uses U.S. vendors for many of its business jet interior components.

Observers point out, however, that both in Europe and in Canada, the weaker dollar does not translate into immediate savings for European and Canadian companies as many goods and services are part of long-term contracts, some signed years ago.
U.S. companies with large maintenance, mod and interior shops in Europe may be less concerned with whether the business comes to the U.S. or remains in Europe. Gulfstream’s service center at London Luton Airport has doubled in size since it opened in 2003, and Bombardier reports that business is brisk at its Lufthansa Bombardier Aviation Services Center at Berlin Schoenefeld Airport.

While European shops appear to be busy, there is also concern there that the weakened dollar is giving U.S. shops an edge in contract bidding. “It’s a tough business, with U.S. shops offering the same job at a lower price but equivalent value,” said a source at one major European completion center. At the rate of exchange at press time last month, €152,000 would buy about $200,000 in U.S. goods and services.

Middle East Customers Avoid U.S. Completion Centers
While the weaker dollar may work to the advantage of U.S. shops and suppliers, the war in Iraq, dissatisfaction with U.S. foreign policy in the Middle East and stricter visa requirements have the opposite effect.

The president of one established completion center specializing in widebody
interiors described the terrorist attacks on the U.S. and subsequent reaction from
immigration authorities as “a massive knife in the heart of the U.S. big-iron business.”

An executive for a large interior design and project management firm that had designed four widebodies said, “Since 9/11 and changes to the visa application requirements we’ve lost two or three Middle East contracts to European shops.”
According to Ralph Emery, chairman of Dallas-based Aviation Concepts, it has taken as much as six months for some Middle East customers to obtain visas. “We know of one Saudi customer who traditionally had come to the U.S. to have his aircraft interiors installed, and had expected to do the same with his new airplane. After months of visa delays, said Emery, “he finally gave up and took the business to a European competitor.”

For a widebody interior shop that may deliver one aircraft a year, the loss of a single contract is a business catastrophe.

Many of the OEMs also have reported delays in visa approvals for Middle East clients, attributable directly to the increased security demanded by the Department of Homeland Security (DHS). Simulator training specialists are also reporting delays and problems in obtaining visas for pilots born in the Middle East.

Simulator operators are suffering from a perception of “guilt by association on the part of the DHS.” After 9/11, investigators discovered that a number of the terrorists had attended flight schools in the U.S. in preparation for their roles. In response, U.S. authorities passed new regulations making it more difficult for applicants to obtain visas for the purpose of learning to fly at a U.S. school. Long delays for visa approvals have resulted. The problem was that the DHS didn’t distinguish between a flight school and flight simulator training. Right or wrong, the result is that the relative ease of entering Europe has become leverage for European shops negotiating with Middle East customers.

It has reached the point that industry representatives from groups such as NBAA and the General Aviation Manufacturers Association have been lobbying the DHS to reduce the delays involved in visa approvals for the industry’s Middle East customers.
“The frustrating thing is that everyone on all sides of the issue seems to recognize that there’s a problem, but no one has come up with a solution,” said NBAA president Ed Bolen.

The U.S.’s Loss Is Europe’s Gain
If it seems certain that U.S. completion centers are losing Middle East customers, it appears equally certain that European shops are not. Early last year, Swiss aviation services provider Jet Aviation delivered its second Boeing Business Jet to a Middle East customer, and the Basel facility is currently completing a third. Then in June the company announced it had received contracts for two Boeing 747-400 executive interiors from Dubai Air Wing.

Expanding its profile in the Middle East, Jet Aviation expects to open an FBO operation at Kuwait International Airport this year. Comments from Jet Aviation Group CEO Heinz Kohli amounted to a blunt challenge to competitors: “This is an important strategic move to strengthen our position as a global provider of corporate aviation services,” he said. The new facility will offer private aircraft handling, line maintenance and hangarage.

Lufthansa Technik is also enjoying an increase in Middle East business. In the fall last year, the company announced it had been awarded a long-term contract from VIP operator MidEast Jet of Saudi Arabia for “life-cycle care” for a combined total of six widebody jets. The contract includes retrofit of Class 3 electronic flight bags on a Boeing 777-200, as well as service checks and other work on a 767-200, 757-200 and three BBJs. All six of the airplanes are outfitted for executive transport.
Two months later, the company announced it had been awarded a contract from another “Arab” customer to install an executive interior in a Boeing 747-400. The widebody job is in addition to another executive 747-400 interior installation already under way at Hamburg.

Where does that leave U.S. interior completion shops and aviation service providers? “Worried,” said one, who declined to be identified. Certainly if the remarks of Edward Walker, president of the Middle East Institute, are taken seriously, U.S. aviation service providers should be worried.

In a perspective released by the institute last August, Walker said he and Wyche Fowler, chairman of MEI’s board of governors, were “deeply disturbed by the extreme reaction we encountered in the business community in Saudi Arabia in December toward the U.S. and toward the [U.S.] administration’s visa and immigration policies.”

While the U.S. business aviation industry is understandably reluctant to go on record expressing the same sentiment, Walker’s comments reflected those feelings.
The American business community has been “deeply concerned that U.S. policies would eat into their bottom line over time,” and, he added, “The cost of the new U.S. policy to U.S. business will mount into the billions of dollars.”

Walker noted that according to the U.S. Embassy in Riyadh, visa applications in Saudi Arabia have declined by 70 percent since before 9/11, and, he added, “Applications in the Arab world as a whole have declined 40 percent.”

Arab businessmen told Walker and Fowler that they could not do business with the U.S, given the long lead time for visas. They also said they would not subject themselves to the indignities of U.S. border controls. While reports of strip searches and body cavity examinations may be exaggerated, Walker pointed out that all that was required in the close-knit Saudi business community was a single incident.

In his assessment of the loss of Middle East customers, Emery noted that Europeans, “are taking advantage of the dissatisfaction on the part of Middle East customers.” As if to confirm Emery’s assessment, Saudis who told Walker and Fowler that they were moving their business to Europe noted that British and French companies were now advertising that visa applications would be approved within 72 hours.

“People have been asking, ‘Where did all our Middle East customers go?’,” said Aviation Concepts president Kim Emery. “Now we know.”