VLJs in Latin America

 - February 8, 2008, 3:50 AM

Put simply, the very light jet (VLJ) is a small airplane in search of a big market. Latin America might not be the big market the manufacturers hope for, but it does hold promise to be big enough. Just how big might depend on whether there is sufficient aviation infrastructure and government backing for an aviation segment perceived to be composed of rich men’s toys.

Brazilian aircraft manufacturer Embraer forecasts deliveries of 288 VLJs in Latin America over the next decade. Some believe that to be a conservative estimate. Rui Thomaz de Aquino, president of Taxi Aéreo Marilia (TAM), the exclusive Cessna dealer in Brazil, expects to see 21 Citation Mustangs in service in Brazil by the end of this year.

Eclipse Aviation has “about a dozen firm orders from Latin America for the Eclipse 500,” said Eclipse director of product marketing Matt Brown. Half of those are in Brazil, he added, but the first is not scheduled for delivery until 2009, “which gives us time for Brazilian certification, and to examine the market with regard to support and service.”

According to Oscar García, chairman of InterFlight Consulting and chairman for the MIU Events VLJ conference held in Rio de Janeiro in December, the VLJ in Latin America will most probably fill a niche between traditional on-demand charter and airline travel. He explained that rising ticket prices and limited access at the airlines and higher user costs for charter will open a market that the VLJ is positioned to serve.

He estimates that the airlines will sell approximately 100 million seat trips over the next three years in Latin America, and two million travelers will take advantage of private aircraft transport. These numbers, he added, suggest a substantial market potential for fast, reliable transport with the advantages of on-demand charter at prices close to coach-class full-fare airline prices.

In Brazil, said Embraer Executive Jets market analyst Cássio Grasselli, the growing hassle of airline travel will also contribute to the popularity of VLJ air-taxi service. Slightly more than 70 percent of the flights in Brazil use 10 hub airports, resulting in growing congestion and delays. Since August 2006, the percentage of on-time airline flights has shrunk from 95 percent to less than 60 percent. He also noted that the number of cities in Brazil with regular airline service has fallen from about 235 in 1997 to approximately 155 in 2004, creating an air transport void and ready market for a VLJ air-taxi service.

Aquino sees considerable potential for the VLJ in an air-taxi role, something in which TAM has been involved since the Brazilian aviation services provider was formed in 1961. He pointed out that 80 percent of TAM’s charter flights are to destinations within 1,000 nm of the point of origin, and that 75 percent of flights carry four or fewer passengers. Such missions perfectly match the capabilities of the VLJ, which typically carries four to six passengers and has an IFR max range of slightly more than 1,100 nm.

The Citation Mustang, for example, has a max IFR range of 1,150 nm and a max passenger load of five plus one pilot. The Eclipse 500 has a max IFR range of 1,300 nm and can accommodate five passengers plus a pilot. Both aircraft are certified and in service. The Phenom 100, under development by Embraer, is expected to receive certification in the second quarter of this year. It has a max range of 1,160 nm and can carry a max passenger load of five, plus a pilot.

TAM will take delivery of its first company Citation Mustang late this year as part of an air-taxi service, a role for which Aquino believes the small twinjet is particularly well suited. The Mustang has received certification from Brazilian aviation authorities and to date is the only VLJ with certification from a Latin American country.

Aquino said the Mustang will burn 87 gallons of fuel per hour (based on a flight time of 1 hour 56 minutes over 600 nm) and that maintenance costs are estimated at $90.15 per hour flown. He compared that with a flight time of 1 hour 24 minutes over the same distance in the Learjet 35, which would burn about 197 gallons of fuel per hour and rack up per-hour maintenance costs of $390.45.

VLJs are also an attractive replacement for an aging fleet of turboprops. More than half of the total business aircraft fleet of about 1,250 aircraft in service in Latin America are turboprops, of which about 68 percent are 20 years old or older, according to an Embraer estimate.

The Honeywell Annual Business Aviation Outlook released in October 2007, which forecast a record 1,300 business jet deliveries worldwide this year, also noted that in Latin America, 30 percent of existing business jets and turboprops will be replaced in the next five years. That represents a total of 600 airplanes.

Operating-cost advantages alone make the VLJ an attractive replacement choice, said Grasselli. A 600-nm mission in a Phenom 100 would require a flight time of two hours at a total cost of $1,226. The same flight in a King Air C90GT, a much newer twin turboprop than most in service in Latin America, would take 2 hours 22 minutes at a cost of $1,330, according to Embraer.

With the growth of a VLJ air-taxi industry in Europe, InterFlight Consulting chairman Oscar García foresees “parallel operations by air-taxi operations alongside regional carriers and access to the public through the same reservation systems.”

Aquino envisions a less competitive relationship in Latin America among international carriers and air-taxi operators. Most international flights to Brazil are into São Paulo, said Aquino, but he noted that this is rarely the final destination for a majority of passengers, “so a single airline booking into São Paulo with a continuation flight on an air-taxi VLJ is a real possibility.”

Creating a Caribbean Link

As VLJ manufacturers look closely at the Latin American market, they are prone to include the Caribbean as an area with excellent potential. Eclipse Aviation has sold “more than a dozen” Eclipse 500s in Latin America and the Caribbean.

Joe Leader, president of the Air Taxi Association (ATXA), sees the sale of between 500 and 900 VLJs in Latin America over the next decade, “but especially in the Caribbean.” With a max range of slightly more than 1,000 nm, the aircraft can provide nonstop service throughout the entire Caribbean basin.

Bill Herp, president and CEO of Concord, Mass.-based air-taxi operator Linear Air, took delivery of his second Eclipse 500 in mid-December and expects to have eight in service by year-end. The company fleet has in the past consisted primarily of single-engine turboprop Grand Caravans, and the focus of operations shifts seasonally from metropolitan areas of the Northeast in the summer to the Caribbean in the winter. The Caravan has been an ideal model for the leisure market, Herp said, but there has been sufficient interest in the Eclipse 500 by Caribbean business interests that he expects to add the VLJ to the fleet there in the winter of 2008/2009.

Respicio Antônio do Espirito Santo, Jr., president of the Brazilian Institute of Strategic Studies and Public Policies in Air Transport, believes VLJs have a bright future linking Latin America and North America. Most of the VLJs will easily fly nonstop between Caracas, Venezuela, and Key West International Airport in Florida. Some, under favorable conditions, will make the 1,184-nm flight nonstop from Caracas to Miami, a popular destination with many Latin American travelers.

Relaxed Regulations Might Fuel the Market
Some industry analysts equate a strong market for business aircraft with higher corporate profits. This has been particularly true in recent years in China, India and Russia, where thriving economies boost corporate profits. Santo noted that increases in gross domestic product (GDP) are directly related to increased demand for air travel. And he pointed out, “Latin American economies are in a region [unlike Europe] where small increases in GDP translate into a much higher increase in passengers flying [than in other regions].

“When we put just a few more reals, pesos or bolivianos into the pockets of the public, more of the public will be flying,” said Santo.

According to Renato Covelo, a partner with the São Paulo-based law firm of Machado, Meyer, Sendacz e Opice, banks in Latin America are creating lines for aircraft purchase. “Access to the money is easy,” he said, “but not without conditions.”

He added, “Many of the aircraft purchases are by companies buying their first aircraft, so the banks are looking carefully at creating [adequate] security packages.”
And if the expected demand for VLJs materializes, a standard purchase contract similar to that for an automobile purchase is likely to be the result.

Insurers are also gearing up to accommodate VLJ purchasers, said AIG Aviation agent Cristina Domingues. But she added that underwriters will be looking carefully at all the factors, including pilot training, operational procedures, operational use and maintenance. And as with any aircraft insurance package, she added, better training and more experience will lower premiums.

Whether the insurance experience of Latin American operators is the same remains to be seen, but Linear Air’s Herp said the rates for his Eclipse 500s, flown with two pilots, are actually a little less than what he pays for the Cessna Grand Caravans in the fleet.

Regulations, Taxes and Infrastructure Issues
Adalberto Febeliano, v-p of the Brazilian Association of General Aviation (ABAG), said that in Brazil alone, “We are expecting the delivery of 150 business aircraft per year for the next three years.”

The forecast might be still more optimistic, said Febeliano, were it not for regulatory, tax and infrastructure issues.

Speaking at the December conference, Febeliano used Brazil as an example, noting that while the country has 5,563 counties spread over more than five million sq mi, only 134 cities have regularly scheduled airline service. And only about a third of the country’s 2,500 registered runways are open to the public.

He also pointed out that unlike in other Latin American countries where the great majority of the population is concentrated in the capital city, Brazil has a widely scattered population. In fact, São Paulo, the country’s largest city with a little more than 11 million, contains only about 6 percent of Brazil’s total population of 183 million. Brasília, the capital city and seat of the federal government, has a population of 2.5 million, and Rio de Janeiro is home to about 6 million. Because of this population dispersion, said Febeliano, “business aviation is fundamental to the development of Brazil.”

Unfortunately, say some observers, the Brazilian government seems unwilling or unable to grasp this relationship. Part of the problem stems from a restructuring of aviation regulatory responsibilities. The Brazilian Civil Aviation Department (DAC), managed primarily by the military, is being replaced by the National Civilian Aviation Agency (ANAC). To further complicate matters, the agency’s administrative and financial independence was put at risk following two major airline accidents within the past couple of years.

“All this means that the transition period might impose additional certification and authorization delays,” explained Febeliano.

Introducing more turbulence to the air transportation system is the fact that ATC remains under the management of the Brazilian Air Force, so military structure and doctrine form its primary guidelines. Febeliano noted, “Limits on military spending will affect any long-term investment in this area.”

In addition, personnel hiring and training depend largely on the strategic vision of the air force, rather than the needs of civil aviation. As a result, 63 airports are responsible for more than 90 percent of total passenger traffic.

Embraer’s Grasselli suggested that the government make investments in the aviation infrastructure, in particular in São Paulo. Noting that the government has little or no money for such investments, Febeliano recommended a different approach: creating conditions that would encourage private investment.

Further, Infraero, the public company that manages some 65 Brazilian airports, is subject to political influence. As a result, said Febeliano, there is no reliever airport network and money that should have gone to congested airports such as those in São Paulo and Brasilia was spent elsewhere “where expansion was not needed.”
Taxes, said Febeliano, are another barrier to the growth of business aviation in Brazil and will present a similar hurdle to the success of the VLJ.

The airlines, he explained, pay no taxes when buying aircraft, but a private individual acquiring a glider will pay up to 41.6 percent in taxes. “A continuation of the present tax structure may create sizeable barriers to development of the VLJ market [in Brazil],” he said.

The cost of fuel, “a critical consideration,” is yet another challenge to a viable VLJ market. General aviation, said Febeliano, pays 50 percent more than the airlines for fuel. “If the fuel question isn’t resolved,” he concluded, “the VLJ will be priced out of the market.”

Santo emphasized the need for an open skies agreement among Latin American countries akin to that of the European Union. Such an agreement would greatly facilitate an air-taxi service connection. Febeliano agreed, suggesting that something like CanPass, an agreement between the Canada and the U.S. to streamline the customs and immigration process, would encourage business aviation growth. Unfortunately, said Santo, “What we have in Latin America is ‘can’t pass.’”

Aquino, who is also chairman of ABAG, said he spends half of his time in Brasília, “trying to help the government understand the importance of business aviation,” and formulating a plan to resolve challenges to the growth of a VLJ market and to business aviation in general.

While much of the VLJ conference discussions centered on challenges facing the VLJ market in Brazil, InterFlight chairman García noted that many of the problems in Brazil are similar to those in other Latin American countries. “If we can solve a problem in one country,” he said, “then we will have created the framework for a solution in all the other countries.

According to Santo, environmental responsibility is becoming as much an issue in Latin America as it is elsewhere. “Aviation has been chosen as a great villain in the battle against global warming,” he said, “and aviation must unite to deconstruct this demonization.”

Meanwhile, the business aviation industry in Latin America is moving cautiously into the age of the VLJ, encouraged by a number of factors.The strong acceptance of turboprops and piston aircraft in Latin America will facilitate acceptance of the VLJ, said ATXA president Leader, as will a speed advantage at similar cost.

Leader also said there are compelling reasons for VLJ operators in Latin America to cooperate “so long as market expansion surpasses market saturation.” With that in mind, he said, “Business models should be of a nature that will allow
high utilization of cooperative, business-to-business exchange.”

He also suggested that corporate flight departments in Latin America are going to view the VLJ air-taxi service as a source of supplemental lift. In some ways, the VLJ air-taxi business might not be so much a freestanding industry segment as much as an integrated segment of the overall air travel industry in Latin America.

The future of the VLJ in Latin America as a fledgling industry segment poised to meet demand and fit within a changing air travel industry is still to be determined. Perhaps a good baseline for forecasting the success of the VLJ in Latin America, said Herp, lies in North American and European sales and business model development. Latin American markets, he noted, have typically followed those by a year or two, and the VLJ market is not likely to be any different.