Bizav will weather economic turbulence

 - May 21, 2008, 6:07 AM

Today’s economy probably has less effect on corporate aircraft use than most believe. Understanding how the economy affects business aviation requires an understanding of how the nature of business aircraft use has changed over the past 15 years or so, according to Barbara Beyer, president of Arlington, Va.-based Avmark. Avmark is an intern-ational aviation marketing and management service that specializes in airline reorganization, aviation market analysis and manufacturing and maintenance evaluations.

Historically, it was a common practice for the CEO to have corporate aircraft available to use as he saw fit. And it was often used as much for personal reasons as for company business. If corporate earnings were down, the board of directors would sell the airplane, and when the economy rose, they’d buy another one. But that practice has become a losing proposition in today’s high-technology world.

Beyer said companies currently consider a corporate aircraft to be a tool that they use appropriately. No longer a management perk, the flight department tends to weather uncertain economic times better because it isn’t considered a luxury.

“But corporate aircraft are like sports cars,” she continued. “As soon as a hot, new one is available the value of older-technology aircraft drops. There’s a huge disparity between older aircraft values and modern ones, though often there aren’t really significant changes in performance or utility. Every time it changes hands the new owner tears out the interior, adding little or nothing to the value of the airplane, running up the cost enormously.”

Beyer said she predicted the economic downturn last year and expects it will continue for another four years, though she doesn’t believe it will be as bad as the economic situation in the early 1990s. “Things are going to be a little better but we’re still going to have problems. The airlines are both a leading and lagging indicator,” she said. “Clearly we’re getting signals from the airlines that there is a major problem.” She said airline profits are down about 50 percent so far this year.

“More and more people in business aviation are finally starting to believe we’re in an economic downturn,” she said, “but I don’t see a correlation between the stock market and the economy. It’s been rising some lately but new car purchases are still down, fuel prices are high and new housing starts are still down. You have to look at the big picture.”

One of Beyer’s concerns is labor cost. “Labor is totally out of control,” she said. “The average airline per-employee labor cost increased $5,000 last year. It was brought on by the ridiculous pay airline pilots are demanding and getting.” Beyer believes domestic carriers will continue to combine and the fallout will leave the independent carriers too small to compete with them. “We’re seeing this problem emerging in Europe and to a lesser extent in Asia,” she said. “Airline salaries clearly are the industry drivers. They have the effect of increasing salaries throughout the entire industry,” she emphasized.

Staffing Shortage

Beyer, noting the growing shortage of pilots and mechanics throughout the industry, stressed that the airlines simply lure away pilots and mechanics by offering them, in most cases, better pay, benefits and working conditions. A major problem is that there is a limited source of new pilots and a marked resistance by students to go into aircraft maintenance.

“We have to increase the salaries and eliminate the perception that maintenance isn’t a particularly glamorous job,” she said. “Maintenance personnel have never really been highly valued within the industry. They have always been second-class citizens. We have to change the dynamic. There is going to be a demand for corporate air travel in good times and bad. The real question is whether or not there are going to be qualified people to keep the aircraft flying.”

Beyer said she expected Asia to lead us out of the current economic situation. “Asia is going to be the key,” she said. “The Asian economy, except for Japan, is growing again and will probably take us out of this downturn in the next four years. Asia bolstered the entire world economy during the recession of the early 1990s because of growth in that region. Japan is still in serious economic trouble and will be for some time though.”

She also noted that “amid all the doom and gloom” there are bright opportunities. “The next four years will provide opportunities for those in a position to make acquisitions,” Beyer explained. “There are going to be winners and losers. It will be the right time to buy an aircraft, for instance. And there will continue to be a demand for the support industry, though I predict we are going to see the development of alliances with non-competing businesses to provide better service for customers.”

Frax Save the Day

She is also a supporter of the fractional concept. “The whole idea of fractionals is much more sellable to a board of directors because they’re not footing the entire bill but still have an aircraft available,” she said. “Today, boards are more critical about how aircraft are used. Witness the growth in corporate shuttles since the airlines have gone to the hub-and-spoke concept. Boards are approving purchases based on real value.”

Overall, Beyer sees the future of corporate aviation as a growth industry, despite today’s economic downturn, citing three pronounced trends as motivating forces. “The fractionals are opening up corporate aviation to companies that would have never bought an airplane. Another major force behind bizav is the tremendous congestion both inside an airline cabin and at airports in general. How can you get anything constructive accomplished when you’re dealing with the airlines?” she asked. “And the airfares for business travelers are just too high. The airlines are the best form of advertising for corporate aviation that I can think of.”