Business aviation enjoys boom times but faces complex, challenging future.

These are boom times for the business aviation industry. Manufacturers of business jets such as Gulfstream, Raytheon, Cessna, Bombardier, Dassault and Embraer are all building and selling airplanes as fast as their assembly lines will permit. The very light jet or "VLJ" is now a reality and hundreds are expected to enter service in the next few years. At the same time, however, the business of buying, selling, financing and operating corporate jets is becoming ever-more complicated, as changes in international, United States and local laws and regulations add complexity and create uncertainty for aircraft owners and operators.

Business jet aircraft manufacturers are enjoying a third consecutive year of record deliveries, sales and orders. Industry experts believe that more than 930 business jets will be delivered this year--an all-time record--and more than 1,100 will be delivered in 2007. Cessna, a Textron subsidiary, sold 249 business jets in 2005 and currently expects to deliver nearly 300 jets in 2006, a 19 percent increase. Cessna already has 290 orders in the pipeline for 2007 delivery. New aircraft orders from Gulfstream, a division of General Dynamics, are likewise expected to set a company record for the third straight year in 2006. Gulfstream took in 124 orders in 2005 and has more than 300 aircraft in backlog with deliveries scheduled through 2011. The company delivered 84 completed jets in 2005 and another 49 during the first half of 2006. Raytheon Aircraft, which received a $1 billion order for 50 Hawker 4000 aircraft from Net Jets in December 2005, expects to deliver 156 business jets and 142 turboprop King Airs before the end of the year, a 15% increase over 2005. Canadian-based Bombardier and French Dassault are also enjoying record-breaking years.

Boom times for original equipment manufacturers (OEMs) also have a positive effect on the preowned aircraft market as well. Susan Sheets, president of the National Aircraft Resale Association, reports that members of her organization, representing some 20% of the nationwide aircraft broker-dealer market, had a record-setting year in 2005, selling more $2 billion worth of used aircraft, and expect to top that number this year. With OEMs holding multi-year order backlogs, many buyers cannot afford to wait for new airplanes to be built and those purchases are driving the inventory of preowned aircraft down and prices up.

But even as the major manufacturers and resale brokers report unprecedented success, it is the VLJ that may spur a revolution in the business aviation industry over the next decade. Very light jets, sometimes also known as microjets, are turbojet fan aircraft weighing 10,000 pounds or less maximum takeoff weight and approved for single pilot operation. VLJs can weigh less than an SUV, but have a range of more than 1,000 miles and can carry as many as six persons at maximum speeds of more than 400 miles an hour. VLJs also feature the latest advances in cockpit automation and engine and avionics technology, which is expected to make them easier to operate and fly than traditional commercial jet aircraft. At the same time, VLJs are expected to sell for $1 million to $3 million, a price tag that will place them within the reach of many businesses and individuals that couldn't afford to buy a larger business jet. Per hour operating costs are also expected to be significantly lower and the VLJ will be capable of taking off and landing from shorter runways than commercial airliners, opening access to more than 5,000 smaller airports across the country.

The Eclipse 500, built by Eclipse Aviation of Albuquerque, New Mexico, was the first VLJ to win governmental approval, receiving provisional certification from the Federal Aviation Administration (FAA) in July of this year in a ceremony at the annual Oshkosh Air Show. The Cessna Mustang was close behind and actually beat Eclipse to full "type certification," receiving the FAA's "good to go" stamp of approval in early September.

Many industry experts believe the market for the VLJ is going to be huge and that VLJs are going to be a boon to business and corporate aviation. Several existing and start-up charter operators around the country believe they will be able to turn a profit based primarily on the use of the VLJ. Eclipse already has 1,500 jets on order and Cessna has customers for 250 Mustangs, with delivery positions sold out through 2009. A recent study by an aviation consulting group predicts six VLJ designs will make it through the thicket of regulatory clearance and that buyers will spend more than $2.5 billion on the new microjets through 2011. Other VLJs that are ultimately expected to make it into service in addition to the Eclipse 500 and the Mustang are the Adam A700, Diamond D-Jet, Embraer Phenom 100 and Honda Jet. Combined production of these models by the six manufacturers is expected to rise from 115 aircraft in 2007 to 350 microjets in 2011. During that same five-year period, 85 percent of all VLJ deliveries are expected to be made to North American buyers.

If these prognostications prove to be true, the VLJ could ultimately redefine the way many Americans travel, reduce airport congestion and boost economic growth in smaller cities and towns that now lack all commercial air service.

Despite the great numbers and rosy predictions, however, there are a number of challenges facing business aircraft owners and operators. Would-be buyers of corporate aircraft not only need to understand the market, but must also be aware of pressures from a number of different sources. Consider the following:

In recent years, a task force of various federal agencies, including the FAA, has been trying to figure out how to finance an upgrading of the current air traffic control (ATC) system. The current system doesn't make use of the 21st Century technology already built into most airplanes and lacks the capacity to handle expected increases in air traffic over the next 20 years. However, the FAA has been chronically underfunded in recent years and cannot afford to make needed changes in the ATC system. For that reason, federal officials are looking at other ways to raise the money to modernize control of America's airspace. A major political battle erupted this summer when the Air Transport Association (ATA), the group that represents the nation's commercial airlines, proposed the imposition of user fees on every airplane, regardless of whether the aircraft has one passenger or 400 passengers. A user-fee system would be based on the number of departures and the length of time an aircraft uses the ATC system and it would replace, in its entirety, the current system, which is based on taxes raised from commercial airline tickets sales, fuel taxes paid by business jets and a percentage charge on the hourly cost of charter and fractional operations. The business aviation community arose in a fury over the ATA proposal, arguing that the airlines were unfairly attempting to shift more than $2 billion in ATC funding to general aviation. Trade groups said a user-fee system would have a devastating impact on the cost of business aircraft usage. Congress and the Bush Administration are expected to begin confronting the problem next year when the legislators take up the issue of funding reauthorization for the FAA.

Another challenge to business aviation, especially to owners of older aircraft, is presented by efforts to eliminate older, noisier airplanes. The FAA banned the use of all Stage 2 aircraft over 75,000 pounds in 2000, but Stage 2 aircraft under that weight threshold are still permitted to operate in the United States. For example, of the 188 business jets currently based at Van Nuys Airport, 87 are Stage 2. Although so-called "non-addition" rules prohibit anyone from basing any more Stage 2 jets at Van Nuys and will require any replacement Stage 2 aircraft to leave the airport by January 1, 2011, Stage 2 aircraft that were already based at Van Nuys on June 10, 2000 are "grandfathered" and can remain at the airport indefinitely. The Los Angeles Board of Airport Commissioners recently directed Los Angeles World Airports, the agency that operates Van Nuys and three other airports in the greater Los Angeles area, to investigate whether it might be possible under federal law to eliminate all Stage 2 operations at Van Nuys within seven years. This means that owners of aircraft such as the Learjet 20-series, Gulfstream GII and GIII and Dassault Falcon 20 could eventually be forced to move their airplanes away from Van Nuys unless expensive hush kits can be mounted on the engines to reduce the noise they generate. LAWA is also going to explore the possibility of a cap on the number of Stage 3 aircraft at Van Nuys and a cap or complete phase-out of helicopters at that airport.

The FAA is expected to release a new policy applicable to air taxi and charter operators later this fall. The new rules, known as Operations Specifications A008 or "Op Spec 008," are already having a significant impact on both air charter operators and the aircraft owners who have their airplanes managed by charter companies. Op Spec 008 compels charter operators to assume operational control over all phases of flights flown under their FAA-issued Part 135 air carrier certificates, including the airplanes and pilots. Traditionally, many aircraft owners insisted that charter operators use only the owner's pilots when flying their airplanes for charter purposes and such a requirement is often committed to writing in the leases or management agreements the parties negotiate. However, the FAA now takes the position that flight crews must affirm their allegiance to the charter operators when they are flying under FAR Part 135, even if the pilots are employed by the aircraft owners and don't receive any compensation from the charter operators. FAA officials have recently begun refusing to approve management contracts that include any provisions that could be interpreted to limit the charter operators' operational control over Part 135 flights and these rejections have caused major headaches for both charter operators and owners who want to get their airplanes into Part 135 operation as soon as possible.

The FAA has backed down, for the time being, on a proposal to require air-taxi and fractional jet operators to add a 15-percent safety margin to actual landing distances, but the agency's action appears to be primarily a response to pressure from business aviation trade groups which argued the agency had failed to follow its own rule-making process in implementing the policy. The FAA is expected to renew the effort in 2007.

An area of continuing uncertainty involves the tax treatment of flights flown on corporate aircraft for entertainment or recreational purposes or for mixed business/personal reasons. Congress changed the rules related to the deductibility of general aviation expenses when it adopted the American Jobs Creation Act of 2004 and the Internal Revenue Service (IRS) then used the Jobs Act as the authority for publication of a 2005 notice that generated a furor over how to comply with the new rules. The IRS promised that further guidance would be forthcoming, but it has now been more than a year since the agency's notice was published and nothing further has been issued.

An example of the impact international law can have on American business aviation was the March 1, 2006 implementation of the Cape Town International Registry (CTIR). The United States is currently one of nine signatories to the international treaty that created the CTIR. This means that when airplanes are now bought, sold or lease-financed in the U.S., a series of title searches and computerized registrations involving the buyer, seller and lender must take place in connection with the closing of the sale. Failure to take the necessary steps to complete this registration process can delay the closing of an aircraft sale by days or even weeks and if not properly recorded could ultimately cloud title and negatively affect mortgage interests in an aircraft or its engines.

In an era of airline bankruptcies and ever-tightening airport security, the use of corporate aircraft is an even more valuable tool to businesses in Southern California and throughout the country. However, today, more than ever, airplane owners need to assemble the strongest possible team of advisors in order to navigate the myriad of issues that challenge aircraft acquisitions and ownership. Every company considering the purchase or leasing of a corporate aircraft should consult with experts in the fields of aircraft brokering and sales, financing, operations, accounting, tax and law before making critical acquisition decisions. Thereafter, it's just as important that owners remain aware of the latest developments in the industry. Both profits and safety may be at issue.

Stephen Hofer is President of the Aerlex Law Group, a Santa Monica-based law firm that specializes in aviation law. Sometimes called the "aviation attorney to the stars," Hofer has represented numerous Oscar-, Emmy- and Grammy-winning performers and world-famous athletes in connection with their aircraft acquisitions. Aerlex Law Group represents hundreds of whole and fractional aircraft owners and lessees and many of Southern California's Part 135 charter providers.