Corporate jets flock to the runways: business-aviation use is surging, for a variety of reasons, among them convenience, flexibility and efficiency. And increasingly, executives below the C-suite level are going along for a ride.
It doesn't take a rocket scientist to reckon that a good economy lies behind all the excitement. "People are flying more for business," says Pete Bunce, chief executive of the General Aviation Manufacturers Association (GAMA), which includes such well known companies as Beech, Cessna and Gulfstream. "And [corporate] aviation gives you the ability to fly more efficiently."
Statistics help account for why everyone involved in the business aircraft industry--from the manufacturers to high-flying business people--are so upbeat these days. Paid-for shipments of business jets jumped 26.9 percent in 2005 compared with 2004, making it the second-best year ever for the industry, GAMA reports.
In dollar terms, the numbers tell an even sunnier story. Total billings worldwide for general aviation airplanes--pistons, turbo-props and business jets--came to $15.1 billion in 2005, compared with $11.9 billion in 2004, a 27.2 percent jump. (Jets accounted for about 88 percent of the total dollar sales last year.)
The rise in the popularity of business aviation hasn't taken place overnight; the field has experienced steady growth over last 15 years. Yet many of the underlying reasons for the business-flying phenomenon are not patently obvious. For example, industry experts say that the "hassle factor"--the desire by business people to circumvent long security lines and the demands that travelers empty their pockets and slip off their shoes before boarding a scheduled commercial airline flight--is not really a key driver.
Nor, say industry insiders, does the perceived pampering of top executives play a huge role. In the popular mind, CEOs and other high-powered executives are pictured boarding sleek corporate jets while the rest of the world is consigned to no-frills economy flights. Yet, industry experts assert, sound business decisions and hard economic logic lie behind businesses that are increasingly employing general aviation.
Typically, that means the use of company-owned, leased or chartered planes to whisk employees from Point A to Point B and beyond because it is more cost-effective than waiting around O'Hare, Logan or Reagan National airports. Many companies are also engaging in "fractional" ownership schemes in which several businesses collaborate to jointly own aircraft and share usage.
"Corporate airplanes used to be a perk only for executives," says Dave Labrozzi, senior vice president and general manager of corporate aircraft financing at GE Capital Solutions, a Danbury, Conn.-based division of General Electric Co. Labrozzi's division finances purchases and leases for 25,000 business aircraft across the globe, 16,000 of which are in the U.S. "Because of personal security issues, productivity and convenience," he says, more companies are not only getting into the act, but fewer employees who are hopping aboard come from the top of the corporate pecking order.
Adds Dan Hubbard, vice president for communications at the 7,000-member National Business Aircraft Association (NBAA), the leading trade association comprising companies that own or lease aircraft: "What we find in the surveys we've taken is that people who fly are not always the top executives. We're seeing more middle-managers and members of sales teams selling products or services to companies with offices in far-flung locations. And we're also seeing more companies' locating their warehouses, manufacturing and other business operations outside major cities, where costs are lower."
Oddly enough, just as companies have been ramping up many of their operations on roads less-traveled, the major commercial airlines have been scaling back hub-and-spoke service to second-tier cities and smaller communities, making those places much less accessible. "The economic reality is that airlines have cut back on flights to fill seats and to be more efficient," says Bunce, "and the net result is there are fewer flights out there."
Business aviation has not only been picking up the slack but, when locating new operations, Hubbard asserts, many companies are increasingly choosing sites near regional airports. Corporate aircraft are also better-suited to the shorter runways of the regional and community airports, he notes, which make them inaccessible to major airlines even if they wanted to fly there.
Many Fortune 500 companies and other high-profile business corporations make ample use of corporate aircraft, but they are by no means the chief market for company aircraft. While the board of directors at NBAA is well represented by executives from ExxonMobil Corp., PepsiCo Inc., Bell-South Corp., Anheuser-Busch Cos. and IBM Corp., about half the directors are from lesser-known businesses. All told, moreover, Fortune 500 companies constitute only 3 percent of the businesses availing themselves of general aviation.
"More than 10,000 companies use aircraft, and that means that a lot of them are small and mid-sized companies," Hubbard says." (NBAA, which has 7,000 members, reports that governments, schools and universities, churches, farms, foundations and charitable organizations also are among the ranks of aircraft operators in the U.S.)
Clayton Homes Inc., a commercial and residential construction company based in Knoxville, Tenn., is typical of an NBAA member that relies heavily on business aviation, Hubbard says. Clayton owns and operates three aircraft--two piston "twins" and one turboprop jet--which the company uses to shuttle employees among its 18 facilities. Most operations are situated in sparsely populated rural areas across 14 heartland states, making aviation not only a key business tool but an integral part of the company's overall business strategy.
GE's Labrozzi could be referring to Clayton when he says, "We're seeing as much demand (for aircraft financing) now as we had in the late 1990s, with the dot-com phenomenon. But, now the customer base is much broader. There's a lot of demand in California, and it goes beyond Silicon Valley."
The big news in the industry is that the introduction of aircraft known as very light jets--or VLJs--is expected to reconfigure the shape of general aviation. According to the Federal Aviation Administration, there are 219,426 general aviation airplanes in the U.S., 9,298 of which are jets. But that ratio is expected to change dramatically in coming years: not only are the new jets lighter and faster than piston- and propeller-powered planes of the same size, but the VLJs boast attractive price points, ranging in price from $1.3 million to $3 million.
"This is a brand new class," says GAMA's Bunce, "and so far, they've only been demonstrated at air shows. But people have seen them and orders have already been placed. There's a lot of buzz in the industry."
As hard as the industry works to make sure that its aircraft are in tiptop shape and its pilots well-trained and certified, general aviation does remain much riskier than scheduled airline flights. General aviation accidents increased to 1,669 in 2005, up from 1,617 a year earlier, according to the National Transportation Safety Board. Of these, 321 were fatal accidents, up from 314 in 2004. In contrast, the NTSB reports, scheduled airlines operations recorded 32 accidents, three of which accounted for 22 deaths.
Financing and tax implications involving business aircraft remain an important concern. GE's Labrozzi says that it is common for companies to move gingerly into the world of business aviation by first leasing aircraft, then trade up by purchasing planes or becoming a "fractional" owner. However, notes Ed Kammerer, an aviation attorney and partner at Edwards Angel Palmer & Dodge in Providence, R.I., leasing an aircraft can be the best route for companies that are already highly leveraged or whose banks or other lenders have imposed restrictive debt covenants. For such a company, leasing a corporate jet keeps the asset off the balance sheet.
Fuel costs have been rising while, in an era of tight government budgets, taxes on business aircraft--especially for personal use--are making the industry's Washington and state-house lobbyists earn their pay. States are increasingly charging a range of registration, excise and property taxes for planes parked in their jurisdiction. "It's more common to hear from your friendly state tax authority than ever before," says Kammerer.
And the proliferation of tax regimes taking aim at business aircraft guarantee an income stream not only for the government but for tax accountants. "In Texas," notes Jason Uetrecht, manager of personal financial services at PricewaterhouseCoopers, "each county has a different way of assessing taxes on planes."
In addition, the U.S. Congress's passage of the American Jobs Creation Act of 2004, along with an Internal Revenue Service advisory in May 2005, have eliminated a business's tax deductions for the entertainment-travel use of corporate aircraft by top officers and directors.
Moreover, Congress is now considering taxing the employees themselves for the personal use of company aircraft. And the tax bite could be stiff. Under a pending bill in the Senate, Congress could assess such taxes by calculating "all fixed and variable costs" of travel. That includes--but "is not limited to," the bill declares--fuel, salaries for pilots, take-off and landing fees and the costs of depreciation of the plane. "This is the hottest topic in business aviation now," says NBAA attorney Kammerer.
Paul Sweeney (firstname.lastname@example.org) is a freelance business writer in Austin, Texas, and a frequent contributor to Financial Executive.
RELATED ARTICLE: takeaways
* The popularity of corporate aircraft continues to grow as usage moves down from the executive suite into middle-management levels.
* Convenience and flexibility are big drivers for corporate jets, especially as companies find it's more efficient not to have people sitting at major hubs.
* Corporate aircraft have become more important as companies expand into smaller cities where major carriers have cut back or curtailed service.
* Leasing, ownership and "fractional ownership" are the primary models for financing, with the fractional area showing the most growth.
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|Date:||May 1, 2006|
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