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Economy, 'Fat Cat' Label Hit Corporate Jet Makers Hard
July 31, 2009
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  • By Dan Reed

    3-3-09

    Commercial aviation manufacturers are rediscovering the truth behind the tragic Greek myth of the Flight of Icarus: When you soar too high, the inevitable descent can be frightfully steep.

    Propelled by a roaring U.S. economy and booming demand from oil-rich Middle Easterners and newly rich Russians and Eastern Europeans, the makers of corporate jets and other business aircraft set sales records every year from 2003 to 2007.

    But global recession, constricted credit markets and the public flogging of corporations that spend lavishly to fly top executives on corporate jets have sent the sales of general aviation aircraft into a hair-raising nose dive.

    JimSchuster, CEO of Hawker Beechcraft, estimates that sales and the value of planes sold are off more than 30% industrywide since last fall. Existing orders are being deferred or canceled at alarming rates.

    Aircraft makers such as Hawker Beechcraft are loath to cut the price of their new planes for fear of devaluing those sold in recent years. But the few used planes that are finding buyers these days are selling at prices 30% or more below what the models sold for just a year or two ago. In the last six years, general aviation aircraft makers worldwide sold 21,531 new planes, up 35.2% from the 15,927 sold in the six previous years.

    In 2008, sales fell 7% as a result of record high fuel prices in the first half of the year and the swelling economic crisis in the second. Still, the industry’s total billings hit a record $24.8 billion.

    In 2007, plane makers delivered a record 1,138 business jets and a record 4,272 total general aviation aircraft worth $21.2 billion, according to the General Aviation Manufacturers Association. And in 2008, they delivered a record 1,315 business jets, thanks to a three-year backlog in orders.

    Not a normal downturn

    But now, like Icarus, who against his father’s warning flew so close to the sun that the wax holding his wings together melted, general aviation is melting down at an alarming rate – and not just because companies have stopped buying new planes.

    “This industry has seen lots of downturns in the past,” Schuster says. “Typically in a downturn, companies would just stop buying planes. But they wouldn’t actually shed planes. What we’re seeing this time is companies actually shedding their airplanes.”

    Brian Foley, a veteran industry consultant, says business aviation “takes a mighty fall in any downturn as companies cut back their capital expenditures. … Buying anything that is not an absolute necessity is being deferred for as long as possible.”

    But there’s more to the current collapse in sales than a mere downturn in economic cycles.

    Richard Aboulafia, an aviation analyst with Teal Group, noted in January that finding financing for new corporate aircraft has grown much tougher.

    Lenders with limited resources and grave concerns about the value of assets on their books now have to choose carefully what they’ll finance.

    Typically, Aboulafia says, lenders view business jets as “only slightly more appealing … than luxury homes and boats.”

    ‘Fat cat’ image hurts

    Schuster readily admits that the troubled economy is responsible for the biggest drag on sales. But he and others in the tight-knit general aviation community are angry that the situation is being exacerbated by criticism from Congress and media commentators that characterizes people who use business aircraft in tough economic times as out-of-touch “flying fat cats.”

    That perception, burnished in December when all three Detroit automakers’ CEOs flew to Washington on corporate jets to beg for federal bailout dollars, isn’t just wrong, Schuster says. “It’s one of the most ironic circumstances I could imagine.”

    It led, he says, to Congress seeking to restrict the use of company-owned or -leased aircraft by executives of financial companies receiving bailout money from taxpayers. That provision was removed from the Troubled Assets Relief Program, or TARP, bill. But the message sent was there’s something wrong about flying in private aircraft, Schuster complains.

    “There’s just one industry left in this country that employs Americans, has a dominant world market position, is a large exporter and employs lots of people in high-paying, advanced technology jobs,” Schuster says. “So why is it that general aviation is the foil for everyone’s complaints about flying fat cats? Why do they want to handcuff an industry that has 1.2 million workers and $150 billion annually in economic impact?”

    Bob Stangarone, vice president at rival aircraft maker Cessna, agrees. “We’d seen the market declining for several months before December, but the three automakers certainly didn’t help things when they flew to Washington in separate jets to seek a bailout,” he says. “Before the downturn we were expecting to deliver 535 planes in 2009. That number has been adjusted down to 375 now.”

    Taking the offensive

    The industry is starting to fight back. Cessna and Hawker Beechcraft have launched a PR campaign in defense of their products, their customers and their industry. In a newspaper ad last month, Cessna goads companies contemplating selling their corporate planes or canceling orders for them by saying “true visionaries will continue to fly.”

    Hawker Beechcraft’s campaign takes a different approach. Its ads feature the Beechcraft King Air 350, a nine-passenger turboprop that is the current version of the best-selling business aircraft in history. It’s portrayed as a sensible alternative to much more expensive corporate jets. Hawker Beechcraft makes jets, too, but featuring the King Air allows it to attack the notion that business aviation is all about excess.

    “I’m not going to defend every company, or every CEO or every person out there and say that some of (their planes) haven’t gotten too extravagant,” Schuster says. “You can debate the size (of corporate planes) and amenities. But that doesn’t negate the basic economic premise of the value of business aircraft to many, many companies.”

    Eighty-five percent of companies that use business aircraft aren’t corporate giants. They’re small and midsize companies, according to the National Business Aviation Association, a trade group that represents business aircraft users and makers. And 86% of those on board those planes are non-executive employees. They’re salespeople, technical experts or repair people traveling to remote business locations not easily reached via commercial airlines.

    In many cases, the association says, business planes are used to deliver urgently needed parts or equipment to customers or operators in the field.

    The decision to fight back has paid off, at least a little. A provision was added to the economic stimulus legislation signed last month by President Obama that grants a 50% bonus depreciation or, in some cases, a $250,000 one-time tax deduction on certain general aviation planes purchased in 2009.

    Graef Crystal, an executive compensation consultant-turned-columnist, is a well-known critic of executive excess. But even he says there are legitimate reasons for companies to own or lease business aircraft.

    “I was a consultant in the ’70s and ’80s to (diesel engine maker) Cummins … in Indiana,” he says. “They were in an out-of-the-way place, and their factories were all in out-of-the-way places. They had a small jet that was used by their chairman and other executives to get between those places quickly. It made sense.”

    When senior executives choose to fly on company planes, Schuster says, the decision should be a “function of the cost of their time,” not their egos, personal tastes or desire to avoid mixing with the hoi polloi flying commercially.

    “What makes a business competitive isn’t necessarily squeezing every dime out of a transportation budget, but getting the most out of the people it employs,” he says.

    CEOs and senior executives flying on corporate aircraft can make productive use of their time aloft by discussing sensitive or private business issues with colleagues or customers, he says. They can use phones and other communications tools to stay in touch and manage operations or crisis situations from 40,000 feet. They usually can’t do that on commercial aircraft.

    What’s too much?

    Cessna CEO Jack Pelton argues that lavish corporate jets are a small percentage of the world’s fleet of 235,000 general aviation aircraft. There are more than 10,000 corporate jets in the world, most of which, he says, “are fairly Spartan, designed for business, with a cabin about the size of a minivan or SUV interior.”

    Crystal counters that while “there’s some justification for corporate jets,” it too often “gets erased by the luxury.”

    As a compensation consultant for most of his career, Crystal says he’s been on many corporate jets. “They often don’t spare any expense … the finest wines … good food,” he says. He says corporate leaders could achieve the same business results using less luxurious, less expensive jets.

    Schuster says his buyers demand that planes be handsomely equipped, though most aren’t as lavishly outfitted as the jet former Citigroup CEO Sanford “Sandy” Weill used in December, at the company’s expense, to take his family to a $10,000-a-night resort in San Jose del Cabo. The top-of-the-line, 18-seat Global Express made by Canada’s Bombardier was finished with $13,000 carpets, Baccarat crystal glasses, Christoflesterling silver flatware and pillows made of HermĀs scarves.

    “But everybody’s planes are nice on the inside,” Schuster says. “We compete on that basis. If you asked for a Plain Jane interior you’d have a really hard time finding that.”

    http://www.usatoday.com/money/industries/manufacturing/2009-03-02-corporate-jet-makers_N.htm

    USA TODAY 2009-03-03false