BIZAV ECONOMICS

Whose business is it anyway?

A sobering look at the role of company operated aircraft in today's global economy.


Lee Jeans Division Pres Gordon Harton (L) and Chief Pilot Gary Tucker on the way back to MKC (Downtown, Kansas City MO) after a meeting with VF Corp in Greensboro NC. Corporate aviation tailors air transport to the demands of the business day, rather than the other way around.

Airlines will continue to alter routes, frequencies and capacity to meet changing market conditions. Resulting rationalization and extremely high load factors could result in business aviation carrying more and more traffic.

To meet competition from low-cost carriers, airlines cut unit costs of ownership, product distribution, infrastructure, maintenance, etc, sacrificing costs supporting service quality as necessary.

Declining business conditions weaken pricing power, hitting aviation markets hard and forcing the industry to retire or park aircraft, delay replacements and cut back capacity. Airlines may offer business class service and comfort, but the real product-transportation-remains at par with that of the lowest-fare passenger.

Airlines were never designed for flexibility and never will be. This is why business aviation came into being in the first place, using 3 strategies to achieve advantage over airlines-airport selection (nearest actual destination), aircraft selection (able to use airports selected) and flight level selection (minimizing enroute delays).

Some detractors insist that corporate aviation is a questionable benefit. They blur its advantages with claims that business jets are used mostly to ferry corporate executives or wealthy individuals in plush cabins with cushy seats and wood-paneled interiors.

Such characterization undermines the utility of the aircraft as a working asset. Responsible companies expect employees to bring in revenues beyond individual compensation-an "effectiveness multiple"-to achieve profitability, each at a level commensurate with his/her position.

This is reflected in insurance policies issued on the basis that key employee injury or death is a potential loss to the beneficial company.

Key person insurance is usually written as multiples (typically ranging from 2.5 to 15) of an employee's compensation, making the value of time more understandable and its waste more acutely perceived. Then there is the view that corporate aviation encourages wasteful travel.

Technical mythology says that electronic commerce can avoid the need for direct business-to-business (B2B) and business-to-customer (B2C) contact. The truth is that global markets are tougher (ie, more competitive), more demanding (in terms of quality, speed, service and price) and more capricious (requiring follow-up).

Business aviation cuts through layers of cost and complexity to position key staff quickly on-site to address needs personally, proactively and precisely.

Government reaction

In 1994, the General Airline Revital_ization Act was signed into law, allowing GA to continue generating jobs and innovation. The threat at that time was tort reform-the threat today is poor perceived image.

The Securities & Exchange Commission addressed alleged abuses of executive perks by stiffening reporting requirements for use of company aircraft.

This may have fueled alternative ways of paying for private jet travel. Instead of outright ownership, more corporate users are chartering or purchasing fractions of jets.

Current residual values of many business jet models are higher than the original list price of aircraft less than 5 years old.

This year, the US Treasury Dept released a series of restrictions on executive compensation, aimed at companies receiving government bailout money and calling for tighter controls on "luxury expenditures," though without specifically prohibiting ownership or use of corporate aircraft.

These measures are meant to ensure "that public funds are directed only toward the public interest in strengthening our economy by stabilizing our financial systems and not toward inappropriate gain."

Under the provisions, company policies involving such luxury expenditures (including aviation services) need to be established by the board of directors. Under recent amendments to the Internal Revenue Code, a company may only deduct the expenses associated with a personal-use flight by certain specified executives in an amount equal to the value imputed to the executive's income, which may be significantly less than the expense incurred by the company.

Business aviation and the economy

Put simply, business aviation supports economic performance and growth by driving local economies, promoting employment and facilitating trade.

It links communities not included in other formal transportation networks. Employed appropriately, it can help struggling institutions resurrect to start repaying debt, sustain top-paying (and spending) jobs and expand business.

Business aviation contributes over $150 billion to the US economy annually. It employs 1.2 million people in manufacturing, selling, maintaining, operating and managing business aircraft.

The table on this page includes comparative data for Europe. Less publicized is the extent to which business and corporate aircraft are provided to public service, humanitarian and charitable flights in times of need.

Commerce and business aviation

In 2007, trade figures reflect 266 aircraft exported (worth $3.1 billion) and 219 imported (worth $3.9 billion). Most foreign-made business aircraft were completed with US-made avionics, engines, subsystems and interiors.

However, international trade goes beyond air commerce. IATA research verifies a clear link between a country's business productivity and its connectivity to global markets. Investment in air transport capacity generates very high rates of economic return.

Connecting with global markets is vital for business productivity and growth. And it's here that corporate aircraft operate as high-profile, business-critical tools for thousands of corporations, intent on increasing viability and shareholder value, by facilitating communication and movement of personnel and parts between multiple points not served effectively by other modes.

 

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