November 2010 - Page 3 Aviation Articles

China's awakening means vast changes to business and general aviation

As the Chinese Proverb goes: 昨天是历史; 明天是奥秘 or in English: “Yesterday is History; Tomorrow is Mystery.”

 

The waking process of the giant sleeping dragon that which is the vast country called The People’s Republic of China, is scheduled to begin on Jan. 1, 2011. When this giant does stir, the world order in Business and General Aviation as we know it today will undergo vast changes.

 

A bold statement, maybe, but as soon as the low altitude levels are released for unrestricted air movements, like the Chinese government has promised (read the Chinese News Agency Report at the end of this article), we, I believe, will see a rapidly building hurricane of activity that the world has never seen the likes of before.

 

According to a recent report in the press, there are an estimated 875,000 people in China worth over 10 million RMB ($1.46 million) and 51,000 worth over 100 million RMB ($14.64 million), therefore the number of people with the wherewithal to invest in and utilize business and personal aircraft is rapidly growing into a viable sector. Sixty of these people are officially billionaires.

 

In the United States, there is currently an estimated 9,000,000 people worth over $1 million, with 403 of these people officially billionaires. Armed with these statistics, we can make the following assumptions:

 

[more]There are 308,000,000 people that are legal citizens of the United States of America. This population total, currently-statistically supports/shares/enables approximately 30,000 turbine business aircraft to exist in the domestic fleet. Which if you divide this total population figure by this business fleet total, you arrive at 10,267 U.S. Citizens to each aircraft. Currently in China, there are 1,800,000,000 people, therefore potentially this population count in comparison, should translate to a business turbine-aircraft fleet of more than 175,000 aircraft! The landmass of China is about the same as that of the United States (China has 3% less.)

 

Boeing currently spends more than $600,000 on having parts, components, and subassemblies, including the vertical fin of the B787 built in China. Bombardier is the largest supplier of train rolling stock to China, and I have heard that they are trying to build on this success by expanding its commercial aircraft sales position in this country as well. The fact that neither Canada or the U.S. are members of the B.R.I.C. Community: Brasil, Russia, India and China (coined in 2001 by London based Jim O'Neill, the global economic research, commodities, and strategy research head at Goldman Sachs) is not lost on Embraer, who have to date, outsold Bombardier two-to-one with Regional sized aircraft. It stands to reason that Bombardier shall probably institute a similar manufacturing policy regarding China, like Boeing has already.

 

With so many of the business aircraft O.E.Ms building aircraft subassemblies and components offshore (especially in Mexico), it stands to reason that their production plants may well shift to China in the coming decade or two. This is where we shall see the biggest paradigm shift in our industry. However, as Dassault has found over the last two or three years, their marketplace has shifted already away from the traditional U.S. Market holding close to 80% of their global sales, now down to around 40%. It is a known fact that business aviation growth in Arabia (the number of aircraft entering this region) is outstripping the normal historical annual growth rate seen in the U.S.A., by three times this number (Arabian business fleet is growing in-number by 100% every five years. The U.S. growth is 33% every five years.) It is, I believe, inevitable that China shall eventually knock both of these figures into a ‘cocked hat’ based on scale.

 

In 1929, Curtiss-Wright partnered with the then Chinese Government to form the China National Aviation Corporation (CNAC). The purpose of this partnership was to establish, promote, and develop commercial air service throughout China. In 1933, the U.S. Flag Carrier Juan Tripp and his company Pan-American Airways took over the stake that Curtiss-Wright had established in China. This commercial arrangement was a complete success up until 1949, when communism became the new governing philosophy in China. Then all communications between the United States and China ended forthwith.

 

Almost 30 years elapsed until both commercial and political channels of communication reopened with China. Then in 1984, a Civil Aviation Cooperative Agreement and a Bi-Lateral Airworthiness Agreement between the U.S.A. and China was signed. From then on, the Civil Airworthiness Administration of China (CAAC) would assume FAA-type regulatory responsibilities, including airworthiness assurance.

 

Then in April of 2004, the U.S. Trade and Development Agency (USTDA), the Federal Aviation Administration, and many U.S. aviation corporations, launched the U.S.-China Aviation Cooperation Program (ACP). The founding members of the ACP included Boeing, General Electric, Honeywell, Lockheed Martin, Parker, Raytheon, Rockwell Collins, United Airlines, UPS, and United Technologies. Today there are 42 U.S. member corporations

 

What I have laid out for you thus far all bodes well for the U.S.; however, there is a definite move towards anti-U.S./American sentiment growing within the European Aviation Space Agency (EASA) and within the Business and General Aviation field on the continental mainland. I am referring to how EASA is attempting to outlaw domestic/resident aircraft operations that are carried out by FAA Licensed Pilots, and in FAA Registered aircraft.

 

What enables non-U.S. citizens to fly on and fly in U.S. aircraft that they own offshore, is the generous system of Licensing Reciprocity and Aircraft Ownership Trusts. Why does this practice thrive? It really boils down to cost.

 

I am pretty certain that I cannot be factually criticized if I say that none of the European Aviation Authorities has ever really improved aviation safety because of their philosophy of putting more checks and balances in front of applicants and operators. For instance, I have never really understood how a Commercial Pilot with a European license is a safer/better pilot because he/she was required to pass a written and oral test that includes the specific internal componentry and physics properties behind how a VHF Omni-Directional Radio Beacon ground station is constructed, repaired and operated. Unfortunately, this and other nonsensical knowledge requirements create an incredibly long series of hurdles that an aspiring Instrument or commercial pilot candidate must jump over to attain their license. Then of course, this valuable piece of paper must be maintained, not just by proving currency, but also the financial means to pay the incredibly high renewal fees levied against the applicants. No, I contest that the European system merely promotes vast layers of bureaucracy and “jobs for the boys” that are supported by massive, and for a large part totally unnecessary, licensing taxes and fees.

 

I mention all of this because of one reason - much of Europe truly has communistic leanings. The People’s Republic of China is one of the last remaining Communist State systems. With this said, I am genuinely worried that EASA will continue to take a ‘holier-than-though’ approach to Business and General Aviation certification and licensing, and the Chinese Aviation powers that be, start to pay serious attention to the EASA way of doing business, and elect to discount the simplicity and practicality of the U.S. system of aviation oversight. If this happens, then the market potential of the emerging Chinese business and general aviation market will be severely hog-tied, the industry there will be stifled, and either the Manx or U.S. Registries shall thrive through Trust Agreements in China, like they do now in Europe, (unless they are foolishly outlawed.) This in turn may spark the biggest trade and political war ever seen.

 

What can we Americans do to avert this potential calamity? I suggest that you call and write your Industry Association leaders, your representatives in Washington, and most importantly of all, start learning Chinese. A cogent, firm, but positive message must be sent to the officials both in Cologne and in Beijing: the U.S. is business and general aviation, and to discount our system, is a sure-fire way of hurting your systems.

 

So, back to how the Dragon is on the brink of waking up. According to the Caijing Business News agency: “…(Beijing) — China has decided to open the country’s airspace to altitudes lower than 1,000 meters and plans to build a nationwide low altitude aviation system with market oriented operation by 2015.

According to Tang Jilong, deputy secretary general of China General Aviation Association, China’s Central Military Commission and the State Council approved the guidelines on lower airspace restrictions August 23.

According to the new regulations, a pilot program opening the low altitude air space to general aviation will be launched at the end of 2011 in Changchun, Guangzhou, Shenyang, Zhuhai and Xinjiang. General aviation business covers a wide range of aviation services from private flying, flight training to air ambulances, and aerial firefighting.

The program will be expand nationwide by 2015, with low altitude airspace to be opened in the country’s five aviation control areas including Beijing and Lanzhou.

Between 2016 and 2010, China will take further efforts to improve the law and regulation system as well as infrastructure for low altitude aviation.”

Is A U.S. Senator Subject To FAA Enforcement Action For Landing On A Closed Runway?

According to an Article in the Tulsa World, the United States Senator from Oklahoma, James Inhofe, landed his Cessna 340 on a closed runway at the Port Isabel-Cameron County Airport in Texas. At the time, the closed runway was marked with large X's to protect a crew that was working on the runway and a corresponding NOTAM regarding the runway closure had been issued.

The Senator stated that he only saw the X's about 20 seconds before he landed, which, according to him, was too late to change course. However, he was able to land on a part of the runway that was away from the location where the work was being performed. When asked about the NOTAM, the Senator stated "I did not know it because it was not given to me." Later, when the Senator wanted to leave, he used the airport's taxiway to take off.

What is interesting about this incident is that, after apparently notifying the FAA soon after landing and then talking with the FAA several days later, the Senator "expressed assurance that the agency will not take any action against him." I find that hard to believe.

Any other airman would be looking at an enforcement action alleging, at a minimum, violations of FARs 91.103 (requiring a pilot to become familiar with all available information concerning a flight), 91.139(c) (requiring compliance with a NOTAM) and 91.13(a) (careless and reckless) and seeking suspension of the airman's pilot certificate for a period of at least 30-90 days based upon FAA Order 2150.3B Appendix B (the FAA's Sanction Guidance Table).

[more]Don't get me wrong, I am not trying to encourage an enforcement action against the Senator. After all, he has always been a stalwart supporter of general aviation. Also, as we all know, stories reported in the media never include all of the facts. Perhaps the Senator has some viable defenses. However, it seems to me that the Senator should be subject to the same regulatory enforcement as every other airman. No more, no less.

It will be interesting to see what, if anything, happens. If the FAA does pursue an enforcement action, I hope the Senator filed his NASA/ASRP Form, and hires a good aviation attorney to defend him!

(When) Will Business Jet Values Recover?

The 2010 NBAA Annual Meeting finished up less than two weeks ago. For the most part it was a success. At our booth on the convention floor, we saw a lot of good, quality traffic. People were generally upbeat. From talking with folks all year long, and especially at NBAA, here are a few comments on where aircraft values may be headed.

Big Iron. Global business jets are recovering, if they are newer. At the top, the GV/G550/ Global Express families currently show about 4% of the active fleet as “for sale” according to AMSTAT. Vref shows that values flattened out over the summer and have started to drop a bit in recent months, but with a low number for sale, I’d say the market for this category has hit recovery mode.

Long range business jets, they are not doing quite as well as their big brothers and sisters. The Falcon 900EX shows 7% of the active fleet for sale and for the G450, it has 4% of the active fleet for sale. The Challenger 604 shows 11% for sale while the newer Challenger 605 shows 4% of the fleet for sale. So while numbers for sale are getting tight, values in this big cabin/long range market have not recovered (yet). As you look at older models in this category, the numbers (as a percent of the active fleet) increase, and values tend to show less of a recovery. In general, older big cabin and long range business jet values have not showed signs of a recovery.

Super mid-size values remain soft, but again the numbers for sale show a tightening up in the market. For the Challenger 300, 8% of the active fleet is currently listed for sale.  Challenger 300/ G200 values are flat as are Citation X and Falcon 50EX values.

Midsize jet values like the Hawker 800XP family, Lear 60, Citation 650s are flat. Percentages of their active fleet for sale are in the 12 – 22% range. Again, I am not seeing any recovery here yet.

[more]Small jets: percentages of the fleet for sale vary by model. In general, newer models have a smaller percentage of the active fleet for sale. Overall, this market is still soft and values have not shown much of a broad recovery. Values are bouncing around at the bottom. Again, popular, newer models are doing better than older models.

For business jet values, the newer, bigger aircraft are leading the way with a soft recovery. Anecdotally, I’d say this is likely to continue. With a relative tightening up in the number for sale, values will strengthen for these jets in the coming year.

As you move down in size, things are not as healthy for residual values. While a general recovery is under way, it will take longer for values to recover, but only for the newer models.

For business jets older than 10-15 years of age, I just don’t see a lot of evidence of a recovery in terms of sales and residual values. I do not have confidence that the situation will see much improvement for these older jets. I think that what you see in residual values for the older business jets is the new normal. Why?

·     Banks are not into lending for older business jets. They do not want the residual value risk for a 20 year old aircraft, nor do they wish to sell it if it comes back to them after lease end or a default. Yes, you can get financing, but with impeccable credit and a significant down payment. 

·     The market recovery seems to be led by sales outside the US. In recent years, more and more new business jets were being sold outside of the US. These markets are no longer “dumping grounds” for the aging business jet. The can afford and want the newer models.

·     The last several business boom cycles saw a large increase in aircraft production rates. Thus, the used aircraft buyer tends to have a large number of relatively new aircraft to choose from.

By most economic prognostications, it will take 12-24 months for the recovery. Some global regions are well into a recovery while others lag behind. The supply of used aircraft will take time to draw down. Meanwhile new deliveries will continue to occur. I don’t see enough growth forecast to generate the market demand to clear out the older business jets’ inventories. Theese older jets will continue to age. I do not think their values will recover with many of the oldest business jets only maintaining their salvage value.

I've seen Richard Aboulafia of the Teal Group present his firm's aviation sales forecast on several occasions. As he said one time, "If you don't like my forecast, feel free to make one up on your own." So don't worry so much about the future, but just take care of today. If you need a jet, go get one. If you need to sell your current jet, go get a good broker to represent you.  

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