PRESIDENT&CEO Magazine: A Time Machine, Not a Trinket

A Time Machine, Not a Trinket
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PCEO, Gregory Taggart on 02/16/2012 08:03:00

The year was 1982. Driving rain pelted the windshield of our Cessna 180 as we
approached Sheridan, a town of about 15,000 people on the eastern slope of
Wyoming’s Bighorn Mountains. From our February Issue.

I had chartered the plane in Cheyenne so that Don Monette and I could barnstorm
the state on behalf of our employer, Michigan National Bank. Already that day,
we had hosted breakfast and lunch with bankers in Cheyenne and Casper. We
planned to meet with bankers in Sheridan and three other Wyoming towns over the
next day and a half in an effort to convince them to support the move of
Michigan Bankard from Lansing, Michigan to some lucky community in Wyoming.
In the end, because Wyoming bankers opposed our attempt to move more than 150
jobs to the state, we relocated our credit card subsidiary to Rapid City, South
Dakota instead. That said, our efforts would have been impossible from the
get-go if not for our ability to charter a plane. Wyoming is the 9th largest
state in the union, with roughly 500,000 people  scattered over 97, 914 square
miles. At the time, the state offered little or no commercial air service, and
certainly no service that would have allowed us to travel the 1,023 miles we had
to cover to meet with all the people we had to meet in just two days. In short,
that charter made the trip possible.
From Here to There
Actually, without the tool and convenience of business aviation, we never would
have considered moving our credit card subsidiary to Wyoming in the first place.
Multiply that fact by the thousands of small- to mid-sized communities not
serviced by commercial airports, and you have some idea of the value of business
aviation to small communities nationwide and the many businesses who locate in
them. “We have members tell us all the time, ‘we located there because they
have a general aviation airport nearby, the cost of living is low, the quality
of life is high, and our workers like it,’” says Dan Hubbard of the National
Business Aviation Association, or NBAA.  Richard Aboulafia, vice president of
aviation analysis at Teal Group, adds, “When a business is thinking about
where to sell, buy, or locate, the last thing they want to think about is
airline schedules.”
In fact, business aviation serves about 10 times the number of airports served
by commercial airlines, according to Robert Knebel, vice president of sales for
North America for Brazilian aircraft manufacturer Embraer. “The airlines serve
approximately 450 of the 5,000 airports in this country. Business
aviation—jets, turbo props, and pistons – serves all airports and under more
convenient schedules. Simply put, business aviation is a time machine, a
productivity tool that allows business people to use their scarcest resource –
their timevwell.”
Thus, President Obama’s repeated criticism of corporate jets has fallen on
many bewildered ears. To take just one example, Schwan Foods is headquartered in
Marshall, Minnesota with subsidiaries in Salina, Kansas; Stilwell, Oklahoma; and
Pottstown, Pennsylvania, among other places. According to Travelocity,
Watertown, South Dakota is the closest commercial airport to Marshall – 75
miles away. No matter, there are no commercial flights into Stilwell anyway.
Salina is served only by tiny SeaPort Airlines. And Pottstown? Take your pick:
Allentown, 30 miles away; Philadelphia, 34 miles; and Trenton, 44 miles, all
sport airline service, yet are anywhere from 6 ½ to over 12 hours from
Watertown with tickets running in the $1,000 to $2,000 range – and that’s
after the drive to Watertown. And don’t forget airport security. “Imagine if
you need to get to all of these facilities in the same day, or in a day or
two,” Knebel continues. “Can you manage all of that on the airlines? You
know you can’t.”
Business Aviation Microeconomics
You can with a time machine, that and more. According to NEXA Advisors’ Fall
2010 report Business Aviation: An Enterprise Value Perspective, businesses use
their aircraft for the obvious—transporting employees and executives;
suppliers; and cargo, parts, and mail from one place to another – and for the
not-so-obvious – as transportation for humanitarian and charity missions or
for photography and facility inspections. Such use leads to measurable increases
in management and employee productivity; improved personnel and customer
retention; and direct travel expense savings, among other things, for most
companies in the study. “We have a customer that is what we call ‘wheels
up’ by 6 AM and will visit four separate locations for face-to-face meetings
with both employees and customers and be back by 6 PM that night, in time to eat
dinner with his family and sleep in his own bed,” says Shawn Vick, executive
vice president at Wichita-based Hawker Beechcraft.
These benefits apparently translate well to the bottom line. The NEXA report
claims that business aviation users generated a total return from 2005 to 2009
that was 245 percent higher than nonusers. Likewise, the EBITDA and Earnings of
users were 230 percent and 219 percent higher, respectively, than nonusers over
the same period. ROA, ROE, and Asset Turnover were also substantially higher. No
surprise then that the market capitalization of companies that used business
aviation was 11 percent higher than of nonusers. The report concludes
emphatically that “for any business, small, medium, and large, companies using
business aircraft consistently outperform companies that do not, in terms of
shareholder and enterprise value created.”
Business Aviation Macroeconomics
Returns on equity and assets tell only part of the financial story of business
aviation. In the 20th edition of its 2011 Business Aviation Outlook, aerospace
giant Honeywell forecasts the sale and delivery of some 10,000 new aircraft with
a total sale price approaching $230 billion over the next 10 years, a two
percent increase over the company’s forecast in the previous year’s report.
Yes, the recession has affected the aviation industry – Honeywell estimates
that deliveries of new business jets will be down about 15 percent from 732 in
2010. However, that should improve in 2012.
“The problem is that the overwhelming majority of jet transactions in the
bottom half of the market—the workhorse jets, the $25 million and under jets
– needs third-party credit, third-party capital, and that’s been really
tough to come by over the past couple of years,” Aboulafia says. “The good
news is that when credit frees up, and when people feel confident about spending
money again, the cash is there to buy business jets.”
And not just in the United States. Again according to Honeywell, pent-up demand
for new business jets is higher in every region of the world than in North
American, with the BRIC countries anticipating “fleet replacement and
expansion purchase plans [of] just over 49 percent over the next five year
period.” North American companies that responded to Honeywell’s survey
expect about 26 percent increase.
Countries outside the U.S. should account for about 45 percent of new jet
purchases over the same period, a figure that illustrates a fact touted again
and again by the business aviation industry in the face of the
Administration’s ongoing criticism: general aviation manufacturing is one of
the few U.S. industries that contributes positively to the U.S.’s balance of
trade. In fact, according to Katie Pribyl, director of communications for the
General Aviation Manufacturer’s Association (GAMA), “general aviation
manufacturers generated $4.6 billion in new airplane export revenue, according
to the most recent figures, accounting for more than 50 percent of the total
value of all planes exported from the U.S.” About one quarter of that is going
to emerging markets. “They’re buying airplanes; they’re waking up to the
utility of business aviation,” Pribyl continues.
General aviation contributes approximately $150 billion to the U.S. economy
each year, including $53 billion in payroll that goes into the pockets of 1.2
million employees. And that doesn’t include the second and third effects, the
restaurant that springs up near a busy general aviation airport, the additional
car rentals, and such. Nor does it account for the leg-up effect. “A lot of
people actually increase their amount of business flying when the economy is
bad, going out to find new business opportunities,” Hubbard says. “Business
aviation is a great, essential American industry.”
Who are these Guys?
As with any industry, the players in business aviation are myriad, their
functions many. From component manufacturers like Hartzell Propeller to Aspen
Avionics and the big name engine manufacturers like Pratt & Whitney or Lycoming
and even Rolls-Royce of North America, the industry includes companies, sung and
unsung, that make eating a catered meal at 30,000 feet possible – and safe.
GAMA counts 73 such companies among its membership.
Of course, the companies that use the components, avionics, and engines to
create the actual aircraft we fly figure prominently on that membership list.
They range from Mooney Aerospace, a small, Texas-based manufacturer of
single-engine piston driven planes to Savannah-based Gulfstream Aerospace,
manufacturer of the ultra-large-cabin, ultra-long-range G550 and G650 jets. They
include Wichita-based Cessna, with a fleet that includes the piston-driven
Cessna Skylane and the Citation Ten jet, until recently the fastest civilian
aircraft, at Mach .92. Hawker Beechcraft is on the list and touts a fleet of
planes that includes the twin-engine workhorse King Air 350i and four different
Hawker jets.
At least 26 different companies manufacture business jets, including a number
with headquarters outside the U.S. For example, Quebec-based Bombardier, home of
the iconic Learjet, and Brazil-based Embraer figure prominently in the business
aviation industry, both worldwide and in the United States. Embraer, for
example, produces its Phenom 100 executive jet at its new Melbourne, Florida
plant. “It’s an entry level jet capable of being flown by a single pilot,”
Knebel says.
Decisions, Decisions, Decisions
For the business intent on adding a business jet to its toolbox, choosing from
that list of different manufacturers is only part of the decision process, a
process should probably begin with a few questions: What are your needs? Where
do you need to go? Do you have two or three outlying facilities that you go to
routinely? Do you travel domestically? Internationally? “I would try to figure
out what your needs are first,” says Mike Pierce, director of product
marketing at Cessna.
A discussion of needs quickly devolves into a discussion of hours – what you
might call the price point of business aviation. If your company plans on flying
100 to 200 hours per year or more, so-called whole ownership of a jet probably
makes sense. From 50 to 100-150 hours, you’re in the so-called fractional
ownership time zone. “Twenty-five to 50 hours puts you in a sort of gray
area,” explains Michael Silvestro, CEO at Flight Options, a fractional
ownership and jet card company. “Anything below 25 hours, and you’re better
off with a jet card.” That, or you might consider a charter.
With fractional ownership, businesses or individuals can purchase as little as
a 1/16th undivided interest in specific aircraft – a tail number if you will.
With that you get 50 hours flying time. Typically, you can increase your
ownership in 25 hour or 1/8th interest increments. The interest doesn’t
guarantee that you’ll always fly on that aircraft, but it does guarantee
you’ll fly when you need to and on a plane of like quality. Moreover, you
generally don’t pay for ferrying time, only for time you occupy the plane.
Fractional ownership is also turnkey. “In addition to the initial purchase
price, customers pay a monthly fee and an hourly fee when actually using the
jet. The fees cover insurance, certification, pilot training, maintenance,
hangering, and a lot of other things,” says Fred Reid, president of Flexjet.
“Jet ownership has a lot of sex appeal, but it’s very work intensive, so
fractional appeals to a lot of people.” No surprise that many of the factional
and whole ownership companies offer management services to take care of all of
the work that comes with owning a jet – even the hiring and training of pilots
– for a price.
Essentially a debit card, jet cards typically come in 25-hour increments. The
cost varies, but Flight Options, for example, offers 25 hours on a Hawker 400 XP
– a seven passenger jet – for and initial deposit of $100,000. Twenty-five
hours on the larger, 13-passenger Legacy 600 runs $212,375. Depending on the
provider and the size of jet you need, the dollars come off the card at the rate
of approximately $4,000 to $10,000 per hour, and as with fractional ownership,
the jet you want can be at your local airport in as little as 6 to 12 hours and
with no re-positioning fees. “The jet card is a step-up from
charter,”Silvestro says.
In the end, business aviation – from props to jets – is about increased
productivity. Each option comes with its costs, its pros and cons, but the
question you as a business owner really must answer is whether your employees
will perform better and enjoy their work more if rather than standing in a line
at airport security, they were already at their destination, working away.
“What’s your time worth?” Pierce asks. “How much happier is your
management team going to be if they can come home and see their daughter play
basketball on a Tuesday night? Business aviation is not only a time saver,
it’s a quality of life thing.”