Saturday, November 30th, 2013
Eastern Europe Tries to Think Business Aviation Outside its Box
If you are interested in a broad, nuanced view of aviation in all of Europe, you will have appreciated the annual Central Europe Private Aviation (CEPA) conference in Prague in late November. It had over 200 aviation specialists and industry stakeholders in wide-ranging operational, commercial and regulatory discussions. It was a showcase for the dynamic aspirations of the ‘economies in transition’ both in, and beyond, the east of the EU.
One interesting feature of CEPA is that its agenda extends to include commercial airlines. This is an important gesture towards finding common ground between the two sectors. Too often, business aviation suffers from isolated analysis. At best, this relegates it to an out-of-category ´general aviation´ sectors, as the EU refer to it. Worse, it probably encourages the perception of its niche, luxury character, and thus distinctive from the mainstream transportation business.
Of course, business aviation is different from the scheduled airline sector – not least it´s an unscheduled and premium product. But it is surely still about business. Its operators need to be financially viable, its passengers fly, for the most part, for business purposes, and from the most recent study of the economic value of business aviation, the contribution of the business aviation sector to European GDP, in terms of direct and indirect revenues, is an annual €20 billion.
At least €1 billion of that is generated from Central and Eastern Europe. Whilst business aviation activity collapsed in Western Europe during the 2008-2012 recession it surged in Central, East and South-East Europe, with Poland, Russia, Ukraine and the Czech Republic seeing double digit growth. Since 2000, the CEPA territory fleet has grown by a factor of ten. Just in terms of charter activity, that represents a €500 million market. Annual MRO revenues are also in the region of €300 million.
So Central and Eastern Europe is no small fry when it comes to European business aviation. Too often overlooked for the larger leading EU markets, the region´s importance is getting justified, if belated, promotion through CEPA. But now it finds itself in a bit of a rut. While there has been impressive growth in the last decade, 2013 paints a less encouraging picture. This year activity has fallen 6%, and previous growth stars such as Russia and Poland are seeing big declines in flights.
No doubt the slump owes something to the relative spike in 2012 activity when Poland and Ukraine hosted the Euro Football championships. But the underlying economic support to business aviation has darkened in the meantime, at least for Eastern Europe and Russia. And economically, the region remains highly dependent on the Euro zone´s fragile recuperation. The industry also has basic problems, with under-developed infrastructure and shortage in resources dedicated to business aviation, as well as reputedly widespread illegal charter activity.
If there is some truth to the opinion that business aviation is not always 100% business-oriented, it is in its seeming inability to respond to a slump. This is as true in Eastern Europe as it is in the rest of the market. Faced with an obvious decline in customer demand, its stakeholders, in much of the discussion at CEPA, did not seem to be directly concerned with solutions. One rather obvious in particular: how should they go about attracting more passengers onto their aircraft?
Rather, the main topics of debate tend to orientate around technical issues concerning aircraft import and registration. A particular concern is how to reduce taxes and simplify transactions. In other words, there was a strong interest in facilitating aircraft purchases. This tells you that the customer of interest is not the charter passenger but the aircraft purchaser. In turn, this radically reduces the addressable market to the fabled few HNWI (high net worth individuals) sufficiently wealthy to own an aircraft. It ignores the thousands of individuals, entrepreneurs and businesses who make up the charter passengers which float the fleet.
Perhaps the reason the industry is not able to reach out to this audience is that it lacks the scale to market an effective consumer brand. Or it may be that its executives´ operational mentality obscures the commercial reality. But that reality is now urgent. Unless business aviation operators can work out how to appeal to users, not just owners, its growth potential is limited. It is not enough to base future prospects entirely on the impressive growth curve in the tiny number of super-wealthy would-be owners.
This brings us back to the airlines. To its credit, CEPA´s agenda encouraged its delegates to debate potential for integrating commercial and business aviation services. A number of such alliances were cited: Delta, Korean, Singapore and Lufthansa all offer their premium customers jet charters, operated by their business aviation partners.
These are relatively tiny ventures and the consensus is that such opportunities are very limited. But it is not just operational collaboration for which biz-av should look to airlines for inspiration. More broadly, it should look to see how the best airlines have survived and even prospered through the recession. There are lessons to learn.
Those that have prospered most are of course the LCCs. We are all familiar with their competitive advantages: homogenous fleet, scaled-up financing, aggressive marketing, no frills on-board service, high rates of utilization, online distribution… Although business aviation offers a very different experience to easyJet, many of the same efficiencies are potentially available. But whether through lack of imagination or simply because the operators´ traditional business model is inflexible, the lessons are ignored.
Business aviation should not only seek to imitate successful innovation in commercial aviation, it should also exploit the gaps opened up by its scheduled counterpart. Over the last eight years in Europe, this network has provided zero net growth in flights. In fact the huge growth in LCC activity has masked equally substantial declines in the regional networks. As this short-haul coverage recedes, biz-av should have an opportunity to appeal to customers who are increasingly left stranded without a direct connection.
Richard Koe, Aviation Advocacy
Wednesday, May 29th, 2013
Aviation Advocacy much enjoyed moderating the EBAA’s seminar on IT tools in business aviation, and specifically, the potential for such tools to change the shape of the way in which we sell and organise business aviation services. It was an appropriate session for the 13th edition of EBACE; all the indicators are that the European business aviation industry needs some serious reshaping.
On our panel we had a number of leading IT providers, ranging from Avinode (Oliver King), which has been in the market for than 10 years, to the Air Club (Christian Hatje), which has only just set out its intention to offer an online B2C channel. In between, PrivateFly (Adam Twidell) has pioneered the private jet’s consumer portal for 5 years, Victor (Clive Jackson) is hot on the heels, FL3XX (Paolo Sommariva) has successfully pioneered the industry´s first schedule optimizer, and Stratajet (Jonny Nicol) is on the brink of launching flight tracking and pricing software following a 12 month beta cycle.
These competing and contrasting suppliers certainly lack no courage. It may not strike someone from outside the business aviation industry as unusual to have online access to searching and purchasing flights. But within the industry, as Avinode attests, the initial proposal that operators, brokers and users start to switch from, or at least combine, telephone sales and internet searches receives a puzzled and sometimes hostile audience.
The same was probably true at the vanguard of e commerce channels for hotels, holidays and airline flights a decade ago, now long overcome by mass adoption of B2C and B2B online platforms. But the inertia in business aviation is particularly strong. After all, these are some of the most expensive and often complex arrangements available to purchase. That’s why ‘offline’ brokers continue to thrive, and the biggest brokers simply don’t see B2C models as a risk to their telephone-centric businesses.
So they’re brave, and in the case of Avinode, adept enough to find an application which brings the efficiency of an online market place without taking on the traditional ecosystem through which flights are marketed and priced. As such, Avinode is now an accepted member of the status quo, and to an extent, it is being challenged as a vested interest by our other panellists, whose business models can only work if the traditional format is disrupted.
As PrivateFly made clear at the outset of our debate, its aim is to address the problematic fragmentation of the industry’s distribution network. Why problematic? Because customers, whose experience of procuring as well as flying business jets ultimately determine the industry’s prosperity (this is often forgotten in our sector). And fragmentation serves to provide these customers with a procurement process which is slow, expensive and inconsistent.
Avinode get this problem of course; its platform consolidates myriad operators’ fleets and provides at least a stamp of standardisation on a market place which any subscribing broker can quickly navigate. But crucially they did not and have not yet addressed the ‘black box’ within which customers and brokers fix a deal.
For it’s within this black box that the perceived value of business aviation is won or lost; undoubtedly there are some brokers who play a valuable role in linking up customer to aircraft quickly and cost-effectively. Even if it’s all arranged by phone, and in fact often only because it’s all arranged by phone. But in most cases, incomplete knowledge and manual processes lead to delays and encourage hefty commissions.
It’s arguable that Avinode have exacerbated the problem, lowering the barrier for brokers and magnifying the bottleneck between operator and customer. Both parties are frustrated as a result. But then again both are innately conservative and it will take time before they are willing to try out alternatives like PrivateFly or Victor in large numbers. Knowing the market will eventually tend towards a B2C platform, Avinode nevertheless need to start developing a plan B. That seems to be where Air Club fit in.
Of course Air Club protest that their proprietary B2C interface, to be powered by Avinode, is not intended to destabilise relationships between member operators and ‘our good friends in the broker industry’. However it is more than obviously disingenuous to claim that the Air Club’s direct sales are complementary to pre-existing broker channels. Perhaps they have in mind some sort of customer carve-up between the big broker beasts like Air Partner and leading operators like LEA, with the mass market of small brokers left to fall through the gap. Difficult to see that suiting Avinode though.
Stratajet and FL3XX make interesting counterpoints to the B2B versus B2C debate. Theirs are not so much e commerce solutions as fleet management hubs. Their contention is that online sales channels, on their own, are little more than catchy websites. They may improve the marketing of some operators over others, but ultimately they simply redistribute market share, rather than reshaping inventory distribution, or, more fundamentally, improving the business aviation product.
The proposition from Stratajet and FL3XX (whose services may be directly competitive in the way that PrivateFly and Victor are) is that only by optimising the many tasks and processes which coordinate flight allocation and management can operators wring out efficiencies and be more competitive. With an integrated operations hub, which makes the most intelligent decision in response to each customer request, operators have a genuine pre-requisite to make a difference with e commerce.
This of course requires a much bigger bite at the cherry; operators have to be persuaded to drop multiple legacy planning platforms to make way for the induction of a single 3rd party’s planning hub. But clearly someone believes in them, for both have raised several million during a protracted software development and beta launch. And to be fair, Avinode have long seen the importance of bringing their operators standardised fleet management and pricing tools.
The flaw for Avinode is that the precision of aircraft designation and pricing is completely lost once in the hands of the broker which intermediates between their platform and the customer. By contrast, Stratajet claim to have the data and technology in place to mirror-image operators’ pricing and pass it on with complete transparency directly to end users. This is the sort of ‘super broker’ approach which threatens to displace traditional brokerage altogether.
We finished our session by asking the panel to forecast the importance of IT tools for EBACE in 2016. Naturally all agreed on progress. The majority agreed that several solutions would start to work in parallel. Air Club is convinced it will break the mould fastest, and who knows, it may provide the tipping point for operators to coalesce; no one likes being outside the club.
But for the geeks to get more show-time than John Travolta, it’s pretty clear they can’t do it alone. Simply adding an online veneer to the status quo won’t do much for the customer. The challenge is to harness efficiencies in the operators’ engine room and ally that to effective e commerce. If that’s cracked, the traditional distribution network will simply subside, as it has done in the many comparable industries from which business aviation should now take a leaf or two.
Thursday, May 16th, 2013
Business and Private aviation in Europe is stuck in a 5 year recession. The business part – read light/small jets which operate most of the flights – has slumped most. The impression given by many leading operators is that the market is dire and won’t recover for some time: too much capacity; customers ever more price-sensitive; ‘desperate’ operators are dumping prices and undermining everyone else’s margins.
In response there has been a marked tendency for operators to shift towards private aircraft management, with less emphasis on building business models around selling charter flights. After all, the very rich still own aircraft, despite the recession. And management earns steady fees, with less risk. This could be seen as a backwards step, as the industry reverts to its traditional image as a provider a luxury VIP service, as opposed to its aspirational identity as a complementary network to scheduled aviation.
If the recession had been short, and we’d bounced back to pre-2008 growth, battening down the hatches and weathering out the storm might have worked. But it’s now clear that the boom was unique, and that to move ahead, operators need new business models. They will need to take a leaf from the airlines, which responded to the fall in demand and rising (fuel) costs by innovating, particularly with low cost models and more sophisticated online sales channels.
The obvious equivalent to the low cost model in business aviation is the VLJ-supported air taxi network. This is beginning to work, but not without fits and starts. Its corollary, internet-based ‘ticket’ distribution, has been slower to develop and badly missed. Enhanced by intelligent data consolidation and information sharing, operators and intermediaries could be using the internet as a proactive tool to move business aviation forwards, rather than fall back on private aviation.
The sector is not without its pioneers. Ten years on from launch, Avinode virtually monopolises the online B2B market for brokers to liaise with operators. Their latest innovations imply they’re firmly fixed on being the GDS for business aviation. Competition to be the Expedia is led by the likes of PrivatAir and Victor. Rival business models such as Stratajet and FL3XX have a more holistic approach, ambitiously aiming to integrate operators’ front and back office n a single intelligent platform for planning, pricing and marketing capacity.
Some may question whether these online solution providers are isolated innovators or signs of an industry step change. Some brokers remain adamant that this industry’s customer relationship will always be led by the human touch rather than the smart phone app. But there are signs operators now see the need to collaborate around their own direct online sales channels – as Air Club has shown. Brokers likewise are initiating alliances which will unify around consolidated B2C online channels.
Some of these online business models will compete directly, others may complement each other. None has yet cracked the B2C channel, and the jury is out as to whether the solution will emerge soon, coalescing a single new approach, or whether various options will evolve in parallel. But what is clear is that the online innovators are the epitome of forward-looking change for the industry. It may even be that this is the tail that wags the dog and genuinely transforms the market.
To get some insight into the online landscape for business aviation, and the competing business models of its leading innovators, come to Hall 11 at EBACE at 9.30AM on Thursday 23rd May. I will be moderating an EBAA session entitled Shape the Market – Can New IT Tools Apply To Change The Traditional Way Of Doing Business Aviation? It could be an interesting one.
Friday, March 29th, 2013
In December last year, business aviation operators met in London to discuss the state of the industry. In particular, the theme was the fragmentation of the business aviation fleet and the problems this poses. It makes profitable operations difficult; variable costs are high enough, and the fixed costs associated with each AOC is enough to put most operators in the red, especially with 3rd party flying hours well down. Fragmentation also complicates industry cohesion in countering unwanted regulatory interventions such as APD and ETS.
There was some lively discussion on the possibility of aircraft operators consolidating. After all, many operators have fleets of just 2 or 3 aircraft. The benefits – in terms of shared fixed costs but also expanded geographic coverage, mixed fleet, joint marketing and price leverage – are obvious it seems. But there are equally obvious obstacles. Not least the ‘top gun’ egos who run business jet operators. They’re generally wealthy too. Many mind not being profitable less than they’d mind an acquisition or a merger. From time to time they do go bust, but more start ups come into the market. The barriers to entry are particularly low.
Many industry experts subscribe to this view. Alasdair Whyte of Corporate Jet Investor is a shrewd industry commentator. He does not believe there are many business cases out there worthy of an operator consolidation. His analysis of the ownership structure of business jet operators shows most are in private hands, and may not be driven by transparent commercial motivation. The best the industry can hope for may be something more nuanced, like an alliance. Sure enough, in late December several large European operators joined forces to start the Air Club, the first business aviation ‘airline alliance’ of its kind.
But then last week there was an interesting acquisition, with DC Aviation in Stuttgart buying out Jet Link in Zurich. This gives the German group some two dozen aircraft, from ACJ to Lear 45. Not so long ago DC Aviation expanded operations through a JV in Dubai with the Al Futtaim Group. Its global expansion started with its acquisition by the diversified ATON Group. Back to the present, and it was only 6 weeks ago that Marshall Aerospace acquired Flair Jet, the Oxford-based air taxi operator. Marshall wants to expand the fleet to 20 aircraft and sees further acquisition opportunities in India and the Middle East. Also just this year came the completion of Hangar 8′s acquisition of Jet Club in Farnborough. That added 10 heavy jets to its fleet of 40, now active across Europe and Africa.
In just a few months since December, at least some evidence appears to be weighing towards the potential merits of consolidation.
Friday, March 29th, 2013
The European Commission’s ham-fisted efforts to half-nelson the business aviation industry into working with its Emissions Trading Scheme is coming to a climax. As a neutral observer, this could be fun to watch. Even business aviation operators, who have had to bear the burden of this unnecessary imposition, should get to see Brussels’ delusion being fully exposed.
For the end of next month marks the deadline for business aviation operators to surrender their allowances for their carbon emissions over the last year of flight operations. Largely this obligation falls on European operators, since the European Commission has put the global activation of its ETS on hold in the hope that ICAO will kick start a multilateral replacement.
In short, there is no way operators will meet the April deadline. Not in any manageable order, and not to any useful end. Business aviation should never have been shoe-horned into the airline ETS rule book. The industry believes it’s been picked on. True, it’s no friend of Brussels. But in truth there was no harm intended. Business aviation is just another victim of the collateral damage of ill-prepared EU policy making.
Business aviation operators won’t make their deadline because the rules imposed on them took scant notice of the reality of day to day operations, and woefully underestimated the challenge of coordinating proper participation across 27 member states. Dozens of operators have not even opened a registry account through which to begin tracking their flights. For many, properly completing registration took 6 months alone.
Straight out of the EU cookbook, the ETS enforcers are now threatening punitive fines for any operators failing to fall into line. Repeated non-compliance may escalate to aircraft grounding and even seizure of aircraft. While the bureaucrats of Brussels anguish over the rule book, business aviation – which creates employment in Europe of over $5bn and supports businesses across the continent – is wilting away in the recession.
If the Commission, in fantasy land, got its way and was able to verify all business aviation aircraft emissions accurately, the irony is that it would most probably see that almost the entire sector falls beneath its designated payable threshold. But it won’t get its way, at least not in April and probably not this year.
By then, ICAO will have done nothing, demonstrably. The Commission will have been thoroughly bluffed; there is no chance of non-EU countries accepting the resumption of Europe’s global ETS en lieu, and the continuation of a Europe-only ETS is so pointlessly discriminating to European operators that even the Commission would think twice. We hope.
Friday, February 1st, 2013
The economics of operating business jets in the current economic environment make commercial airline business models looks pretty by comparison. Business Aviation case studies show that private jet operators looking to make money through charter need a dedicated fleet of at least 10 aircraft to break even. Even with a mixed case of charter and managed aircraft, fleets of less than 5 aircraft do not seem to provide the economies of scale to sustain a profitable business.
Such indicators are bad news for the European bizav industry, given there are a scarcely credible 1100 operators with an AOC managing a fleet of only 4000 business aviation aircraft. Aside a handful of operators with more than 20 or 30 aircraft, most operators are managing fleets of just 2 or 3 aircraft. If the ‘standard’ economics apply, this would mean that a good number of European business jet operators are underwater.
Yet the roster of operators and the size of the fleet continued to expand in 2012, even whilst activity fell. In fact in December 2012 business aviation departures were at their lowest levels since 2005. Movements were 7% down on December 2011, but given the fleet increased over 12 months, that equates to some 20% fall in average per aircraft activity. This of course further undermines the case for running a charter operation.
So, why aren’t we seeing widespread bankruptcies, or at least a bunch of cheap M&A activity? In fact there have been a few collapses. That includes Ocean Sky, which not so long ago managed to get product placing in a Bond film (there’s hubris for you). There was a big acquisition too, with the IPO-fuelled Hangar 8 buying up more aircraft from the venerable Jet Club. But overall, given what should be a parlous financial situation, there’s not much tumult amongst the operators.
The reason for this relative calm may be that we are mistakenly expecting the industry to respond as rational economic actors would in other more open, mature service sectors. Creaking business models should collapse, and a fitter next generation should swiftly consolidate the market. That doesn’t happen in business aviation, where most operators are beholden not to profit margins and shareholders, but aircraft owners who don’t want to sell their aircraft or the business around it.
Operators benefiting from such owners don’t need to sweat the fleet with charter. At a certain point, and below a certain price, their owners don’t need the business. Operators who have invested in their own fleet and are dependent on charter can only look on with envy – or of course, they can refocus their own business on managing the aircraft of wealthy individuals, rather than slogging it out in the charter market and paying all the operational costs.
This repositioning seems to be the key to survival right now. Operators whose business models were aggressively charter-oriented a year or two ago are quietly pivoting their attention back to aircraft management. The income potential might be substantially less, and indeed the excitement of controlling and building a real air taxi service might be lost. But the risks are far lower; the operating costs and much of the overhead can simply be passed back to the owner.
This apparent flexibility in business model may not be good news for the industry as a whole. It could equip many of its operators to survive the recession when in fact the market should benefit from some ‘creative destruction’. It may take the industry backwards, towards a concierge-service for the very rich, rather than develop its more hopeful path towards a genuine transportation alternative to the creaking commercial aviation networks. Being old fashioned could be a smart short term tactic, but not a great strategy for the industry.
Friday, February 1st, 2013
Business aviation in Europe had a ragged time of it in 2012, losing ground on an already disappointing 2011. At the MIU year-end conference in London, the operators gathered to debate how to ride the waves. The EU’s economic writing is on the wall; they won’t get much help from new customers. Consolidation was debated, but the consensus was that alliances of one sort or another would be a more pragmatic way to increase efficiency and stay afloat.
Sure enough and not a month later the Air Club was born. There are eight founder members, including fleets in Switzerland, UK, Germany and Austria, from bizliner 757s to air taxi Cessna Mustangs. The Club promises to be the first business aviation venture to imitate the airline networks of oneworld et al: combined fleets to complete multi-leg itineraries, cooperative purchasing including fuel uplift, shared airport access, and joint loyalty schemes for their overlapping travellers.
Brave words, so let’s see how they go. For all their resemblance, business aviation and commercial aviation are very different. They won’t be interlining schedules services or selling miles, and they have nothing like the airline alliance scale to get decent discounts on operational costs. Maybe they can share some overhead but that will take some heads knocking together. It’s unlikely to happen in an industry characterised by big egos and turf war (and that’s compared to commercial aviation).
The Air Club is bullish too about building a direct sales channel to its customers, even to the extent of making charter booking as easy as ‘hailing a taxi’. Here the Club’s members appear to share a common frustration with the airlines; just as the latter increasingly seek ways to bypass the stranglehold on distribution held by the GDS and OTAs, business jet operators are mostly bound to trade through Avinode, the dominant online intermediary.
The Club may be onto something here, but again, it will be some challenge to walk this talk; B2C platforms work well for airlines, hotels, now taxis, but searching and transacting private jet flights online brings unique challenges. How is the Club going to manage and pay for this investment? Maybe they should invite Avinode to do it for them. Business aviation won’t always be intermediated by brokers, so perhaps Avinode would be wise to hedge their bets and seek such an offer.
A longer version of this article appears in the February 2013 Aviation Intelligence Reporter.
Wednesday, October 17th, 2012
The European business aviation sector was on the brink in 2009. Reaping the whirlwind of the global financial crisis, the private jet industry bubble had burst spectacularly. Jet deliveries, pricing and traffic levels plunged. Then there came a tentative two year recovery. But in 2012, business jet activity in Europe has double dipped and is back on its knees.
In almost every month of 2012, European private jet flights have fallen year on year. Overall, the shortfall is less than 3%. But in some large markets, the collapse in demand is striking. In Italy, traffic levels have fallen between 15% and 20% in three consecutive months. That´s the equivalent of more than 750 flights lost in each month.
The levels of diminished private jet usage are more significant once you consider that jet deliveries have actually increased by more than 25% in 2012. These arrivals mostly reflect long-delayed replacements and upgrades rather than new demand in the market. The fact that overall usage is still down despite this influx indicates the scale of the drop in overall demand.
The stereotypical view of the private jet industry would interpret its crisis as the predictable fate of a luxury industry that had ridden the good times well beyond its means. Governments pander to this view, and reserve the stricken industry no special care, hammering it with luxury taxes and environmental levies. Austere times have little patience for toys on the tarmac.
A less emotional appreciation of the business jet industry begs to differ with this view. In 2008, Price Waterhouse Coopers valued its economic contribution to the European Union at an annual E20bn. Correlating this sum to flight activity, falls in usage over the last four years could imply costs of more than E5bn. Business jet discrimination could be a very costly error for Europe at large.
Yet the irony is that, despite the best efforts of its trade association, the industry´s participants obstinately sustain the luxury image which has undermined its brand. It´s rare to find an operator that does not promote its services with glossy images of champagne and celebrities. Most private jet customers are business executives on the deal path. Perhaps this image would appeal even less?
Of course, to those familiar with the industry, those primarily responsible for branding and selling private jet charter services are the brokers. It´s beyond the operator; with an average of two aircraft in each ´fleet´, operators are mostly tiny flight departments, focused just on the daily logistics of moving aircraft. It´s no surprise that this highly fragmented supply side provides inefficient and expensive services.
To the operator´s price is added the ubiquitous broker commission. So the broker would claim, this is a service fee fully justified by the attention they provide the client. Diligently matching each user´s flight request to the right operator at the right price, then curating the subsequent trip, the brokers consider themselves the brain surgeons of the private jet charter business.
The unpalatable truth for them is that the vast majority of business aviation flights require no such concierge service. Typical flights are point-to-point, short one hour trips, for a couple of travellers in a light jet. Most customers need a service to match: an easy search platform (did someone say internet?), and a direct transaction with the operator. The fact is that most brokers should be out of a job.
Whilst operators remain highly fragmented and lacking in commercial focus, brokerage and its cost burdens are here to stay. Operator consolidation – a lot of it – would address the problem, and it would happen in any other industry under this sort of pressure. But in the private jet industry, resistance to change is embedded in the vested interests that control the industry. The wealthy backers of loss-making operators prefer to carry on bleeding than close up shop or sell out.
With this attitude, the industry will cling to its traditional model. In line with the bleak economic climate, business aviation will stumble along. But it will be increasingly difficult to promote its importance as a tool of business productivity. To recover, it needs to stop bleating about the unfair external environment and instead fix its problems within.
Primarily these problems derive from the old fashioned culture that permeates its operations. Operators and brokers are locked in some sort of symbiotic slow suicide, heads in the sand to the need for change. They need to wake up to the adage that if you want to keep things the same, first they have to change. Nothing less than radical brain surgery will do.
A longer variation on this article will appear in Altitudes Magazine Q4 2012
Friday, July 13th, 2012
On June 28th the Italian tax on private jet passengers got the official green light. The implementation and payment process have been clarified by the authorities, and private jet operators in Italy will be expected to collect and convey their passengers’ payment to the authorities from the end of this month.
The passenger tax, introduced formally on 29th April, comes on the back of the Italian government’s introduction of private jet taxes in February which specifically imposed punitive parking fees on aircraft residing in Italian airports. The context for these emergency ‘luxury’ taxes is the ‘save Italy’ budget passed by Mario Monti’s new government in December 2011.
The Italian government is by no means alone among its European counterparts in singling out certain business activities with ‘luxury taxes’, in an increasingly urgent effort to counter sovereign debt crises. The private jet sector is an obvious candidate, an easy target for politicians seeking to cut back on symbols of financial excess.
Both European and North American business aviation associations have long contested the profligate image with which their industries are tainted. Studies consistently demonstrate that private jets are used primarily as business tools, not personal indulgence. Price Waterhouse Coopers’ 2008 study on the impact of business aviation in Europe concluded the sector contributes almost $20m in economic value.
The business productivity argument for private jets has little weight, however, since the Euro crisis reignited in mid 2011. In the face of potential bankruptcy and at the mercy of financial markets, a number of EU members need every income source available. Italy’s post Berlusconi government was especially under pressure to demonstrate rigorous financial discipline.
The February private jet parking fee was nothing short of draconian. Applicable to any jet, Italian or foreign registered, parked for more than 48 hours in Italian territory, it calibrated fees on a sliding scale to weight of aircraft. For non Italian-registered large corporate aircraft, tax liabilities could have escalated to over EUR 300,000. It made it risky even to transit Italy; a technical problem, bad weather, or an ATC strike would saddle the aircraft owner or lessee with a bill for thousands of euros.
The Italian Aircraft Owners and Pilots Association (AOPA) calculated that more than 10% of private aircraft in Italy were de-registered in the month following the introduction of the parking legislation. Whilst the government claimed it could raise EUR 85m through the tax, AOPA’s calculation was that effective collection might not exceed EUR 5m, less the widespread direct and indirect costs of imposition.
The potential burden of the parking fee brought protests and appeals from national, European and international pro business aviation lobbies. With compelling evidence that the tax would have catastrophic effects on high end tourism and business travel, the diplomatic pressure fortunately obliged the government to modify the parking tax in April. Amendments included an extension of the parking window from 48 hours to 45 days.
However, no sooner was one threat seen off than another one materialised; the parking tax amendments introduced a further explicit private jet passenger tax, directing operators to collect fees from their clients of EU 100 to EU 200 per passenger, depending on flight distance. The publication of the implementation directive seems to indicate that this time the authorities will not be persuaded to reconsider.
The Italian government’s determination to press ahead with private jet taxes is a big problem for the EBA
A and the European industry it represents. First and foremost, private jets in Italy are big business. The country is Europe’s 4th largest market for private jet activity. There are annually over 50,000 departures, and the map of all European business jet routes shows Italy to be a central corridor of activity. Rome and Milan are both among Europe’s five busiest private jet airports.
Italy’s private jet activity highlights some well known exclusive leisure destinations such as Olbia. But it also exposes the use of business aviation as a critical alternative to scheduled airlines. More than 70% of flights are taken by business people looking to save time or make direct point to point connections. Across Europe, business aviation connects three times the number of city pairs linked by the commercial network.
The induced economic value of this connectivity is significant. Not only does the industry generate substantial fees through providing over 1m flights a year across the European area. But it employs thousands of personnel in operators and across the complete supply chain which service their fleet. Most importantly, business aviation has a multiplier effect on facilitating investment and trade.
Market studies show that Italy is a major beneficiary of these economic contributions from business aviation. The 2008 PWC study, for example, indicates that in Italy business aviation generates more than EUR 900m in economic value (‘gross value added’). With a business aviation linked wage bill of EUR 0.5bn, Italy contributes over 7% of the total employment value of the sector in Europe.
No doubt the general public perception is that private jet travellers can easily afford to pay a little extra tax. But the trade argues that most business aviation customers choose to fly privately on the basis of clear cut economic advantage. They are highly price sensitive, and accordingly the private jet charter operators compete intensely.
The evidence seems to demonstrate this price sensitivity. More than most other sectors, and far more than airlines, business aviation has suffered from the economic crisis, as its business customers can no longer afford or justify flying privately. In a country as badly set back by recession as Italy, additional fees for chartering a private jet are therefore coming at a very bad time.
Neither are private jet operators in any position to swallow the extra fees themselves. After several years’ recession, their aircraft are flying well below historic utilisation, and over capacity across the industry is driving ever greater competition. Italy has more than 50 operators, most of which manage a small handful of aircraft. Without any economies of scale, their price bargaining position is very weak.
Private jet operators in Italy have already got the European wide emissions trading scheme (ETS) to worry about, which officially launches in 2013. The most burdensome aspect of ETS is the administration and reporting. Adding private passenger tax collection and payments will be a thankless task for many small operators already distracted from the primary operational tasks.
The approval of private jet taxes in Italy came at the end of 2011, and the trends in business aviation flight activity since then in Italy appear to prove out the taxes’ negative impact on demand. Since January 2012, business aviation departures in Italy has consistently fallen 10% on 2011 activity, with June data indicating a 19% reduction. In Europe as a whole, flight activity in 2012 is between 2% and 3% off 2011 levels.
The biggest slumps in business aviation activity in the Italian market are in the light jet (and turbo prop) categories. These represent the majority of flights and correspond to the most sensitive customers. These are precisely the businesses which tend to use business aviation to increase their productivity on short haul European flights.
As an example of the fall off in demand for these aircraft, flight departures for aircraft in the super light category (such as Lear 45) fell a staggering 30% February and 25% in May (compared with 2011 months). From Italy’s busiest private jet hub, Roma Ciampino, there were 273 departures for Napole in 2011. In the first 6 months of 2012 (including peak periods) there have been just 70.
Certainly the Italian economy has not prospered in any of those months, with the financial markets consistently challenging Monti’s new government budgets. But it is difficult not to see a direct link between this collapse in flying and the introduction of Monti’s private jet taxes. Assuming average charter flights, a 20% fall in charter flights could represent EUR 20m directly lost revenues. It is difficult to see how passenger tax collection could offset the balance.
But at least for the time being, business jet taxes in Italy are going ahead, notwithstanding the obvious economic damage they will continue to do to the sector and its value to doing business. And if that is worrying, the greater threat is that other cash-strapped European governments will now follow Italy’s lead and introduce similarly discriminating levies on the use of private jets.
The EBAA has fought a number of regulatory ‘fires’ threatening business aviation in the last 12 months (no fewer than 9 EU states now levy, or plan to levy, special taxes on aviation). Ostensibly similar to the Italian passenger tax, for example, the UK’s airport passenger tax (APD) has been one such bone of contention. But the difference is that APD, like ETS, is a regulatory directive on commercial aviation which is extending its reach to private aviation, rather than singling it out for specific tax treatment.
It is the singularity of Italy’s private jet tax which is the most worrying but also challengeable aspect of the Monti government’s legislation. It is unprecedented that the business aviation sector should be meted out with such specific and unfavourable treatment. The European Commission’s Directorate General on Taxation has recognised this and may oppose its imposition.
The problem for the business aviation industry is that the Commission is not well known for acting quickly to provide any material opposition to EU member tax policy. Better prospects come from the EBAA, whose new DG Fabio Gamba has vigorously challenged the constitutional legitimacy of the private jet tax and is now considering legal options to challenge the Italian government in the European courts.
If the EBAA were to succeed in blocking the tax, or even simply in generating the publicity to expose its shortcomings, it would be heartening for a sector which is down in the dumps not just in Italy but throughout Europe.
But the sector’s main concern will continue to be the European economic and political backdrop. If Germany concedes it needs to guarantee the shakiest EU economies, of which Italy is certainly one, there will be a reciprocal expectation of even greater fiscal discipline. In this context, the arguments against taxing private jets will struggle to prevail. Especially without Berlusconi in power.
Thursday, June 7th, 2012
The high wire act that’s barely keeping the EU’s financing system from derailing the economy is far from over. The repercussions are serious for serious for the travel industry and in particular the aviation industry.
The one bright spot is that poor growth prospects have caused oil prices to slump. Back in March 2012, IATA warned that a $150 dollar spike would cost the industry $5.3bn in costs. As of this week the WTI price was at just $83.
The last time oil prices were this low, at $79 in 2010, the global airline industry enjoyed its most profitable year of operations. Brent’s price is more closely correlated to jet fuel and averaged $80 in 2010. But even Brent has now fallen below $100 a barrel, 20% down since the start of May.
Fuel is a huge input cost for commercial airline operations, accounting for anywhere between 30% and 50% operating costs. But it’s also a major factor for business aviation operations. Between the light and heavy end of the market, 10-15% of total operational costs (including ownership) are fuel generated.
To counterbalance its many other challenges, business aviation could therefore yet have at least one advantage going into the second half of 2012. Unless there’s another war in the middle east of course…