Optimists have every year since pointed to green shoots. It’s true that the ‘top end’ has flourished, representing strong demand for heavy, premium jets. But that’s mostly developing market demand, most notably in Asia. It also seems that corporate America is coming back to business aviation after a long hiatus. But that still leaves the European market deep in its slump.

Very obviously the sovereign debt crises within the EU are undermining the economic vitality which is business aviation’s core driver. The industry has been further burdened by a raft of taxes and levies, hastily imposed by governments looking to refill their coffers and exploiting the private jet’s ‘fat cat image’.

But as we have emphasized for several years, the biggest burdens on the industry are self imposed. In short, its supply side fragmentation, its dependence on intermediary sales channels, and the significant lack of transparency – for participants, users and potential investors – have seriously held back development.

EBACE 2012 is now around the corner and there’s the usual excitement and optimism associated with an annual convention. But there are signs of change this year which may reflect the industry has reached a critical stage. It’s been sick long enough, it seems, to have encouraged new entrants to break the status quo.

A few examples suffice:

Avinode has been around a while of course, but its SchedAero scheduling software is newly launched and could take its operator platform to the next level. To-date, Avinode is principally a useful but limited ‘online yellow pages’, for operators to advertise fleet performance and pricing, and brokers to find operators to quote for customer requests.

The risk for Avinode is that its operators could unsubscribe if they find a better route to market. If SchedAero succeeds in integrating operator members’ operational management into Avinode, the relationship will become far more solid and profitable for Avinode. And the industry demand-side, whether brokers or ‘end users’, would begin to have a single centralised platform to access all private jet schedules. That sounds like the beginnings of an airline-style GDS.

Fly Victor has a good story and is evidently selling it very well (few business aviation start ups make it onto CNN). They’ve variously been described as the industry’s first effective price-comparison platform, its leading B2C channel, its largest fleet consolidator, and first demand aggregator of business jet customers. Not bad for a 2011 start-up.

The PR is of course outrunning the reality, and Fly Victor has much to prove: other brokers with inventory (typically ‘empty legs’) can provide price comparisons; Fly Victor is still a broker in that it intermediates between customer and operator for which it takes a commission on the trip value; its fleet is strictly ‘virtual’ (in this sense Air Partner could claim a bigger fleet). Fly Victor’s aggregation of individual seats on jets is the most interesting initiative. It has however been tried before without success. Perhaps its time has come.

Another newcomer to EBACE 2012 has come in under the radar, but has promised to unveil its offer at the show’s first press presentation. It’s called Stratajet, and its launch product Stratafleet promises operators a new platform for managing charter opportunities. Based on several years research, Stratajet claims to have researched every flight permutation in Europe, integrating all associated cost parameters. The resulting calculator should inform instant and ‘penny perfect’ pricing for any new trip request.

If Stratajet works it could move the industry forward towards the transparency taken for granted throughout the rest of the travel sector. Customers would be able to use an online platform to query any route and get an immediate price comparison. This would inject a level of competitiveness that would quickly remove less efficient operators, and potentially by-pass much of the intermediary market. Notwithstanding the bloodbath, the industry and its customers would certainly be better off.

Stratajet, Fly Victor, Sched Aero – these are three of several new initiatives seeking to unlock the business aviation industry’s black box. If some succeed, even with the market caught in a recession, the business aviation industry will be much enhanced. In fact it is precisely the prolonged recession, and increasing sense of crisis, which makes it a good time to disrupt the status quo. We hope to see in the next few months that necessity is the mother of all invention.

This month’s Aviation Intelligence Reporter looks into the implications of ETS for biz av. The AIR view is that the industry needs to move fast to be prepared for 2013 trading implementation. Yes, business aviation got a raw deal – it gets the airline one-size-fits-all treatment, despite being a niche of its own, it’s not yet recovered from recession, and after all it generates just 0.4% of global emissions. But ‘clemency’ and ‘private jets’ won’t go hand in hand any time soon, so operators should get their house in order.

Business aviation’s beleaguered defenders have the impression that national governments (and by extension the public opinion they pander to) would simply prefer business aviation to disappear under the weight of ETS and a recent flurry of additional ‘lear jet’ levies.

There might be more than a grain of truth there, but at least ETS exempts aircraft below 5700kg MTOW. This means that most turbo props and very light jets won’t be required to purchase allowances and more importantly won’t be tied up with administration.

This should give a relative boost to the charter sector that does most to expand participation and lower prices across the industry. If the taxi jet market resembles anything like its forecast size in 5 years then the ETS break may have contributed to a rise rather than a fall in overall business aviation activity.

The Pilatus results maintain a decade of outstanding sales for the PC-12, the single engine mainstay of Pilatus’ production line. Used widely in corporate aviation and now also in regional airline networks, the Pilatus cannot be chartered in Europe but is a major player in the fractional ownership market. US-based PlaneSense is the largest fractional operator of PC-12s in the world, operating 34 PC-12s. Jet Fly operates a dozen Pilatus on fractional ownership out of Geneva.

Hawker Beechcraft, by contrast, have endured a dismal record of sales since 2008. This reflects in part the significant fall off in demand for the mid and light aircraft categories in which they specialise. They’ve also clearly made some strategic and operational errors. But their Beechcraft line of King Airs appears to be the exception, rising above the fray and continuing to dominate turbo prop production. HBC’s ABACE deal involved 10 King Air turboprop aircraft for the Chinese aviation company Avion Pacific Limit.

It’s likewise a King Air operation that Sky Work is looking to launch out of Bern. This fleet will partner with a commonly owned luxury hotel group, acting as onward VIP transportation for Sky Work’s incoming customers to reach their holiday locations. Operationally, the fleet is a perfect match for the small and inaccessible regional mountain resorts such as St Moritz, Courcheval and Gstaad.

There is in fact a notable discrepancy between public perception of turbo props as ‘business jets’ and their actual performance. In Europe the King Air has been the most popular business aviation aircraft the last 4 years running. In the US, Avantair has built up a 50-aircraft fleet of propellor Piaggio Avanti aircraft, growing its fractional ownership customers faster than any jet competitor.

Respectively, the overall turbo prop fleet represents 30% and 40% of all business aviation aircraft in the US and Europe. And Jet Net’s February 2012 Y-on-Y data shows that turbo props are the one category firmly moved into the sub 10% inventory bracket, making it business aviation’s stand out seller’s market. In that year, prices are up 19% (compared to 3% for business jets).

The much over-hyped forecast of air-taxi services a decade ago was premised on the viability of super light jets equipped to carry around 4 passengers for short range flights. By jet standards, their capital and operating costs were low. But not low enough to encourage mass participation, and so far their impact has been just incremental to pre-existing light jet charter. In fact the taxi opportunity has always been more accessible to turbo props.

In terms of purchase cost, the newest King Airs narrowly out-price VLJs such as the Mustang and Phenom, but 5-10 year old King Air 200s are available on the market for less than $2m. Their reliability and robustness support a feasible lifespan of 20-30 years. This kind of track record is as yet completely unproven for the incoming VLJs. Turbo prop operating cost advantage over VLJs is marked even if it varies by model. Embraer’s Phenom 100 for example is the most ‘frugal’ jet in burning 160+ gallons of fuel per hour. Compare that to the PC-12’s burn of less than 100 gallons.

The various standard derogatory stereotypes of turbo prop performance are mostly misleading. Turbo props are comparatively slower than jets, but on the average European sector length of just over 500km, most turbo prop – light jet comparisons differ by a matter of 15 minutes. You could point to extremes, comparing the Cessna Caravan’s 190mph with the 490mph boasted by the Phenom 300. Yet the Caravan is still the mainstay of one of the US’s most successful self-styled taxi operators, Linear. And to take another example, the Piaggio Avanti’s top speed of 460mph easily out paces the Cessna Mustang’s 390mph.

It is equally misleading to bracket turbo props in a different category of passenger comfort and capacity to their light jet counterparts. Among other things, the Eclipse 500 VLJ pioneer foundered on its squeezed 3-4 passenger capacity limit, often managing just 1-2 passengers on longer trips or with adverse weather. By contrast Cessna and HBC’s turbo props can easily accommodate 6-8 passengers. The PC-12 has a comparatively enormous cabin volume of 330 cubic feet. Compare that to Cessna’s CJ1 light jet’s 186 cubic feet.
The PC-12 is exceptional in combining payload with a range of more than 1400 nautical miles, competing with a mid size Citation X. The King Air 200 900m range is easily competitive with the leading VLJs. And it’s not just range that promotes the turbo prop as an attractive alternative to light jets, but airport access. VLJs were touted for their nimble runway performance but in Europe add only 50 or so airports to those already accessible to light jets. By comparison, turbo props can access a further 40-50 paved runways, and many have the ability to utilise several hundred unpaved strips.

The turbo prop production pipeline at HBC, Pilatus, Piaggio and Cessna demonstrate the ongoing development of turbo prop technology, even as the market’s attention is largely focused on jets. In terms of range, comfort, and reliability turbo props are, if anything, closing the gap on jets. So why doesn’t industry do more to promote this turbo prop capability? To illustrate, Avinode’s online market place captures a large proportion of all jets for charter in its database of 2000+ aircraft. Yet it only features 27 King Airs of the several hundred available in the market.

The obvious catalyst for turbo props to accelerate their attractiveness to business aviation should be fuel cost. This is a no-brainer in commercial aviation, shown by the strong demand for regional network operators like the ATR. If demand is not materialising in the same way in business aviation it’s because of the lingering misperception that turbo props are somehow short of the mark for the purpose of flying privately. Perhaps this is true in terms of prestige. With the imposition of ETS, and much wider awareness of the industry’ green responsibilities, the comparatively poor-man image of turbo props is surely set to change.

What is wrong with unbundling?  It has been very successful for Jetstar in Australia, there is no question of that.  But, it reduces the ability to charge a premium.  All you are doing by going back up the ‘add extra items’ line is that you are getting back to square one.  As we said in the  Aviation Intelligence Reporter this month, that leaves you with the risk of passengers that do not get all they want, or expect and you lose the passengers that want to concentrate the pain of paying and spread the pleasure of your experience.  It also seems to challenge most of the current airline booking engines.

Which is where the comparision of airline websites and Amazon comes into play.  Amazon sells the experience, not the pieces.  Airlines are like vending machines, and their websites have all the subtlety of your average vending machine.  There is little opportunity to up-sell and cross-sell.

The second issue with unbundling is that there is no control group.  It is not clear that this works anyway.  Apart from Qantas/JetStar, it is very difficult to think of an airline that has tried to be both at the same time.  Little sister airlines of big legacy carriers, apart from JetStar, like Buzz, Go and Ted, have all failed.  Successful airlines are totally stand-alone.

There is hope for the airlines in this model, but they have to be careful.  One case study is Dow Corning.  Dow started a low cost line – Xiameter – in 2001.  It sells 250 products, Dow sells 7.000.  There is no overlap.  Service standards are lower; delivery takes 7 days, prices in only a handful of currencies, changes to orders only at a fee; that sort of thing.  Dow’s combined sales went from 2.4B in 2001 to $3.9B in 2005.  A $28M loss in 2001 became a $500M profit by 2005.

There is hope, but perhaps the moral is to always be sure to be able to charge a premium.

For more information about the Aviation Intelligence Reporter please go here.

Clearly demand for business jets has fallen off the rapid growth trend seen 2003-2008, but the need for general aviation is only going to increase, even in mature markets where, despite the recession, numbers of HNWI grow and corporate profits have prospered. The fact that sales are still so depressed is at least partly due to the inaccessibility of finance.

This is in stark contrast to the pre-recession boom in business aviation, when banks competed to lend even 100% to win new customers. They were betting on an unsustainable increase in asset pricing and paper-thin assurances of their clients’ credit worthiness. Many got their fingers burnt.

These lenders were primarily the corporate jet and mega yacht finance divisions of large private banks. That label says it all; jets were and still are seen by traditional lenders as comparable to mega yachts, not just in terms of price bracket but because they are luxury lifestyle assets which should be the preserve of the ultra high net worth customer.

This thinking has convinced those banks still in the game to enforce rigorous discipline on the credit worthiness of the borrower. Full recourse lending is the norm, and most banks would prefer to integrate their customers within their private wealth management arm as security.

Unsurprisingly, this has focused lenders’ attention on the top end customers whose wealth is largely unaffected by the recession. But these buyers it seems would prefer to pay in cash than to jump through credit check hoops. Reportedly 80% of aircraft purchases in the last 12 months have been cash-only.

There was a ‘corporate jet investor’ conference in London this February. The corporate jets which light up bankers’ eyes are those being snapped up by newly minted billionaires in BRIC markets. The business aviation trade, orientated around mainstream use of small jets as genuine business tools, is speaking a different language. For traditional lenders, the jet is a proxy for creditworthiness, not an operating asset.

For all that they may still be shell shocked by deals gone sour, and further lending restraints through Basel III, it shouldn’t make sense that lenders are so restrictive on private jet lending. After all, lending to commercial aviation operators is relatively huge and still prospers. Yet this asset-based lending relies on the tiny and unpredictable margins of scheduled operations.

By contrast, a proper understanding the business jets are mostly used to facilitate doing business rather than lifestyle would emphasise that most customers with a genuine interest in owning a jet are likely to have a flourishing business with which to support its financing. Unlike their ailing scheduled operator counterparts, corporate jet operations do not fail for lack of load factor and passenger yield. And with less than 20% of the usage, corporate jet depreciations schedules are far kinder to the reseller.

All the same, the conference response from bankers emphasised the need for owners to be more aware of the aircraft’s inherent value. Besides the roller-coaster effect of the last 3 years on asking prices (a 2006 Gulfstream V may have increased in price through 2008 but then fallen by 15% or more), lenders are now focused on the wide variation in value retention among different aircraft types and models. Where the purchase is pre-flown, specific pedigree is of paramount importance.

In addition, the risk of financing a business jet is complicated by relatively complex operating variables. To begin with, there are over 500 operators (just in Europe) an owner may choose to manage their asset.

And over 50 active aircraft models have their own distinctive maintenance requirements. Beyond credit-worthiness, lenders in this market want to see their borrowers bring the right operator and maintenance provider to the negotiation table.

The corporate jet investor conference may not have given the impression that traditional lenders have a way out of the corner into which they’re boxed. But it did showcase a new breed of aircraft financier prepared to provide selective limited recourse funding to meet the latent demand for jet purchases.

These financiers have greater latitude to lend through sourcing equity rather than debt. This reflects a growing investor sentiment that corporate aviation provides a genuine business tool and can support asset-based lending. Milestone led the way with a $500m equity fund raised in 2010 and now supporting a dozen sale and lease back deals with helicopter operators.

But let’s not get our hopes up. Non recourse lending is still very rare, and almost all jet financing is still reserved for large corporate aircraft for UHNWI. Emerging markets are not getting much financing support – if you except helicopters represent a distinctly better operating risk for lenders.

In the interim, official policy is helping, and not just from the mature markets. This year’s Corporate Jet Investor transaction award went to Brazil’s export credit agency, Banco Nacional de Desenvolvimento Econômico e Social (BNDES). They have lent $167m to Flight Options to purchase 20 Phenom 300s. The purpose is to support profitable charter operations. This is as close to airline financing that corporate aviation has got. Let’s hope it’s a sign of things to come.

In the US, for Super Bowl XLVI, Indianapolis International Airport expects to set a record for the largest number of jets ever to fly in and out for the big game. That’s some record – football and private jets seem to get on well in the US, even in the worst of economic weathers. Back in 2004, 400 jets flew to Phoenix. Last year, 600 flew to Dallas. This time round we already know Mayor Bloomberg is flying in private. Could we imagine the likes of Boris Johnson doing the same?

Still, the Europeans have held up their end of the industry at Davos (even if the users themselves may not be European). Zurich and its surrounding airports were overwhelmed for parking spaces form incoming dignitaries on jet. And then from the airports they flew in by helicopter. The Occupy movement braved the sub zero temperatures but can’t have had much luck, penned in as they were by the train station…

Many of these trips are now apparently being made between North Africa and locations in south west Europe. The flights are difficult to detect; flying in under radio silence, light aircraft and helicopters can access a huge variety of remote and impromptu air strips. These appear to be highly organised operations, with cargo swiftly dispersed after disembarkation.

Other inbound trips are coming from further afield. In January, Spanish authorities in Barcelona seized an executive jet from Argentina this month that was carrying about 2,000 pounds of cocaine. The operator is an Argentine company, Medical Jet, which specialises in private medical transfers. Argentine military officials and politicians may have been involved, and deeper connections link to Colombian and Mexican drug cartels.

Until now, EU authorities have struggled to address the opportunity for this kind of exploitation. Much of this derives from inconsistent general aviation regulation and monitoring and sanctions, state to state. More than half EU members, for example, do not withdraw pilot licences following a drugs conviction.

In response, the EU is looking to create a more centralised response. Through project AVIA, Belgium, France, Netherlands and the UK will share intelligence on high risk profile airstrips. There are recommendations to review and upgrade flight monitoring and sanctions, as well as to improve intelligence sharing between military and civil aviation.

Europol will no doubt be impatient for actions to follow committees, reviews and recommendations. The problem is that besides the obvious challenge of coordinating multiple crime agencies across 27 states, the business aviation industry is heterogenous to say the least; over 800 independent operators manage Europe’s fleet of 2,000 aircraft, which fly over 600,000 sectors each year. What’s more, many of these aircraft (obviously the helicopters) can land in thousands of locations.

That has me to thinking about what is good lobbying.  There is an excellent blog – The Thoughtful Campaigner – http://thoughtfulcampaigner.wordpress.com/ which recently pondered the same thing.  He cites there a recent paper that puts forward three things that are vital: Strong Leadership, Time, and Robust Evidence.

That seems like a very good place to start.  Now play those criteria against most of the airline/aviation campaigns you have seen recently…

Play those criteria against the work Aviation Advocacy does too of course.  I think there must be other things, such as good writing, and pursuasiveness, but no-one can deny the importance of these three.