Aviation Business Models

It takes a number of things to go right for any business to succeed... but throw aviation into the mix and a business has two routes; Sink or barely float.  In today's world, that seems to be the reality of business in the aviation world.  There are a number of legacy airlines that continue to stay afloat, barely breaking even from year to year.  For every successful aviation business, however, there are a half-dozen, if not more, that sink.

The joke throughout the aviation world is a simple question with an even simpler answer, "How do you make a small fortune in aviation?  Start with a very large fortune."  Even those that invest everything they have into aviation can fail, and there is a trail of corporate and commercial aviation headstones to prove it.  In 2011, an article was published stating that, since 1990, there were 189 airlines that had filed for bankruptcy.  While many of the airlines on the list are no longer in existence, airlines including Delta, American, and Northwest survived their financial issues and survived bankruptcy.  Trans World Airlines was not so lucky.  After filing for bankruptcy in 1992 and 1995 and recovering from those, their planes were finally stripped of the trademark and TWA was bought by American (Johnson, 2001).  In one article, TWA was compared to Marilyn Monroe, "an American icon done in by powerful men who wanted a piece of its magic. Glamorous, tragic, gone before its time."  In theory, TWA should have strived and stood the tests of time.  They were a company that had been around since 1930 after the merger of Transcontinental Air Transport and Western Air Express and had survived two previous bankruptcies in a span of 10 years.  The problem with TWA was there were no lessons learned, and if there were lessons learned, they were profited from and then thrown out when used to the max.

While there are a number of companies that have failed over they last century, there are a number of companies that have survived.  In my opinion, a prime example of a company that seems to be doing things right is Southwest Airlines.  Their business model has relied on consistency, innovation, employee satisfaction, and customer service.  While other commercial airlines have chosen to brand themselves, investing in varying aircraft models, one thing that Southwest chose to do is stay with Boeing's 737 (with the exception of operating a handful of 727s in the 70s and 80s).  Southwest is committed to low-cost tickets and, while they may not flash all the benefits and perks other airlines advertise, they are still going strong.  Not only do they offer low-cost fares, when other airlines started charging fees for baggage, Southwest chose not to.  In addition to making decisions like these, Southwest took a huge chance on financial hedges which helped the company mitigate the costs of fuel.  By doing this, it kept Southwest ahead of the curve on fuel while other companies struggled to manage the costs.  This also keeps Southwest one of the front-runners in the industry, only behind Delta as the second-largest domestic airline in 2012.

There are a lot of factors that play into what it takes for any company to survive in todays economy.  For a company in the aviation community, it is even more difficult because what would appear to be a cornering of the market by the big names like Delta and American.  Regardless, companies still strive and survive or fall flat.  

References

Associated Press.  (29 November, 2011).  American joins long list of airline bankruptcies.  Retrieved from: http://www.boston.com/business/articles/2011/11/29/american_joins_long_list_of_airline_bankruptcies/

Grant, E.  (October 2005).  TWA- death of a legend.  Retrieved from: http://www.stlmag.com/St-Louis-Magazine/October-2005/TWA-Death-Of-A-Legend/

Johnson, T, & Kahn, K.  (10 January, 2001).  AMR takes TWA abroad.  Retrieved from:  http://money.cnn.com/2001/01/10/deals/amr_twa/

Mouawad, J.  (20 November, 2010).  Pushing 40, Southwest is still playing the rebel.  Retrieved from:  http://www.nytimes.com/2010/11/21/business/21south.html?pagewanted=all&_r=0

Boeing vs. Airbus

Boeing and Airbus have, for the past two decades, ran the world of commercial airliners.  The success of both companies is a result of beneficial mergers and a decline in the economy, which would push any other would be competitors out of the picture.  This left Boeing, an American-based company, and Airbus, based out of Europe.  Both companies have fighting like cats and dogs for the top spot, developing aircraft to out-do the other.  The current competition between Airbus and Boeing is between the Boeing 787 and the Airbus A350.  Recent issues with the batteries in the 787 has grounded the fleet due to fires.  While the A350 has not seen issues like this, it does not mean that they are currently taking over the market.  In sales, both Boeing and Airbus delivered around 600 aircraft; the issue lies in the over 4000 jets that are currently backlogged.  Politics and government relations is important to both companies, as made apparent by both having made numerous attempts to outbid each other for government contracts.  In 2011, Boeing beat out Airbus for a contract worth $35 Billion dollars to produce tankers for the United States Air Force.  Some politicians were not happy with the decision to go with Boeing.  “I’m disappointed but not surprised.  Only Chicago politics could tip the scales in favor of Boeing’s inferior plane. EADS clearly offers the more capable aircraft. If this decision stands, our warfighters will not get the superior equipment they deserve.” said Senator Richard Shelby.  On the other end of the spectrum, Senator Patty Murray said it was “a major victory for the American workers, the American aerospace industry and America’s military.”  Politics do play a large role in who gets what and not everyone has to be happy about it.

There are a number of factors that make companies such as Boeing and Airbus successful.  The first is obviously the manufacturing aspect.  Without a solid product, neither could be successful.  About 15 years ago, Boeing switched their manufacturing philosophy to a more lean approach.  In the actual aircraft, Boeing primarily uses hydraulically operated systems.  Airbus took a different approach; they made the plane it self more efficient and pilot-friendly.  Airbus' approach is known as the fly-by-wire, a concept that they came up with in the 1980s and never looked back from.

Boeing currently employees over 170,000 people in the United States and 70 other countries.  In comparison, Airbus has 59,000 employees internationally.  Both companies have their strong hold in the market right now, but it's only a matter of time before another manufacturer comes out with the bigger, better, and safer aircraft that unseats one or both from the "duopoly."

References

Airbus. Fly-by-wire.  Retrieved from: http://www.airbus.com/innovation/proven-concepts/in-design/fly-by-wire/

Altmeyer, C, Hepher, T.  (17 January, 2013).  Boeing overtakes airbus in annual sales race.  Retrieved from: http://www.reuters.com/article/2013/01/17/us-airbus-orders-idUSBRE90G0CF20130117

Bloomberg.  (3, June, 2001).  Boeing goes lean.  Retrieved from: http://www.businessweek.com/stories/2001-06-03/boeing-goes-lean

Drew, C.  (24 February, 2011).  Boeing wins contract to build air force tanker.  Retrieved from: http://www.nytimes.com/2011/02/25/business/25tanker.html?_r=0

Thompson, M.  (17 January, 2013).  Boeing overtakes airbus as clouds gather.  Retrieved from: http://money.cnn.com/2013/01/17/news/companies/boeing-airbus/index.html

European Union ETS

What is the European Union's ETS?  Many people don't understand how it works or how exactly it is governed.  Simply put, the Emission Trading System is based off a "cap and trade" system where companies are held accountable and limited in the amount of greenhouse gases emitted that they are permitted to emit into the atmosphere.  This system encompasses a number of industries, including powerplants, factories, and aviation.  There are numerous countries, the US included, that are opposed to this participation in the system, specifically because of its charges that could be applied to aviation.  The EU saw China order their fleet of European-bound aircraft not to participate and then ordered a freeze on the purchases of additional Airbus aircraft because of the EU ETS.  India had a similar reaction to the ETS, refusing to report their emissions to the EU.

The United States is currently opposed to the ETS scheme as well.  In preparation, the United States has already drafted legislation making it illegal to pay the proposed tariff.  With all the pressure ensuing from all angles, the European Union was forced to announce the postponement of the law.  Britain, France, and Germany were pushing for the elimination of aviation inclusion all together.  

ICAO is now responsible for developing a plan to make a global solution by the Fall of 2013.  This will be a hard task, considering all the parties that must be included in the talks.  The US's initial issue with the EU's plan was the fact that the emission amount for inbound/outbound flights included the entire flight, not just the portion over European airspace.  In my opinion, in order to make the fees fair and justified, fees should be assessed and paid according to where the flight takes place.  There is so much technology tracking flights, flight time, fuel rates, and even emissions, that a formula could be made to fairly divide monetary reimbursement to the countries affected.  With the ICAO's funding and access to research and information, there is no reason why something like this couldn't be accomplished.  By doing a formulated, evidence based calculation of fees, companies will know what kind of fees they will incur.

References

DeVore, J, Hayes, J, & Labrousse, F.  (26 February, 2013).  Aviation and the EU ETS: what's next?.  Retrieved from: http://www.mondaq.com/unitedstates/x/223598/Aviation/Aviation+and+the+EU+ETS+Whats+Next

Lewis, B, & Volcovici, V.  (10 December, 2012).  Insight: US, China turned EU powers against airline pollution law.  Retrieved from: http://www.reuters.com/article/2012/12/10/us-eu-airlines-climate-idUSBRE8B801H20121210

European Commission.  (25 February, 2013).  Reducing emissions from the aviation sector.  Retrieved from: http://ec.europa.eu/clima/policies/transport/aviation/index_en.htm

European Commission.  (4 January, 2013).  The EU emissions trading system (EU ETS).  Retrieved from: http://ec.europa.eu/clima/policies/ets/index_en.htm

General Aviation in China

China: a country with potential that seems to be limitless and an economy that seems to be booming.  In General Aviation terms, Chinese companies are taking a strong interest in improving and growing the industry, not only within their borders, but internationally.

There are numerous companies throughout the United States that have been around for years, established themselves, and, due to economy hardships or an eye for growth, have decided to team up with Chinese companies.  Hawker Beechcraft, which seems to have been under the spotlight for bankruptcy and then the proposed purchase by a Chinese firm, is not the first to have ties to China.  According to a number of sources, the Beechcraft deal did not go through because terms could not be met to satisfy the needs of both parties.  Cessna is a prime example of a company that decided to expand.  In March of 2012, Cessna agreed to team up with Chinese investors to build business jets that would meet Chinese standards.  Cessna saw this as beneficial to their company because, not only was Cessna able to keep all the employees that it had prior to the deal, the deal expanded their company internationally and opened more opportunities for employment.  In addition to Cessna, Cirrus Industries, Inc., which is the parent company of Cirrus Aircraft, was purchased by a Chinese company.  Cirrus did not see a cut in any employees but was immediately granted $150 million in order to finish the development of the Vision jet project, a light jet in which production had been slowed for years do to finances.

There are a number of reasons for the rapid growth of General Aviation in China.  The most notable and important in my opinion is the 2010 announcement by the government of China that would open up low-altitude airspace specifically for General Aviation.  Prior to this announcement, General Aviation in China was very limited and as few as 150 GA-purpose airports.  By 2020, they hope to have an additional 100 airports built.

In the big picture, by GA manufacturers from the United States branching out, introducing product in China, and building relationships abroad, this benefits everyone.  As made very clear by companies that have already made those bonds, Americans will not loose their jobs; if anything, job growth and potential may improve throughout the industry.  Cessna is a great example of this; they are still producing all their aircraft stateside and then shipping the aircraft so that China can finish the product in accordance with their standards and requirements.  While many Americans hate seeing businesses go this route, I don't believe that it will harm General Aviation in the United States.

References

Associated Press.  (18 October, 2012).  Hawker beechcraft sale to Chinese firm collapses.  Retrieved from: http://www.cbsnews.com/8301-34227_162-57535483/hawker-beechcraft-sale-to-chinese-firm-collapses/

Clyde & Co. (September, 2012). Update: general aviation in China.  Retrieved from: http://www.clydeco.com/uploads/Files/Publications/2012/General_Aviation_in_China_19.09.12.pdf

Hegeman, R.  (16 July, 2012).  U.S. plane makers teaming up with Chinese firm.  Retrieved from: http://www.manufacturing.net/news/2012/07/us-plane-makers-teaming-with-chinese-firms

Niles, R.  (28 February, 2011).  Cirrus acquired by Chinese company.  Retrieved from: http://www.avweb.com/avwebflash/news/Cirrus_Acquired_By_Chinese_Company_204192-1.html

3) What is the relationship between these U.S. general aviation manufacturers with ties to China, and the growth in the Chinese general aviation industry?

4) Most importantly, what does all of the above mean for career opportunities in the U.S. general aviation sector?

Sequestration and the Aviation Community

Over the last couple years, there have been a number of problems with the economy throughout the United States.  With all of the financial woes and our debt ceiling crushing down on us, a number of people have tried to find ways to correct this uncorrectable situation we see ourselves in.  More recently, we have seen the word "sequestration" being thrown around.  To be honest, before everything really hit the fan, I probably couldn't have defined the word.  Now, it seems like every can, or knows some sort of definition variation on the topic.

Sequestration is described as the "practice of using mandatory spending cuts in the federal budget if the cost of running the government exceeds either an arbitrary amount or the the gross revenue it brings during the fiscal year." (Murse)  Basically, what it boils down to is that money can and will be saved by any means necessary, whether it be through mandatory furloughs of employees or cuts in government programs.

Originally, the idea of sequestration was, just that, an idea.  Sequestration was proposed as an incentive for the government to act on the problem and come up with some sort of solution, ultimately an agreement, that would prevent the need for sequestration.  According to President Obama, the sequestration can be halted, but it is the responsibility of the Senate to come to terms on a compromise. (Spetalnick, 2013)

This could potentially have a huge impact on a number of government-funded projects and grants, including those related to the aviation community. The FAA currently has some of the most cutting edge programs in the world on the table and those are now being threatened.  NexGen, the top of the line air traffic management system is now being put on the back burner, where over the past year it has been a top priority installation.  Funds have been slashed so that repairs to navigational aids are done only when deemed necessary. In addition to this, the FAA has been forced to furlough employees, just as other agencies have had to do.

Another one of the most notable impacts that is already being noted is the closing of numerous air traffic control towers across the United States.  There are 173 towers, located in small- and medium-sized airports, that will now become unmanned. (Bennett, 2013)  While these control tower cuts do not eliminate FAA-held jobs, as a majority of these are run by contract, the concern is the safety around the towers for incoming and outgoing traffic.  While pilots do train for unmanned towers, the concern is that those medium-sized airports that have a heavy traffic flow may be at risk for more incidents both on the ground and in the air. 

The sequestration currently in place affects all angles of aviation, whether it be commercial airlines or the guy who is taking private lessons.  Ultimately, you have to look at the safety aspect of what the cuts are forcing the FAA to do.  As the sequestration presses on without some sort of proposition that can be agreed upon, I believe the aviation community will continue to see cuts.  Programs like NexGen that have been made to improve efficiency, safety, and air traffic management will suffer, which in turn will cost airlines money.  Airports that do not get the funding necessary to maintain their runways or facilities or that are denied funds to develop and expand airports through procurement of surrounding land will suffer and, in turn, economies surrounding those airports can suffer.  General Aviation will only see a fraction of the hit on the aviation community, but see that affect nonetheless.  

Bennett, D.  (6 March, 2013).  FAA to close air traffic control towers due to sequester.  Retrieved from: http://www.theatlanticwire.com/national/2013/03/faa-close-air-traffic-control-towers-sequester/62802/

Murse, T.  What is sequestration?.  Retrieved from: http://uspolitics.about.com/od/thefederalbudget/a/What-Is-Sequestration.htm

Namowitz, D.  (27 February, 2013).  Top officials offer glimpse of a post-sequester FAA.  Retrieved from: http://www.aopa.org/advocacy/articles/2013/130227top-officials-offer-glimpse-post-sequester.html

Spetalnick, M.  (2 March, 2013).  Obama: sequestration crisis will 'inflict pain,' congress should help with compromise.  Retrieved from: http://www.huffingtonpost.com/2013/03/02/obama-sequestration-_n_2795749.html

American and US Airways Unite... For Better or Worse?

A little less than five years ago, breaking news around the United States was the merger of Delta and Northwest.  This announcement verified all the rumors and talks throughout the industry.  This past week, we saw two more airlines, American and US Airways, announce a merger that would create the "World's Largest Airline."  With this announcement, a number of questions arise; these questions are not only from employees within the companies, but from consumers who utilize the airways.

The American Airlines and US Airways merger, like the Delta/Northwest, did not come as a surprise to many of those who follow the commercial airline industry.  The question is, will this merger be beneficial to the consumer, the person deciding whether to fly American/US or with another airline.  There are some who believe the merger will not provide any additional benefits to fliers of AA/US, only higher prices and a nice story.  Even with the articles stating the pros and cons, as a consumer I know what I look for.  There are three major things that many people look for when shopping for an airline ticket: out-the-door price, duration of flight or number of stops, and departure/arrival time.  In my opinion, consumers are going to go for the best deal.  Before the internet, airlines relied on loyalty and returning customers.  In today's world, I can set up alerts for low-fares, "bid" on seats, and get refunds from some travel sites claiming the lowest fare.  Despite the fact that the merger reduces the number of major airlines in the United States from five to four, the big three (American, Delta, and United) still must contend with Southwest, who are known for their cheap flights and limited travel fees.  Looking at the big picture, with fewer carriers, consumers have fewer options in terms of who to fly with and cities they service in addition to the possibility of higher ticket prices. (Mouwad, 2013)

Another topic that has been covered in past mergers and one that has already been mentioned in this merger is the question of how pilot seniority will be dealt with.  The merger of any two companies, regardless of the industry, will see this in some way; the aviation community, however, has to deal with pilots.  Different companies have different requirements as far as experience and time with the company.  Before the merger was even announced, both unions representing the pilots of American and US Air had drafted memorandums of understanding.  There are already talks of how the seniority integration will work and, while both sides are optimistic, US Airways is still tied up with seniority issues from their last merger with America West.  The reason why seniority is so important is because of promotions, it determines what plane a pilot flies, whether that pilot is captain or first officer, the ability to get advantageous scheduling and time off, and pay for certain assignments. (Carey, 2013)  While this part of mergers is important, I think it would be hard to set an industry standard.  There are a lot of different factors in regards to how the unions work together, the sizes of the companies merging, and what each side is willing to give and take in the process.  Ultimately, a common ground must be reached, I just don't feel as though the industry can step in and say, "This is exactly how you will set up the seniority list."

The final step for the merger is to be approved by the Justice Department's antitrust division.  Many are confident that the merger will pass through without a hitch, however US Airways has been stopped from merging before.  In 2001, the merger between United and US Airways was stopped.  The Justice Department said that the merger would limit choices to consumers and raise prices.  While both of these are concerns today, mergers similar in size to this have been approved with no problems.  The Justice Department antitrust division is an important part of the process because of their ability to prevent companies from monopolizing a certain market.

I am fortunate enough to already have a job lined up after graduation that has nothing to do with airlines but it is something that I have taken interest in.  With all of the mergers that are already in place, it makes me question whether or not "big corporation" life is for me.  I know that with big companies comes a lot of room for advancement and growth, but that can also allow people to slip through cracks. With mergers, pilots are most likely to keep their jobs; management, on the other hand, is not an area that will also need to be doubled in size.  While commercial aviation will grow over time, I believe corporate aviation will grow as well.  When looking at the two, I would go with corporate.

Sources

Carey, S. (2013, February 8). US Airways pilots approve merger integration process. Retrieved from: http://online.wsj.com/article/SB10001424127887324590904578292401183882548.html

Koenig, D. (2013, February 14). American, US Airways merger creates world's largest airline. Retrieved from: http://business.time.com/2013/02/14/reports-american-airlines-us-airways-to-merge/?iid=biz-article-latest-ap-widget

Maxon, T. (2013, February 8). US Airways pilots approve transition deal for prospective American Airlines merger. Retrieved from: http://www.dallasnews.com/business/airline-industry/20130208-us-airways-pilots-approve-transition-deal-for-prospective-american-airlines-merger.ece

Mouwad, J. (2013, February 14). Service cuts may follow merger of airlines. Retrieved from: http://www.nytimes.com/2013/02/15/business/airline-consolidation-may-be-costly-to-travelers.html?pagewanted=all&_r=0

Tuttle, B. (2013, February 14). What can consumers expect from the American-US Air merger? Nothing good. Retrieved from: http://business.time.com/2013/02/14/what-can-consumers-expect-from-the-american-us-air-merger-nothing-good/

Corporate Aviation... Pros and Cons

In today's fast-paced world, business and corporations have come to rely on getting from one place to another complete deals, market their name, and expand the reaches of their business.  One thing that a number of corporations rely on is corporate aviation.  There have been a number of publications stating the benefits corporations can gain from a corporate aviation division; on the other hand, there have been just as many exploiting the select few that abuse the idea of corporate aviation.

By definition, corporate aviation is the use of aircraft by companies for the transport of passengers or goods for business purposes (McMurchie).  Over the last decade, however, abuse of these business-purposed services have been brought in to the publics eye on numerous occasions.  In 2004, a study was conducted and found that over 250 CEOs logged personal flight time valued at $50,000 in addition to over 100 CEOs logging personal flight time valued at over $100,000; in comparison, the same study was conducted in 2002 and found that the numbers of CEOs utilizing these services for personal flight time was drastically lower, 140 and 33 respectively.  In addition to the flight time being covered, some CEOs received additional benefits for utilizing business aircraft for personal use.  On the other hand, companies encourage the use by CEOs because of the efficiency and speediness corporate aviation provides (getting from city A to a more remote city B that would otherwise be out of the way financially impractical).  (Strauss, 2005)

While I think Corporate Aviation does play an important role in the success of some businesses and do in fact benefit out economy, I think the abuse of corporate aircraft that we are constantly reminded of makes people question the importance and necessity.  With all the questions and doubts brought up with corporate aviation, information sharing is important; there are very few companies, however, that choose to disclose the type of aircraft, flight hours, and cost CEOs spend on trips, be it personal or business.  (Strauss, 2005) There are a number of Fortune 500 corporations that utilize corporate aviation and quite a few that do not.  Ron Sargent, the CEO of Staples, flies upwards of 170,000 miles a year, most of those miles are flown on commercial airliners, saying "It's not like there's a security risk if I'm flying (commercial). Besides, if you're the CEO, you have to set an example. I usually fly coach." (Strauss, 2005)

Since entering office in 2008, President Obama has made numerous mentions of eliminating tax breaks for corporate and general aviation, even adding to fees in an attempt to help balance the governments deficit.  During the presidential debates this past Fall, President Obama made numerous statements that fired up business jet companies and companies with corporate aviation divisions.  In President Obama's generalization, he said that if a company can afford a corporate aircraft, they should pay more taxes.  While large corporations may not have been happy with this and could probably afford any taxes levied on them, a majority of businesses with corporate aircraft are small to mid-sized business owners.  These small business owners do not have a fleet of jets and are typically not using these for frilly vacations; these business owners are trying to spread their name, branch into new markets.  Following the debate, the president and CEO of the NBAA, Ed Bolen, wrote a letter to the President, saying "Your comments seemed to illustrate a complete lack of understanding about the importance of business aviation in the U.S., and appear to be at odds with your stated interest in promoting job growth, stimulating exports, driving economic recovery and restoring America to its first-place position in manufacturing."  (Patiky, 2012)

The current tax break that President Obama is trying to eliminate is the accelerated depreciation applicable to certain corporate aircraft.  This law allows businesses to write off the cost of the aircraft over a period of five years in comparison to commercial or charter aircraft which can be written off over a seven year period. While President Obama's idea of eliminating tax breaks, and even making additional fees and taxes, would provide funds, these funds would total $3 Billion over the course of 10 years.  (Frank, 2013)  

Today's world demands businesses to leave their comfort zone.  Everyday, companies are ordering supplies, manufacturing their product, and turning those products around, selling them not only to their local cliental, but to customers across the nation.  Growth is necessary for a business, and many businesses find growth, marketing, and stability through corporate aviation.  Corporate aviation is important to businesses, whether a business owns or leases an aircraft or a company they do business with utilizes these amenities.

Sources

Frank, R. (2013, February 6). New dogfight between Obama and private jet industry. Retrieved from: http://usatoday30.usatoday.com/money/companies/management/2005-04-26-corp-jets-cover_x.htm

McMurchie, J. What is corporate aviation?. Retrieved from: http://www.ehow.com/facts_6849315_corporate-aviation_.html

Patiky, M. Zinger from the president stings business aviation. Retrieved from: http://www.forbes.com/sites/businessaviation/2012/10/05/zinger-from-the-president-stings-business-aviation/

Rubin, R & Zajac. Corporate jet tax gets six Obama mentions, $3 billion estimate. Retrieved from: http://www.bloomberg.com/news/2011-06-29/jet-tax-break-cited-six-times-by-obama-would-cut-debt-by-about-3-billion.html

Strauss, G. (2005, April 26). The corporate jet: necessity or ultimate executive toy. Retrieved from: http://usatoday30.usatoday.com/money/companies/management/2005-04-26-corp-jets-cover_x.htm