A Dysfunctional FAA

Last year was not a good year for the FAA and 2008 is shaping up as even worse. How this important agency, which has a major role in not just aviation but a major impact on our economy, can reinvent itself is the $64 billion question. The FAA is mismanaged, not by the FAA leadership but by the micromanagement of Congress. (Left, Nicholas Sabatini, FAA Associate Administrator being grilled by Congress.) Until this problem is resolved there is risk to every aviation business and every business touched by aviation. The one bright light is that business aviation and business aviation service companies are booming at the expense of the airlines.

The problems at the FAA began with airline deregulation. Regulating a deregulated industry was an adjustment. However, most but not all of today’s issues are operations not regulation. All the FAA’s problems seem to be politically driven. Last fall the FAA shut down one of the largest business jet charter companies alleging safety violations. (See General Aviation Tsunami) This company had never had an accident since its founding over 20 years ago. It had never received a safety violation. Its independent operational auditors ranked the company as the best of the best. But several years ago a foreign entity purchased 51% of the company. For this sin the FAA shut down the company and levied a $100 million fine.

Next the FAA discovered a problem with Southwest Airlines inspection routine. As that was being dealt with, Congress began demanding tighter oversight on inspections. The FAA reacted by grounding the entire American Airlines MD80 fleet of over 300 aircraft. 700 to 1,000 flights a day were cancelled, disrupting tens of thousands of passengers. All this was over wiring bundle straps that were spaced a fraction of an inch out of tolerance. The FAA demanded one inch spacing, while Boeing delivered many aircraft with 4 to 8 inch spacing. There has never been a problem with these wiring bundles.

Airspace and airports have reached capacity. Again Congress has created both problems. The FAA has never been able to modernize Air Traffic Control. Closing and consolidating facilities is subject to Congressional review and almost never happens. Billions have been wasted on systems that were long delayed, far over budget, and eventually scrapped. The controllers union, which has strong support from the majority in Congress, has been a major deterrent of modernization.

Former House Speaker Newt Gingrich in a paper My Plea to Republicans: It’s Time for Real Change to Avoid Disaster, says, “The problems of the Federal Aviation Administration are symptoms of a union-dominated bureaucracy resisting change.”

General Aviation Tsunami

On October 4th the FAA first suspended and eight days later revoked AMI Jet Charter’s air carrier certificate. Immediately a shock wave of tsunami proportions was felt in every sector of the general aviation industry. Until AMI Jet Charter was acquired by TAG Aviation USA in 1996, this company was known as Aviation Methods, a highly successful and highly regarded aircraft management company and charter operator.

Aviation Methods was founded by Roger McMullin and Jake Cartwright 30 years ago. One of the major customers of Aviation Methods was TAG Aviation USA, owned by TAG Aviation S.A., a Geneva-based holding company founded by Akram Ojjeh (1923-1991) and his sons, Mansour and Aziz.

Because of a law that prohibits a non-US entity from owning controlling interest in a U.S. air carrier (a company operating under FAA part 121 or part 134), TAG Aviation USA purchased only 49% of Aviation Methods. Fifty-one percent remained owned by two US citizens. All of Aviation Methods aircraft became management clients of TAG Aviation USA.

One of the reasons for the certificate revocation was the FAA's allegation that TAG, not AMI, was exercising operational control of flights, which would mean it was, in the words of the FAA, "under active control of foreign interests".

The Department of Transportation oversees the ownership issue of all air carriers operating within the United States. The DOT enforces an arcane law (49 U.S.C. § 41101), passed in the 1930s, that prohibits control of any U.S. air carrier by a foreign entity. In today’s global economy this law makes no sense and should be repealed. In September of 2005 the DOT issued an exemption to this law for air carriers providing “assistance in the carriage of freight and people affected by Hurricane Katrina”. Sam Skinner, who was Secretary of Transportation from 1989 to 1991, proposed repealing this law in the interest of bringing more capital into the U.S. airline market. Jeff Shane, Under Secretary of Transportation for Policy, and others have long been advocates of repealing or amending this law, but all such proposals have run into a buzz saw of special interest opposition on Capitol Hill.

At the recent Aviation Business Roundtable meeting I sat across from Mary Peters, the current DOT Secretary. I wanted to point out to her that the largest aviation service companies in the GA industry are 100% foreign owned. Directly on her left was the CEO of BBA Aviation, a British owned company and the parent of Signature Flight Support. Three chairs down on her left was Jet Aviation, owned by a German investment company. At the adjoining table was Landmark Aviation, owned by Dubai Aerospace. Not in the room was the largest (70 bases) FBO in U.S., Atlantic Aviation, owned by the Australian financial power house Macquarie Bank.

So where’s the beef and what harm is there in having foreign ownership of business jet charter companies? Mrs. Peters, or anyone else, please explain this to me.

Footnote:
In researching this article I consulted with my cousin Langhorne Bond. Langhorne’s father worked for Pan American World Airlines. In the 1930s and 40s he set up and operated China National Aviation Corporation which Pam Am controlled. You can read the whole story in “Wings for an Embattled China”. I also found an article, “30th Anniversary: TAG and Bombardier”. Much of this story was related by Bill Juvonen who along with Jim Taylor, Dave Hurley, and Barry Smith helped launch the Bombardier (then Canadair) Challenger. Today Bill Juvonen is a part of The Aviation Group.

Of Vacuum Tubes and Sealing Wax

This week I was part of a six member panel of “elder statesmen” that held a press conference in the Capitol building. I my case they may have had the first part of the description correct but I was out-eldered by Alfred Kahn (above), who is about to turn 90. Kahn, a former Chairman of the CAB and known as the “father of airline deregulation”, is as sharp as a tack and full of P&V. Others on the panel were former DOT Secretary Jim Burnley, and former FAA Administrator Langhorne Bond. Jonathan Howe and yours truly represented the General Aviation industry. Jonathan was a former President of NBAA.

We were on the Hill touting a Statement we had signed onto. The statement called on Congress to look beyond the current squabble over user fees and controller contracts, and to begin the process of completely reorganizing Air Traffic Control. If you are wondering why traveling by air has become such a mess. Read two excellent pieces that appeared in the Wall Street Journal the same week I was on the Hill. The video interview with John Fund is a must watch, and Holman Jenkins’ Op-Ed article A Dream of Air Travel is a must read.

Jonathan Howe pointed out that the General Aviation trade associations, AOPA, NBAA, and NATA, were doing their members a disservice by not getting on the ATC reform bandwagon. He said that when the system reaches saturation, GA will be left waiting as aircraft with large passenger loads, the airlines, will be given priority in the airspace system. It has happened before. Jonathan reminded everyone of the GAR program during the controller strike of the 1980s.

I pointed out two success stories of two freed former government entities. Canada’s air traffic system became NavCanada ten years ago and is governed by a stakeholder Board and operated independently from the government. Costs are down and efficiency is up. My second example of freedom-from-government concerned Washington National and Dulles airports. These airports were once anachronisms - some called them dinosaurs. However, when freed from governance by Congress and management by the FAA, they became modern marvels. Jim Wilding was the manager both under the FAA and MWAA. Once empowered by a free market and with access to the capital markets, he was free to work his magic.

Believe it or not there are still vacuum tubes in ATC radar, and as John Fund points out in the video, there are only 6 programmers left who understand some critical ATC software code. It is indeed Alice in Wonderland.

Others signing the statement were Aaron Gelman, founder of GRA, Inc., Clint Oster, former research director of the Aviation Safety Commission, and James Wilding, former CEO of the Metropolitan Washington Airports Authority.

David vs. Goliath

Over a year ago I wrote about the problem FAA certified repair station were having in obtaining maintenance manuals from aircraft manufacturers, Freedom of Maintenance Information. Instructions for Continued Airworthiness (ICA) in FAA parlance are the manuals required to maintain aircraft in an airworthy condition. The FAA requires anyone repairing an aircraft or an aircraft’s components do so in accordance with the ICA.

I just read the U.S. Southern District Court’s response to Gulfstream’s request to vacate the Court’s decision of a year ago in favor of CAMP Systems. It was amazing to me that Gulfstream would go back to the Court after reaching a settlement with CAMP following the Court’s earlier decision. Apparently the Court was just as taken back, writing in their opinion: If all vacatur does is slave a wounded ego, that would not advance the public’s interest. Granting Gulfstream’s motion here, for that mater would only create a precedent for more motions – thus wasting more judicial resources.

The court did not mention the wasting of company resources. Gulfstream apparently has plenty of resources to waste but almost all repair stations are small businesses that could never afford to take on giant Gulfstream and the other aircraft manufacturers. They all owe a vote of thanks to CAMP, which is also a small business, at least compared to General Dynamics, Gulfstream’s parent.

Incipient Panic

"Incipient panic" is how Look Out, This Crunch Is Serious, an opinion piece in The Washington Post, began. Incipient means “beginning to appear”. From where I sit in Virginia, a long way from Wall Street, it would seem we are past the beginning of a panic. Panic in the credit markets has spilled into the equity markets with all the averages & indexes we use setting new record one-day declines and then record advances, then repeating this extreme up and down cycle a few days later as the next injection from the Central Banks or the collapse of the next hedge fund or mortgage lender is announced in the press. If not a panic, it is the lead story on the evening news and fodder for a full hour recently on Larry King live.

The first question from every analyst who has called me in the last week has been, “How is the meltdown in the credit markets affecting the business jet industry?" So I decided to give myself a refresher course, grabbed my dog-eared copy of the classic Extraordinary Popular Delusions and the Madness of Crowds, the more recent and in my mind classic, When Genius Failed, and sat down for a Sunday of reading. I also ordered Devil Take the Hindmost: A history of Financial Speculation, by Edward Chancellor, the author of the afore-mentioned Post article. I also have calls into some good friends whom I consider the best business jet marketers in the business. I looked through the program guide for the National Business Aircraft Association (NBAA) convention, only a month away, and could not find any seminar on the credit markets. Nevertheless, I will be listening for any tremors while I am at NBAA next month.

Last week I wrote about this industry surviving a perfect storm, and warned of a possible approaching tsunami that would test our industry’s ability to survive an even larger Perfect Storm.

I invite you to read along with me and share your thoughts on these interesting times. Remember as a wise man once said, “In Adversity there arises Opportunity”. My partners and I will be looking for those opportunities.

Irrational Exuberance

Just over ten years ago in a speech to Congress Alan Greenspan proposed that the reason for the rising stock market was Irrational Exuberance.

I have watched the range of multiples paid for general aviation service companies double over the last seven years.

Most of the fundamentals for the GA industry have been strong. Business jet sales have reached new highs almost every year, backlogs are at record levels, and the number of hours flown has steadily increased. All this has occurred in the face of what I have called the perfect storm – the dot-com meltdown, 9-11, and record high fuel prices. More waves from this storm are reaching the shores of general aviation as I write this:

• An antiquated Air Traffic Control System;
• An FAA with no funds or direction from Congress to improve this situation;
• Airlines increasing the size of their fleet with smaller aircraft;
• An airport infrastructure unable to accommodate these changes;
  

And then there are the collapsing worldwide debt markets… Could all this mean a tsunami is approaching?

On the bright side, after 1996 when Greenspan tagged the stock market with Irrational Exuberance, the market set record highs for the next four years until the real irrational exuberance of the dot-com era burst that bubble.

The Barron Killer

This week Cirrus Design announced their new Cirrus Jet. This was a closely guarded secret development project. I visited Cirrus’s headquarters and factory last year. No one would talk about the jet then, but you could just feel that it was there somewhere. Last fall at the NBAA trade show there was a scheduled press conference at the Cirrus booth where most expected the jet announcement, but again no mention of a jet. NBAA took place only days after the tragic accident when a Cirrus prop plane crashed into a building in Manhattan with New York Yankees pitcher Cory Lidle as one of the pilots. Cirrus Design was not looking for attention until they could sort out what happened. (It appears it was pilot error – a poorly planned 180 degree turn over the East River.)

Cirrus is a very credible company and builds great small single engine propeller air planes. In only a few years they out produced and out sold Cessna’s single engine line, which had dominated the industry for years. The Cirrus Jet should not be lumped into the class known as very light jets (VLJs) like the Eclipse, Honda Jet, Embraer Phenom, etc. We have written earlier about the VLJs – most recently Very Light Jets: A Reality Check for Eclipse, and last summer I posed the question, The Eclipse of the Eclipse?. However I predict the Cirrus jet will be a success; but there are bumps in the road ahead.

The Cirrus Jet is a personal airplane and will be owned and flown by individuals. It has a price point at $1 million that makes it comparable to a Beech Barron. If fact it might be the Barron killer. What red blooded pilot who can afford a Barron would not want to go higher, faster, and maybe father than the two engine version of the 60 year old Bonanza? More than 180 of these high testosterone pilots have stroked a check for a $100,000 deposit to make their dream come true.

Certification of a jet is different than certifying a non-pressurized piston engine powered aircraft. However, Cirrus Design has a lot of experience in certifying new and sometimes radical designs.

The silver lining or dark cloud, depending on where you stand, is the airline implosion this summer with delayed and cancelled flights. The traveling public is looking for any alternative to using the unreliable airlines. This mess will certainly sell more general aviation airplanes, and clog our highways and trains. Mix all this in with an antiquated air traffic control system, along with record high fuel prices, and we have a formula that spells trouble for all if corrections are not made.