Competition risesInvestment will paydividends, saysBrad Thress, Cessnasenior vice-presidentPage 2

Inside »

HelicoptersSevere conditionsdemand aninnovativeapproachPage 3

FractionalownershipCautious optimismin the sector afteran eventful yearPage 4

Australia beatsglobal slumpResources boombehind expansionof business aviationwww.ft.com/corporateaviation

FT SPECIAL REPORT

Corporate AviationTuesday October 22 2013 www.ft.com/reports | @ftreports

The business aviation sectorhas yet to escape the turbu-lence it entered with the glo-bal economic downturn. Yet,while some areas of the

industry are resigned to stagnation inthe short term, others are flyinghigher. And many participants andobservers are allowing themselvesrenewed optimism for overall pros-pects in the longer term.

Private jet traffic is still well belowits 2007 peak, so many in the industryare hopeful of a return to thoseheights. They point to the fact thatthe world business aircraft fleet isexpanding as an indicator that activ-ity will ramp up again.

Richard Aboulafia, vice-presidentfor analysis at the US-based TealGroup aerospace consultancy,says leading US indicators such as

corporate profits and equity marketssupport the view of the optimists.

But in this heavily fragmented mar-ket a number of stories make up thewhole picture. The most obviousexample is the growing divergencebetween classes of corporate aircraft –large jets continue to sell well, whilemidsized aircraft were hit hard bythe economic crisis and have yetto rebound. The outlook for smalleraircraft is less certain, says MrAboulafia.

“There is still no evidence of a sus-tainable recovery for the bottom halfof the market in terms of sales, pricesor production rates,” he says. “Thetop half of the market, by contrast,wasn’t damaged at all by the crisisand is still benefiting from modestgrowth.”

Deliveries of the most expensive

aircraft, costing $26m or more,increased by 0.3 per cent between 2008and 2012. On the other hand, deliver-ies of jets costing between $4m and$25m plunged 56 per cent.

Mr Aboulafia says: “The problemwith small and medium-sized cabinsis that there was serious overbuildingbetween 2003 and 2008, thanks largelyto very easy finance terms.

“The result is a lasting overhang ofavailable jets, but there, too, we are

finally seeing some progress in reduc-ing this inventory.”

Honeywell’s Business Aviation Out-look, released this week, seems tosupport the optimists. The aerospacesupplier’s forecast expects a modest4 per cent rise in the number of air-craft delivered next year, comparedwith 2013.

It also sees the trend towards large-cabin jets continuing, with more thanhalf of the 600-625 business jets deliv-ered in 2014 being super-midsize orabove.

One business aviation analyst says:“In the short term, there has beensome stagnation, but over the longerterm there is a great deal of opti-mism.”

Mr Aboulafia agrees. “If the USeconomy’s recovery continues toaccelerate in 2014, we could see a

turnround in these depressed seg-ments,” he says.

Around the world, the outlook var-ies. Honeywell’s forecast casts doubton the ability of some emerging mar-kets to prop up sales. It expects NorthAmerica to take 61 per cent of busi-ness jet deliveries next year, a rise on2013, and Latin America to holdsteady with 18 per cent. But AsiaPacific’s 5 per cent and the Middle Eastand Africa’s 4 per cent, plus Europe’s12 per cent, will all represent falls.

In China, business aviation hasbeen transformed in just a few yearsfrom a quiet market to an area consid-ered to hold promising potential forgrowth. The country has alreadymade clear its intention to manufac-ture its own business jets.

Continued on Page 2

Expansion ison the flightplan, but willbe patchyMarket for larger jets remains buoyantwhilemood is positive longer-term on sales of smalleraircraft, write JaneWild andRohit Jaggi Hard landing: overbuilding between 2003 and 2008 has created a lasting oversupply of small jets Dreamstime

‘In the short term there hasbeen some stagnation, butover the longer term thereis a great deal of optimism’

On FT.com »

2 ★ FINANCIAL TIMES TUESDAY OCTOBER 22 2013

It is not perhaps surprisingthat Brad Thress sighswhen asked when themarket for corporateaircraft will pick up.

Mr Thress, senior vice-president of business jetsfor Cessna, one of theindustry’s best-knownnames, has followedhopeful signs for thecompany in each of thepast three years – andwatched them turn into aninsignificant rise in sales,whether for the industry asa whole or Cessna.

Also, Cessna, part ofindustrial conglomerateTextron, faces stiffeningcompetition.

Once-minor players suchas Brazil’s Embraer aremaking the formerlynarrow, uncompetitivemarket for corporateaircraft far more crowded.

Some observers fear thatmore companies will sufferthe fate of HawkerBeechcraft, which wasforced into bankruptcyprotection in 2012 and hadto close its corporate jetbusiness.

However, Mr Thressinsists that Cessna’sunique strengths – its widerange of products andheavy spending on productdevelopment – mean that itwill be well placed tobenefit when a recoveryfinally arrives.

It returned an operatingprofit for 2012 and 2011,although it reported a$23m loss for the secondquarter of 2013 and a $50mloss for the second quarterbecause of a changeoverbetween models of itslongest-haul Citation jets.

“We keep our productscompetitive from a directoperating cost perspective,from an acquisition costperspective, from a modernavionics perspective,” MrThress says. “We’reconstantly improving theproduct we have outthere.”

At the heart of theproblem facing companieslike Cessna, according toLoren Thompson, anindustry analyst for theVirginia-based LexingtonInstitute, is newlyintensified competition.

“It’s becoming true ofalmost every manufacturedproduct,” he says. “As thebarriers to trade comedown, you compete withjust about everybody. I’dlike to know how theydistinguish their productin such a crowdedmarketplace.”

Cessna’s product rangelacks the focus of some ofits rivals. Beechcraft,which emerged earlier thisyear from bankruptcyshorn of its lossmakingHawker jet business, nowoperates purely in the lesscompetitive market forpiston-driven andturboprop propelleraircraft, where it has astrong record.

Canada’s Bombardierenjoys a commandingposition in the very long-range, intercontinentalmarket, which it pioneeredwith its Global series ofaircraft.

Mr Thress insists,nevertheless, that Cessna’sbreadth of offerings – from

relatively small propelleraircraft up to Citation jetswith a range of more than4,000 nautical miles – offersit a unique opportunity towin customers’ long-termloyalty.

About 70 per cent of thecompany’s orders comefrom repeat customers,according to Mr Thress.Customers who start bybuying a small business jet– such as the five-seaterCitation Mustang or seven-seater Citation M2 – oftenmove on to a largeraircraft in the same range.

“We’ve had people movethrough four or fiveairplanes during theircareer as airplane owners,”Mr Thress says.

The company alsomaintained investmentafter the 2008-09 financialcrisis, according to MrThress, and will bringthree propeller-driven andthree jet-powered aircraftto the market in the nextfew months.

The jet aircraft include anew, upgraded version ofthe Citation Sovereign, anine-seater aircraft with a3,000 nautical mile range.

“We stayed the course,”Mr Thress says. “Wecontinued to invest in ourfuture.”

Introduction of the newtypes should stem thelosses that Cessnarecorded in the secondquarter. At that point, ithad finished deliveries ofthe earlier version of itsCitation Sovereign andCitation X aircraftbut had yet to startdeliveries of the upgradedversions.

Deliveries of the new

Sovereign will start in thefourth quarter of this year,while customers will startreceiving the Citation Xearly next year.

“This is kind of an oddyear for us,” Mr Thresssays. “In the middle of theyear, we lacked our large-cabin, larger-valueaircraft.”

On the CitationLongitude aircraftscheduled for introductionin 2017, the companyplans to use the newSnecma Silvercrest enginewhich it believes willprovide fuelsavings of 15 per centcompared with the mostefficient engines in itsexisting fleet.

“We absolutely believewe can compete on anyinnovation level withanyone in the industry,”Mr Thress says.

Yet the problemremains that, no matterhow sparkling the productline-up, companies facinga sputtering worldeconomy and regularfiscal crises in theUS appear unlikely toinvest in new businessaircraft in large numbers.

“We continue to seeencouraging signs,” MrThress says, citing highdemand for second-handaircraft and continuingstrong corporate profits.

But, pointing out howlong those positive signshave misled the industry,he concludes: “Theindustry will improvewhen it improves.”

Competitionrises in toughmarketplaceProfileCessna

Jet manufacturerbelieves investmentwill pay off, saysRobert Wright

‘We continue to seeencouraging signs[but] the industrywill improve whenit improves’

Private aviation is an opu-lent business that does notlike to get its hands dirty,yet one that much dependson maintenance, repair andoverhaul, or MRO, for itssuccess. This is nowheremore so than in the US, theworld’s largest consumer ofsuch services.

The requirement forskilled staff is expanding.According to the latest Boe-ing Pilot and TechnicianOutlook, North America isgoing to need another 97,900technicians in the next 20years, and there are con-cerns about where the nextgeneration of mechanicswill come from.

The World CommercialAircraft MRO Market 2013-2023 study by ASD Reportspoints out that newer, morecomplex aircraft, will even-tually require maintenanceproviders to invest in newtraining techniques. That

does not augur well forsmaller, third-party provid-ers that may lack the neces-sary finances to beef uptheir skills. Additionally,the original equipmentmanufacturers (OEMs) arealso entering the market inincreasing numbers, soMRO in the US is startingto change shape.

Beechcraft has eight fac-tory-owned centres acrossthe US. This network offersmaintenance training, full-factory engineering supportand MRO, paint andupgrade services on the fullline of Hawker and Beech-craft aircraft.

Allen McReynolds, vice-president of Hawker Beech-craft Services says MRO isan important part of themanufacturer’s serviceoffering and that he hasseen a change in the mar-ket. The recent dip has ledto many fleet sales and thisswitch in ownership hasmeant refurbishments. Con-sequently, upgrades havebeen all the rage in hangarsacross the US.

“As aircraft have changedhands, more operators arelooking for cockpit andcabin systems upgrades,”says Mr McReynolds.

“People are looking to mod-ify their existing fleets withstate of the art avionics,and entertainment and con-nectivity systems.”

Christi Tannahill, seniorvice-president of Beech-craft’s global customer sup-port, says the company willcontinue to support the out-of-production Hawker air-craft. This will be with itsown service centres and byteaming up with third par-ties, sometimes with aninternational presence,such as the Gama Group,which offers MRO, and

modification certificationservices from facilities inthe US, Middle East and theUK. The thirst for better-connected, more advancedmachines will add morepressure to the labour force,since there are significantchanges afoot for small air-craft and avionics certifica-tions. These are due viaproposed updates to the fed-eral airworthiness stand-ards regulating smaller air-craft. Requirements for the14 Code of Federal Regula-tions part 23 rules date back80 years and were draftedunder the assumption thatsmall aircraft were lesscomplex than larger trans-port category aircraft. Thatis no longer true. Since part23 represents the mostdiverse range of new air-craft, it is ill suited for cer-tifying today’s systems.

The potential changeswill subdivide part 23(which governs airworthi-ness standards) into differ-ent certification tiers,depending on complexityand performance. For avi-onics manufacturers, thisshould reduce certificationcosts, and allow the FederalAviation Administration(FAA) to dedicate safety

resources based on a risk-based approach that callsfor increased oversight ofmore complex systems. Thesuggested new rules are dueout this year, with imple-mentation soon afterwards.That may prove difficultsince the government shut-down of the FAA aircraftregistry is causing disrup-tion. Without sales andsome inspections of aircrafton the flight line, a risingnumber of aircraft and heli-copters are grounded.

This is hurting, sincebusiness aviation and itssupport services are a vitalpart of the US economy. Innorth America the sector isa major fiscal driver. Itemploys 1.2m people, andcontributes $150bn to USeconomic output. In somestates and regions, theindustry is a significantgenerator of employmentand local investment. Acase in point is Kansas,where aviation accounts for$7.1bn, or nearly one-thirdof the state’s economy.

On the plus side, despitethe recent economic down-turn, insiders say the US’smost well known MRO com-panies are thriving. Brandssuch as Jet Aviation, Dun-

can Aviation, Comlux Avia-tion and Standard Aero areall busy and competinghard with one another forcustomer dollars. Jet Avia-tion in St Louis has startedproducing and installingcustom items such as divancushions and carpeting foraircraft that may nevereven land at its facility. Itsupholstery shop sends tech-nicians to any location tomeasure and cut patterns tofit, return to the shop toproduce the items, and thenreturn to the aircraft tocomplete installation. “Thismeans our customers don’thave to worry about ‘downtime’ for their aircraft,”says Chuck Krugh, seniorvice-president.

Indianapolis-based Com-lux Aviation Services saysit is ready to tackle wide-body completions, adding toits portfolio. “We have beenlooking at this side of themarket for some time andare already in discussionswith several potential cus-tomers for our firstproject,” says chief execu-tive David Edinger. “We aredoing so well that we havehad to restructure our com-pany to use our manpowermore efficiently.”

Demand for top mechanics set to grow

Florist shops are disappearingfrom Chinese cities as thegovernment drasticallyprunes its entertainmentbudget. Ostentatious shows of

wealth are frowned upon, which – atfirst glance – seems to have had anegative effect on private aviation.

The market has slowed since 2012,with 18 per cent growth forecast for2013, against 40 per cent in 2012. Lastyear saw 96 aircraft added to the fleet,whereas there have been only 37 new-comers so far in 2013.

This appears, however, to be nocause for alarm. Dominic Lee of HongKong law firm de Bedin and Lee, says:“The greater China market will seeless growth this year but it is a devel-oping sector and we must not losesight of the fact that that growth willbe impressive.”

The recent sluggish growth comesfrom the slowing Chinese economyand “austerity measures” introducedby the government. Also, as buyersget savvier, they are taking longer tochoose an aircraft. Jeff Lowe, generalmanager of the Asian Sky Group(ASG), a Hong Kong consultancy,says: “The China market has been alittle overhyped, but is settling now.”

A report prepared by his companyon the first half of this year showsGulfstream is still flying highest. Ofthe 37 business jet deliveries intoChina this year, 13 were Gulfstreams,10 Bombardiers and nine DassaultFalcon Jets (DFJ). Three Embraers,and two Boeing types made up thenumber. Gulfstream and Bombardierare the strongest players with 35 percent and 27 per cent of market sharerespectively but DFJ has taken off,grabbing a share of 24 per cent – aclimb of 18 per cent over 2012.

Cessna sales have been bruised by

Citation aircraft undergoing technicalupgrades, and awaiting validationtype certificate data sheet approvalsfrom the Civil Aviation Administra-tion of China (CAAC). The manufac-turer, however, is forging ahead withproduction plans via its joint ventureCessna-AVIC Aircraft, which willassemble Citation XLS+ jets in Zhu-hai, and Caravan turboprops in Shi-jiazhuang.

Beechcraft is anticipating a healthyChinese appetite for its products.According to Richard Emery, its presi-dent for Europe, Middle East, Africaand Asia Pacific, the original equip-ment manufacturer (OEM) has seen aresurgence of sales of its King AirC90GTx, particularly among trainingschools. “We are seeing a lot of flighttraining operations springing up,”says Mr Emery.

Minsheng Financial Leasing Serv-ices’ (MFLS) chief aviation lawyerDavid Tang and his colleague, ChrisBuchholz, are keeping a watchful eyeon the fledgling training industry.“The King Air is a fantastic aircraft.The avionics are as good as a jet. It isalso good for smaller companies touse as a commuter,” says Mr Tang.Mr Buchholz believes there could be aproblem with the lack of accessibleairspace, adding that students need topractise flying longer cross-countryroutes during early training.

Gulfstream’s spokesman, SteveCass, would like to see more change.“Relaxing airspace restrictions willlead to faster flight approvals, moredirect routings and more usable air-space, especially at higher altitudes,which generally provide a smootherride, better weather and greater fuelefficiency.”

Although airspace restrictionsare problematic, Mr Lowe says the

relaxation of rules governing loweraltitude airspace in some provincesmeans that helicopter orders haveflourished. ASG is due to release anew rotorcraft report at the NationalBusiness Aviation Association(NBAA) and says helicopter saleshave increased enormously.

There is some good news for buyers.The government has opened regionaloffices to deal with import approvals.This means reducing processing timesto about four months. The number ofair operator’s certificates has alsorisen. These are mostly CCAR91 (pri-vate), with just a few CCAR135 (com-mercial). The bad news is the rumourof a potential new 25 per cent “lux-ury” tax that could be imposed onnew aircraft.

Government has chartered feweraircraft, a move that has hurt largeroperators, some of whom have beenforced to place aircraft outside Chinaon short-term leases.

“The continuing crackdown on cor-ruption and government spending onluxury travel has resulted in a short-term oversupply of the mainland

charter fleet,” says Mike Walsh, chiefexecutive officer of AsiaJet.

However, Bjorn Naf, chief executiveof Hong Kong’s Metrojet, believes themaintenance, repair and overhaul(MRO) market is maturing. His com-pany has opened up new bases in Zhu-hai and the Philippines. “The marketmay have slowed down, but we arestill extremely busy,” he says.

Despite deliveries being low, thenumber of movements is up, whichCarey Matthews of Shanghai HawkerPacific, a business aviation servicecentre, believes is a better marketbarometer. “We have seen our flightactivity increase by double-digit per-centages in 2013. There has been noslowdown in our operations. “I feelthe strength of the industry should befocused on how much people are fly-ing. By that measure, the businessaviation industry is doing well.”

MFLS’s Mr Tang points out that hiscompany is in the process of buildinga new business aviation airport nearBeijing, scheduled to open in 2015.“Slot constraints are a major issue,but this will really help.”

Austerity takestoll but growthprospects stillencourageChinaAlthough buyersmay be taking longerto buy, the privatemarket appears to haveweathered the storm, reportsLizMoscrop

Forging ahead:Cessna’s WilliamSchultz (left), andQu Jingwen,general managerof the AVIC

Teamwork: Christi Tannahill

This year, China’s fleethas grown by 37 aircraft, upfrom 336, the majority splitalmost evenly betweenGulfstreams, Bombardiersand Dassault Falcon Jets.

Chinese regulations arestill holding back growth,however. Further relaxationof the rules will be neces-sary to speed flight approv-als and ensure more directflight routings and betteruse of air space.

There are other negativeindicators for the Chinesemarket: its slowing economyand culture of austerity haveweighed on obvious displays

Continued from Page 1 of wealth – a pattern that isrepeated across the world.

Companies have had toappear restrained during atime of austerity, althoughvery wealthy individualshave still been buying.

Other observers have res-ervations about China.

Kenn Ricci, head of Direc-tional Aviation Capital, aninvestment company thatbought Flexjet, one of theleading fractional ownershipand aircraft managementcompany’s from Bombardierin September, says globalexpansion is on the agenda,though not in China orAsia.

“The Chinese market, we

think, will evolve muchmore slowly than a lot ofpeople are predicting,” MrRicci says. Instead, he seespotential in the developingmarkets of South America.

He also sees scope forgrowth in Europe, althoughEuropean Business AviationAssociation figures showthat total flight activity wasdown 3.4 per cent in the yearto September, comparedwith the previous year.

But one place where thesector has held up is Aus-tralia, supported by miningexports to China. Aus-tralia’s small fleet of about400 aircraft has been grow-ing and, with demand for

natural resources rising, isset to expand further.

David Bell, chief execu-tive of the Australian Busi-ness Aviation Association,says: “We are a small partof the overall business avia-tion community, but we arequite strong and growing.”

An aircraft manufacturermaking the most of toughtimes is Nextant Aerospace,which has built a businessselling remanufactured air-craft based on the Beechjet400A/XP. Its $5m 400XTi hasnew engines, avionics andinterior. The Ohio-basedcompany has delivered 30so far and has an orderbacklog of $175m.

Nextant will take this astep further by announcingat the US National BusinessAviation Association con-vention in Las Vegas thisweek a strategic partner-ship with GE Engines tocreate a range of remanu-factured jet and turbopropaircraft.

The first model, alsolaunched at the convention,is the C90XT, based on theBeechcraft King Air C90twin turboprop. Wisconsin-based Beechcraft, whichhas only recently emergedfrom a painful restructuringto concentrate on its turbo-prop and other propelleraircraft, is bound to see this

as a threat to sales of air-craft in its King Air range.

In terms of marketshares, Embraer of Brazil isset to make the biggestinroads. Over the next dec-ade Teal Group forecasts it

will ratchet up deliveriesmore than fivefold to take6.7 per cent of the market.Embraer itself says itsforthcoming Legacy 450 and500 aircraft will be “gamechangers”.

Gulfstream and Bombar-dier are predicted to holdthe lion’s share of the mar-ket at about 31 and 34 percent respectively.

Dassault and Cessna areforecast to notch downslightly to 13-14 per centeach. The former todayunveils its Falcon 5X, whichwill be the basis for a newfamily of long-range air-craft, while Cessna says itsgrowing range of productswill help it retain customers.

Other clouds remain overthe industry. Boeing lastmonth warned that, withmany pilots due to retire,there would not be enoughto allow for expansion

plans. The pipeline of avia-tion engineering skills alsoneeds development.

Financing, however, hasshown signs of improve-ment. Investor interest isreturning, with banks, pen-sion funds and insurancefunds showing greater will-ingness to lend. But thatdoes not apply across thesector. Banks are not keento fund purchases on olderaircraft and the charter mar-ket complains of difficultyin obtaining bank financing.

Overall, the signs ofencouragement are patchy,and many in the industrymust wait for the overalleconomy to take off.

Expansion is on the flight plan, but will be patchy

Maintenance

More complexaircraft need a bettertrained workforce,writes Liz Moscrop

3.4%European flight activity fall,year to September 2013

Corporate Aviation

FINANCIAL TIMES TUESDAY OCTOBER 22 2013 ★ 3

Corporate Aviation

One distinctive feature of theFalcon 5X aircraft, un-veiled by French manufac-turer Dassault today, castsa light on the thinking

behind the long-range business jet.Its skylight in the forward roof

of the cabin, though it echoes the bub-ble windows that navigators of earlyaircraft used for taking sightings ofthe stars, is unique among businessjets. But it solves the problem ofunlighted entranceways through thecabinet-lined galley area that makejet interiors look initially dark anduninviting.

Dassault has a vast history to plun-der for both simple and sophisticatedideas. Founded in 1929, it has beenmaking executive aircraft for 50 years,with about 2,275 twin- and triple-engined business jets delivered so far.The 5X was initially conceived in 2007as a super-midsize aircraft. But afterthe global financial crisis struck in2008, only the market for large-cabin,long-range jets emerged almostunscathed, while that for smaller air-craft was left with an oversupply fromthe boom years of 2003-08.

Thus the 5X project was recast as atwin-engined, long-range aircraft withan unusually large cabin, plus all theDassault refinements of handling andtechnology that the manufacturer cancarry over from its experience as amaker of cutting-edge fighter aircraft.

But it launches into a crowded mar-ket where other manufacturers havealso been tilting their offerings at theupper end of the business jet sector.Bombardier of Canada has extendedthe range and size of its Global air-craft, and US-based Gulfstream’s newG650, ultra-long-range, large cabinbusiness jet has been shaking up thetop end of the segment.

The aircraft that the French manu-facturer benchmarks the 5X againstare the Global 5000 and GulfstreamG450. Dassault, however, is claimingsome impressive figures that it hopeswill make the 5X a compelling choice– 50 per cent more fuel efficient thanits rivals, 50 per cent greener and 30per cent cheaper to operate.

It is also aiming to bring to businessjets the standards of commercial air-liners in dispatch reliability and lowmaintenance. Embraer of Brazil hasbeen setting some of these standards

since its decision to branch out fromcommercial to business aircraft.

Dassault is also hoping its new air-craft will sell itself on the flexibilitythat its existing range displays, suchas the capacity to operate safely fromshort and demanding runways. It will,for example, be certified for LondonCity’s steep approach. Olivier Villa,Dassault senior vice-president for civilaircraft, describes it as “a twin withthe runway performance of a triple”.

The 5X can cover a maximum dis-tance in one hop of 5,200 nauticalmiles. Within Dassault’s own jets,that puts it between the 5,000nm ofthe Falcon 900LX and the 6,000nm ofthe 7X. But the 5X has been given amore spacious cabin than either ofthose aircraft – 4 inches (10cm) tallerand 10 inches wider.

Its total cabin length (includingcockpit and baggage area) is alsoshorter by only 4 inches than that of

Dassault goes green with new 5XCabin class Simple ideas give long-range aircraft the edge in turbulent times, saysRohit Jaggi

Comfort zone: the interior can be arranged to give six full-size sleeping berths

its biggest sibling, the triple-engined7X.

That space should make those longdistances in the air more comfortable– its 11 and a half-hour range can takeit from London to Tokyo or Los Ange-les without refuelling, or from NewYork to Buenos Aires or Beirut. Plansfor the cabin, which is lit by big win-dows as well as that skylight, show acrisp, sophisticated design that can beconfigured to give six full-size sleep-ing berths.

Apart from the bigger fuselage tube,the 5X has an all-new wing with dis-tinctive curved trailing edge and acomplex system of slats, flaperons,flaps and ailerons to improve han-dling quality at high and low speeds.Deployment of all the control surfacesis computer controlled in this fly-by-wire aircraft, using lessons learntfrom Dassault’s Rafale fighter jet.

There is improved automation inthe cockpit and provision for twohead-up displays that combineenhanced vision and synthetic visionand make low-visibility landingssafer. To make take-offs andclimbouts swifter and safer, Dassaulthas opted for Snecma’s new Silver-crest engine, with a more than ample11,450lb of thrust per side. The com-mercial airliner standards to whichthe engine has been designed bringimproved efficiency and therefore fuelconsumption, and lower noise. Plus,in a first among business jets, con-stant monitoring of the engines willallow for inspections and mainte-nance only when needed, cutting timein the workshop.

The 5X, which is expected to haveits first flight in early 2015 and entryinto service two years later, is animportant aircraft for Dassault, whoseRafale is not selling as well as hoped.Fleet orders for the business jet arelikely but NetJets, the leading frac-tional operator of business jets and animportant 7X customer, is demandinga bigger and bigger discount for itsfleet purchases.

However, the roughly $45m jet willalso, according to Dassault, cost $4mless to operate over six years than itsclosest rivals. That, along with stylishtouches like that simple but effectiveskylight, could be a deciding factor ina sector still struggling to escape eco-nomic turbulence.

When Canada’s Bombardier finallystaged the maiden flight of its CSeries commercial jet on September16, few of the thousands of spectatorsthat crowded the airfield near Mon-treal were paying attention to the air-craft’s engines. But the flight – thefirst for Pratt & Whitney’s new Pure-Power engine series, as well as for theaircraft – marked just as much of aturning point for aircraft engine man-ufacturers as for aircraft makers.

The PurePower engine is the first ofa new generation of commercial jetengines designed to use far less fuelthan previous engine types. Its maincompetitor is the Leap-X engine devel-oped by the CFM International con-sortium of the US’s General Electricand France’s Snecma.

That competition is set to producespillover effects in the corporate jetmarket. Many of the innovations thatwill slash the fuel consumption ofcommercial jets, such as Boeing’s 737Max and Airbus’s A320neo, are beingreworked for corporate jet builders.

Two of the most important enginesin the next generation look set to beGE’s Passport engine – based on theLeap-X – and Snecma’s Silvercrest, itsfirst business jet engine. Both manu-facturers have airframe builders –Bombardier for the Passport and Ces-sna and Dassault for the Silvercrest –signed up to use the engines.

While it remains unclear which typewill win over more customers, BradThress, senior vice-president of busi-ness jets for Cessna, praises theextent of the improvements on offer.Cessna’s Citation Longitude is sched-uled to make its maiden flight, pow-ered by Silvercrest engines, in 2016.

Incremental engine updates havetypically produced efficiency improve-ments of 1.5 to 3 per cent, Mr Thresssays, while Snecma and GE are pro-jecting 15 per cent fuel economyimprovements for their new engines.

“There’s a significant improvementwhen you swap generations,” he says.

The challenge for makers of corpo-rate jet engines is that high-endaircraft fly higher – hence in thinner

air – and faster than commercial jets.Brad Mottier, GE’s vice-president

and manager of business and generalaviation, says that makes one possibleroute to fuel-efficiency problematic. Itwould be difficult, he says, in suchthin air and at such high speeds torun an engine at very high bypassratios – the term for the proportion ofair sucked through only the engine’sfan to the proportion that also goesthrough the turbine at its core.

The PurePower engine runs at anunprecedented bypass ratio of 12:1.Engines with high bypass ratios canoffer high thrust for a given amountof fuel.

Instead, Mr Mottier says, GE hasadopted for the Passport some of thesophisticated materials that allow theLeap-X to run at higher – and moreefficient – temperatures than normal.The company has also improved theengine’s aerodynamics – an effort thathas been helped because GE is pro-ducing an integrated power plant. Theuse of innovative materials has alsocut the engine’s weight significantly.

The Passport engine is due to enterservice on Bombardier’s new Global7000 aircraft in 2016.

Snecma is pursuing efficiency with

its Silvercrest through bypass ratiosfar higher than normal for the seg-ment. The Silvercrest engine’s ratiowill be 6:1. The main question hadbeen whether airframe makers couldfit an engine with the 42.5 inch fandiameter needed to produce such arelatively high ratio, according toLaurence Finet, head of the Silver-crest programme at Snecma.

To gain extra fuel efficiency,Snecma has used some componentsmanufactured by three-dimensionalprinting to keep weight down. Theengine also automatically managesthe gap between the turbine bladesand their housing. In traditionalengines, that gap tends to grow as theengine heats up, harming efficiency.

Yet, Mr Thress says, all these revo-lutionary improvements are likely tobe only the start of the process ofimprovement in fuel efficiency.

Engine innovationspower fuel efficiencyTechnology

Progress in commercialdevelopment spills over intonext generation businessjets, writes Robert Wright

Engines with high bypassratios can offer high thrustfor a given amount of fuel

0

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0 10 155 20 25 30 35 40 45 49

Offshore oil and gas fleetHelicopters by region*

Source: Eurocopter * Excluding RussiaAge of helicopters (years)

Num

ber

of h

elip

copt

ers

Helicoptersless than

10 years old

Helicopters10-19

years old

Helicopters20-29

years old

Helicopters30-39

years old

Helicopters40-49

years old

936 326 407 370 23Total

2,062

Africa/Middle EastAsia/Oceania

Eastern EuropeWestern Europe

Latin AmericaUSA and Canada

November 1 each yearbrings an extra hazard tothe already demanding lifeof the men and womenworking on the oil and gasplatforms scattered alongAustralia’s northwest shelf.Along with the rigours oflong distances from shore,often rough seas and oper-ating drilling equipment indeep water, the six monthsfrom the start of Novemberbring the threat thatcyclones will blow acrossthe Indian Ocean, makingthe platforms dangerousand uninhabitable.

The conditions are typicalof the severe environmentsin which oil and gas pro-ducers increasingly operate,as high oil prices and betterdrilling techniques allowthem to work further andfurther from shore.

There are similarly toughconditions in offshore partsof the Arctic, Russia andthe North Sea. The launchof an inquiry by UKand other European regula-tors last month into fivehelicopter crashes in theNorth Sea over the pastfour years underlines therisks involved.

The operations depend ona rising number of large,heavy-duty helicoptersoperating at the very limitsof their safe ranges fromland and capable of han-dling conditions that wouldonce have been consideredimpossibly dangerous.

The market is a duopolycomprised of the US’s Sikor-sky, a subsidiary of UnitedTechnologies, and Eurocop-ter, part of Europe’s EADS.No other manufacturermakes aircraft with the 10-tonne take-off capabilityrequired to serve the mostdistant platforms.

The question is whetherthe two can maintain theirstrong market positionwhile meeting oil produc-ers’ demands for aircraftcapable of hugely demand-ing tasks – such as evacuat-

ing distant oil platformsquickly in the face of acyclone.

“These long-distance,deepwater finds are usuallyin remote places, with aharsh environment,” saysThierry Mauvais, Eurocop-ter’s head of oil and gasmarket development. “Inthis environment, there’san almost systematic ele-ment of challenge.”

Dan Rosenthal, presidentof Milestone Aviation, a hel-icopter leasing company,says demand for such long-range, heavy-duty helicop-ters continues to grow. “Asthe platforms move furtherand further offshore, youcan see the demand line forhelicopters increasing inparallel.”

The requirements aretough, according to CareyBond, president of theSikorsky division thatmakes some of its heaviestduty civilian products. Thelongest range missionsrequire enough fuel toreach rigs and to fly back iflanding is impossible. Theymust also carry an extrasafety reserve.

“We’re looking at it inthat light,” says Mr Bond.“How do we get out to thatpoint a full load of passen-gers and keep up safety andget the high reliability ratethat customers demand?”

At the heart of the manu-facturers’ efforts, accordingto Mr Bond, has been workto improve fuel efficiency.As the efficiency improves,the proportion of an air-craft’s weight devoted to

fuel can drop.With one of its newest

products, the S-76D medi-um-sized helicopter, Sikor-sky improved efficiency byabout 15 per cent through anew engine, better aerody-namics and more sophisti-cated rotors. The improve-ments allow operators to flyto rigs far faster.

Sikorsky has developedfor its S92 heavy-duty heli-copter an entirely auto-mated system for landingon rigs – known as “rigapproach” – to make land-ings safer. “It’s a safetybreakthrough and it’s a pro-

ductivity breakthrough,”says Mr Bond. “If you canget an aircraft that can[land] in even worseweather conditions, that’sgoing to be key for our cus-tomers.”

Fuel efficiencies are help-ing builders of smaller heli-copters – including the US’sBell Helicopter, part of Tex-tron, and Finmeccanica’sAgustaWestland – to nibbleat the edges of Sikorsky’sand Eurocopter’s long-rangemarket, according to EdWashecka, chief executiveof Waypoint Leasing, ahelicopter lessor. Both Bell

and AgustaWestland areextending the range of theirbiggest medium-sizedhelicopters thanks to fuelefficiency.

However, the biggest riskfor Sikorsky and Eurocop-ter is that a long-term fallin oil prices might deter oilproducers from continuingtheir quest for hydrocar-bons from difficult – andexpensive – deep-sea fieldssuch as Brazil’s new pre-salt fields.

Neither manufacturerexpects much fall-off fromdeclining oil prices, notleast because most helicop-ter trips move crews to andfrom production platforms,which tend to keep workingwhen prices fall.

“We make sure that ourrange will match exactlythe future demand, not onlyin distance but also missioncapability, environment,temperature and so on,”says Mr Mauvais. “Whenwe see the investment inexploration, it’s huge andit’s continuing.” As long asthat investment continues,Mr Mauvais says, the scaleadvantages of helicopterswith a lift-off weight of 10tonnes or more – a segmentin which only the S92 andEurocopter’s EC225 compete– will remain compelling.

“If you’re talking aboutthe market between shallowwater and up to about 160miles, the competition ismore open to medium-sizedaircraft,” says Mr Mauvais.“For long distance, a 10-tonne helicopter is a no-brainer.”

Manufacturers battle to stayaloft over treacherous watersHelicopters

Severe conditionsdemand aninnovative approach,says Robert Wright

‘As platforms movefurther offshore,you can see thedemand forhelicopters rise’

4 ★ FINANCIAL TIMES TUESDAY OCTOBER 22 2013

Corporate Aviation

If you are going to spend as manyhours on an aeroplane everymonth as Christopher Millerdoes, you would be wise to havesome good reading material to

hand. Mr Miller, who runs acorporate aircraft financing businessfor the US investment groupGuggenheim Partners and commutesbetween Atlanta and New York, hasjust that – in the form of juicyreports on potential clients,assembled by what sounds like thecast of a Jason Bourne film: formerState Department officials, ex-CIAagents and local moles among them.

The contents of those pages can bethe reason why he and his team turndown deals – rather than being putoff by a borrower’s bank statementor the collateral, which, forGuggenheim, is always the privatejet itself.

Mr Miller, a former US MarineCorps pilot with an MBA fromColumbia, is confident that both thestructure of the deals he makes andhis team’s acute attention to ever-changing aircraft values protect hisinvestors from losses in the case of adefault.

“The primary focus for us is onaircraft values, and predictingresidual values, really being close tothose values,” he says. That said, healso wants to avoid the Guggenheimname being sullied by the characterof a poorly chosen client.

“We are a rapidly growingcompany, but in some of thecountries where we work the littlegroup I oversee is the firstGuggenheim entity that people haveever heard of. So, being associatedwith the right people is veryimportant to us.”

It is a fine line to walk since hisdivision’s business model relies onbacking aircraft purchases by

individuals who might not, for avariety of reasons, want to offer thefull financial disclosure necessary tostrike financing deals withmainstream, or even private, banks.

But because there have beenenough of these people out there inrecent years, willing to pay higherrates, Guggenheim has found a nichein offering asset-backed loans notjust in the US and Europe, but roundthe world.

Thus all the travel: aside from hisdomestic commute, Mr Miller makesfrequent overseas trips to meetpotential customers in Europe,Africa, Asia or the Middle East,catching up with existing clients andchecking in with the managementcompanies that run financed aircraft.

“I don’t like being away from myfamily but there’s nothing that canbeat the face-to-face time,” he says.

And relationships with privateaircraft operators are an importantpart of risk mitigation: an operatoryou know and work with regularlywill return an aircraft if the ownerdefaults on his loan; that is lesslikely if the management companyturns out to be owned by the client’sbrother, or brother-in-law, or if theclient has a stake in it himself.

These are not scenarios unfamiliarto Mr Miller. He joined Guggenheimas an adviser in 2006, just as it waspreparing to team up with a largeinternational bank to offer asset-backed private aircraft lending. Atthe time, demand for corporate jetswas growing strongly, particularly inthe emerging markets, where thenew group aimed to pick up clients.

“Our goal is to establish aleadership position in this space anddifferentiate the company throughinnovative financing solutions and astreamlined approval process,” saidthe partnership’s managing director

in May 2007. But the credit crunchand recession devastated the sector,and the venture was dissolved.

Guggenheim – which today hasabout $180bn under management –asked Mr Miller to stay on tounwind a troubled portfolio of loansmade in headier times.

The experience gave him insightinto the blunders of the private-jetfinancing business, and preparedhim for when the fund startedlending to corporate aircraft buyersagain in 2010.

“It was like a lifetime ofexperience, not just looking at thatbusiness but looking at deals done

by other banks, too,” he recalls.“That sort of work really preparesyou for the next cycle.”

Investors were still skittish in 2010,and persuading them of the relativesafety of the deals Guggenheim’scorporate aviation arm was makingtook more time than in the past.

But even those fears are abatingnow on the back of healthy returns –and growing competition underscoresthe wider sector’s rebound.

Mr Miller notes that most lendershave learnt from the ups and downsof the past decade.

“Even the credit-based lenders aremoving toward a more asset-basedapproach,” he says. “The days of 100per cent advances are over.”

This new found conservatismmeans more rivals are offeringGuggenheim’s style of loan. But MrMiller welcomes the competition:“It’s not a zero sum game and we’renot a volume shop.”

Former Marinecalls attentionto detailProfileChristopherMiller believes in knowingall he can about his clients, writesRose Jacobs

‘Even credit-based lendersare moving toward a moreasset-based approach’

Leadership position: Christopher Miller of Guggenheim Partners

Since the credit crisis and recessionplunged the corporate jet universeinto crisis, undermining asset valuesand sending financiers into retreat,recovery has been a step-by-stepaffair.

Christopher Miller, managing direc-tor of business aircraft investments atGuggenheim Partners, says: “2009 and2010 were really about regrouping,2011 and last year were when thingsstarted to normalise, and this yearwe’ve finally had some stability.”

That stability is evident on twofronts. First, investor appetite is grow-ing steadily, both among traditionallenders and new entrants, boostingliquidity and driving down rates, par-ticularly on the large jets whose val-ues have held up better in recentyears than those of smaller models.

“Last year, we were struggling toeven get the Credit Suisses of theworld to lend,” says Aoife O’Sullivan,a partner focused on aviation deals atlaw firm Kennedys. Now, she says,not only are the banks back, but pen-sion funds and insurance funds aretaking an interest.

The second sign of the financingmarket’s relative health is thenumber of buyers considering finance-backed aircraft purchases rather thanall-cash deals. Even in Asia, whereAscend Online data show that only13 of 43 business jets delivered lastyear were bought through financeleases or similar structures, demandis growing.

Minsheng Financial, a Chinese bankthat has provided the bulk of domes-tic financing, estimates that the por-tion of cash deals to finance deals willeventually flip from about 70-30 todayto 30-70, in line with current levels inwestern markets.

Refinancing will drive some of thatshift, predicts Eddy Pieniazek, anaviation consultant: “Post-delivery, the ‘cash-heavy’ ownersare finding they have a growingnumber of refinancing options – aresult of both the increasing confi-dence that lenders worldwide have inthe Asia market and the growth in

the number of ‘new faces’ in Asia.”In the west, refinancing is fuelling

much of this year’s activity, as own-ers seek better rates than those theygot three or four years ago.

Banks hoping to leverage theirbacking of private aircraft purchasesinto wider relationships with wealthycustomers accept rates of return aslow as 1 per cent, but today’s moretypical rates are 5-7 per cent.

Helicopter fleet deals offer even bet-ter returns – and stability – since theoperators buying rotary aircraft areusually locked into service contractswith oil and gas groups, providing aclear view of forward earnings.

Daniel Hall, an analyst withAscend, sees rising loan-to-valueratios as a sign of a more competitivemarket, though he doubts the days of100 per cent LTVs will return soon.

Still, “things are getting slowly bet-ter rather than the other wayaround”, with new entrants, such assmall, local banks financing thesmaller jets that big banks veer away

from – either because their values aremore volatile, or because arrangingthe finance package for a $3m jet isnot worth their time. “The local bankssee smaller jets as a niche opportu-nity,” he says.

One group still not playing a bigrole in the market, however, is theleasing companies, in part becausecommercial aviation is keeping thembusy enough.

“In business jets, it’s a completelydifferent structure. You’d have to puta dedicated team on it,” says MsO’Sullivan. That is why she is moreexcited about the prospect of an insur-ance fund backing a deal. Yes, itwould need to hire in aircraft exper-tise, but insurers fundamentallyunderstand the sort of geographical,political and even reputational riskassociated with corporate aviation.

“They’re in the business of financ-ing risk,” she explains. “And this mar-ket is not half as risky as everyonesays it is.”

Lenders regroup ascash takes back seatFinancing

Market for funds starts toshow stability after bumpyride, reports Rose Jacobs

Not only are thebanks back, butpension funds andinsurance fundsare taking aninterest, saysAoife O’Sullivan oflaw firm Kennedys

Oct Jan Sep

28

30

32

34

36

Fractional flight activity2011-12 vs 2012-13 (’000)

2011-12

2012-13

Sources: TraqPak; ARGUS

Companies offering frac-tional ownership have hadan eventful year.

After a period of relativestability, two well-knownnames – CitationAir andAvantair – have departedand big shifts in the sectorare apparent.

The business of owning apart share of an aircraft toensure guaranteed accessfor a set number of hourshas been around for almostthree decades, with theadvent of NetJets in 1986.

And, while the industry isstill dominated by the War-ren Buffett-owned NetJetsand its rival Flexjet, theranks at the other end ofthe market – turboprop andflying in the small cabincategory – have been thin-ning. That reflects thegrowing split in businessaviation between the use oflarger aircraft, such as Das-sault and Gulfstream jets,and smaller, cheaper air-craft, such as Cessnas.

During the downturn,business aviation was badlyhit. This was with theexception of the top of themarket, where orders forjets priced at more than$26m grew.

CitationAir, majority-owned by Cessna, stoppedselling fractional ownershipin February in favour ofa move towards chartermanagement. And, by June,Florida-based Avantair,which operated about

55 Piaggio Avanti twin-engined turboprops, wentbankrupt and ceased flying.

The exit of those compa-nies had a significant effecton the turboprop and smallcabin category.

“The fractional ownershipmarket in many waysreflects the bifurcation [inbusiness aviation],” saysRichard Aboulafia, vice-president of analysis at TealGroup, an aerospace anddefence consultancy.

He adds: “The great bulkof the fractional fleets arebottom half jets, so I thinkit’s telling that fractionalssuffered as badly as theydid – they reflected theweakness in that bottomhalf of the market.”

Overall, the market haspicked up, but it has yet toregain its pre-crisis levels.

“It’s rebounded off thebottom but it’s not storm-ing away and that’s not sur-prising because the econ-omy’s not storming away,”says one aviation analyst.

Data on fractional flyingin the US and Canadacollated by TraqPak, part ofArgus International, a mar-ket intelligence company,show journeys are down 10per cent in the past yearcompared with the previousyear. That drop shows thedeparture of CitationAirand Avantair.

“We are at the bottom ofa trough, looking up,” saysMr Aboulafia. Not only wasthe market hit by the fall-off in demand for lower-end,cheaper aircraft, he says,but companies got pricingwrong, targeting marketshare rather than makingearnings.

Another development infractional ownership is themove away from companies

being tied to manufactur-ers, suggesting that verticalintegration does not workfor the industry, says MrAboulafia.

That was illustrated byBombardier’s sale of itsfractional business, Flexjet.Directional Aviation Capi-tal, the private investmentfirm, acquired Flexjet lastmonth, placing an order ofabout $5.2bn for up to 245Bombardier business jets aspart of the $185m cash deal.

For Kenn Ricci, head ofDirectional Aviation Capi-tal, the fractional businessis looking rosy. His view isthat the gulf between thehigh-end jets and the lowerhalf of the market offers theopportunity to do morebusiness. “There’s a marketfor a bespoke product inour industry,” says MrRicci. His plans for Flexjet,which will join his otherbrands Flight Options andSentient Jets, include work-ing with interior designersfor a greater degree of cus-tomisation of high-end air-craft.

Global expansion is alsoon the agenda, with SouthAmerica a focus. “I don’tthink Flexjet can be a trulyworld-class company with-out having global reach, soI think there’s a greatopportunity to go into thelarger aircraft markets, intolong-range and ultra long-range.” But for overallgrowth, in the near term,not much is set to change,says Mr Ricci. “I see threeto five years of slowgrowth...maybe a couple ofpercentage points a year.”Mr Aboulafia strikes a simi-lar note. “I’m cautiouslyoptimistic,” he says. “I havea better expectation for 2014than for 2013.”

Fractional ownership faces slowclimb out of recessionary troughPart-owners

Market has yet toregain levels reachedbefore the crisis,reports Jane Wild

Jane WildTransport reporter

Robert WrightUS Industry correspondent

Rohit JaggiAircraft, car andmotorcyclist columnist

Liz MoscropPrivate aviation specialist

Rose JacobsFT contributor

Aban Contractor andRohit JaggiCommissioning editors

Andy MearsPicture editor

Steven BirdDesigner

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‘It’s reboundedoff the bottombut it’s notstorming away’