what are the greatest challenges facing the future of the corporate aviation industry?

Middle East Corporate Aviation Summit (MECAS 2012) – GCAS / Al Bateen Executive Airport Abu Dhabi, UAE

0© 2012 1BlueHorizon Group - www.1bluehorizon.com Al l r ights reserved1BHG | Aeropodium Conference MECAS 07.06.12

‘JOIN THE DEBATE’

CORPORATE AVIATION INDUSTRYTHE GREATEST CHALLENGES FACING THE INDUSTRY FUTURE

June 2012


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O Contraction in the business jet market during the economic downturn was the worst since the Great Depression and I think everybody is adapting to this environment and moving ahead…

O Today the market for corporate jets isn't any worse than it was a year ago, but it isn't appreciably better either…

O Delivery numbers aren't anywhere near the record levels of 2006 and 2007, but they're OK, enough to keep companies in business…

O There is promising activity in Latin America and the Asia Pacific region where the economies are stronger…

O Despite the challenges facing the industry, the aviation community is a forward-thinking group. There are exciting industry challenges and many innovations are already under way to tackle them, what we understand under creating (one…) 1BlueHorizon

Source: 1BlueHorizon Group Press | Review Feedback from EBACE Geneva 2012

FOREWORD



O Originally Business jet, Private jet or, colloquially, bizjet is a term describing a jet aircraft, usually of smaller size, designed for transporting groups of up to 19 individuals.

O The more formal terms of Corporate jet, executive jet, VIP transport or Business jet tend to be used by the firms that build, sell, buy and charter these aircraft.

O The business jet industry groups the jets into five loosely-defined classes:1.The most expensive type of private jet is the Heavy jet type, which is designed for the ultimate in large

capacity luxury air travel (aircraft of this class include BBJ, ACJ, Lineage 1000);2. The elite class of the business jet aircraft are the Super mid-size jets that feature wide body cabin

space, high altitude, speed, and ultra long range capabilities (G650, Bombardier Global Express,…);3. The Mid-size jets are suitable for longer range travel such as transcontinental flights and for travel with

larger passenger capacity requirements. (Learjet 60 XR, Gulfstream 250 or Embraer Legacy 450 & 500);4. The Light jets have been a staple of the business jet industry since the advent of the Learjet 23 in the early

1960s. The light jets provide access to small airports and the speed to be an effective air travel tool (Learjet 70/75, Citation Bravo & Encore, coming Pilatus PC24 (ex Grob SPn) );

5. Finally the Very light jets, also known as Microjets or VLJs, are designed to provide air travel, for example, to the more than 5,000 small community airports in the U.S.A. . VLJs have a maximum take off weight of not more than 10,000 lb (Citation Mustang, Eclipse 500, Diamond D-Jet, …).

Overview of the industry wording for those who might not be familiar with the topic

Source: 1BlueHorizon Group Research



At the beginning it appears important to highlight the Demographics of the Corporate Aviation sector - The fleet

Source: 1BlueHorizon Group Research & Analysis 2011

Range of sizes: small single engine to large airline aircraft Most prevalent: middle size corporate jet aircraft, but new growth includes VLJs and larger

intercontinental jet aircraft

A fleet of 30,000 turbine business aircraft globally

17,500 Jet

12,500 Turboprop

Approximately 17,000 operators worldwide



At the beginning it appears important to highlight the Demographics of the Corporate Aviation sector - The manufacturers


Corporate aviation is an essential industry, strengthening each nation‘s manufacturing base, fostering economic development and serving as an indispensable tool for thousands

of companies trying to operate in a fiercely competitive global marketplace…

Aircraft Manufacturers Unlike airline aircraft, business aviation has a large number of manufacturers, with a wide variety

of types, including Boeing and Airbus, also builders of dedicated business aircraft.

General aviation manufacturers around the world are collectively suffering through one of the worst economic downturns the industry has ever experienced.

According to a study by the US International Trade Commission (USITC), potential new entrants to the business jet industry face formidable barriers, including access to capital, technical capacity to design, certificate and produce the aircraft, and resources to provide after-sales service and support of their global aircraft fleet…



At the beginning it appears important to highlight the Demographics of the Corporate Aviation sector - Distribution by region


Corporate jet distribution by region and forecast growth

Promising activity in Latin America and the Asia Pacific region where the economies are stronger - What about the Middle East remaining growth potential?

2002 2011

US/CanadaEuropeS/C AmericaRest of the World



The first challenge is probably the four primary sub‐sectors, with different operations characteristics and aircraft user profiles

1. Commercial on‐demand charter2. Corporate3. Owner Operated4. Fractional Ownership

Point‐to‐point, specific purpose routes (without inefficient hub‐and‐spoke)

Departure times based on specific requirement

Short takeoff distance, short time to altitude, high cruise altitude, fast descent/landing

Use of large number of airports (local & regional airports relieving traffic impact on high density areas)

Priority is on time management, efficiency and flexibility

79% of operators have only one aircraft Executives and high worth passengers, but

78% of passengers middle management and lower (e.g. engineering & audit teams etc)



Without any doubt, the on‐demand charter providers are more concerned about challenges facing the sector (competitive market)The Corporate jet industry (sector) in the Middle East is expected to remain strong on rising demand as the region continues to recover from the 2008 downturn…

This is the only one sub-sector where costs really matter….

The service excellence in the Middle East's Corporate aviation sector strengthen the importance of hiring highly-trained professionals who consistently put the customer at the core in the delivery of its products and services in order to make business aviation safe, efficient and reliable.



As example, the commercial Corporate Jet Operators are calling for more efficiency where the other three sub-sectors are not concerned

Source: 1BlueHorizon Group | Survey 2011

O A recent survey of Corporate jet charter operators highlights the major opportunities for the private jet industry as it begins to recover from the economic downturn. Almost half (45%) of operators who responded agreed that the global recession has been their single biggest challenge to date.

O But ironically, for an industry that delivers business efficiency for its customers, the Corporate Jet charter market as a whole is remarkably inefficient:FLYING EMPTYThree quarters (75%) of operators say that over a third (30-40%) of their flights are empty as they reposition for the next flight.COST CONSCIOUSNESSThree quarters (75%) of operators believe price competitiveness is the single biggest factor in winning charter business - above speed of returning a quote (15%) and their safety record (10%).SALES CONVERSIONNearly two-thirds of operators (60%) prepare 20 or more quotes for every charter sale with almost a quarter, (20%) saying that they prepare 40+ quotes per booking.MARKETING MIXRecommendation is unsurprisingly top of the list, with 85% relying on word of mouth. But 50% of operators now use search engine optimization as part of their marketing efforts, while social media sites are used by 25%. Over half of operators (60%) agreed that showing 360 degree imagery of aircraft on their websites would improve sales.MALE DOMINATIONOn average, operators said that 70% of corporate jet passengers were male, with a slightly lower male majority making the bookings (60%).



The Climate change targets are less challenging than rest of the aviation sector based on the emission realities (only 2% of total aviation) Business Aviation contributes only 2% of total aviation CO2 and 0.04% man‐made CO2. 40% fuel efficiency improvement achieved over the past 40 years. Typical operator flies 500 hrs per year, producing small amounts of CO2 (approx 1,200‐1,500

tones per year). All business aviation equivalent to one fossil fuel powered electrical plant.

The Corporate aviation industry targets are the following: Carbon neutral growth by 2020 An improvement in fuel efficiency averaging 2% per year from today until 2020 A reduction in total CO2 emissions of 50% by 2050 relative to 2005

The challenges (improvement areas) are on improving education related to the low impact of business aircraft on the environment, enhancing best practices for

operators (including fuel efficiency) and accelerating research and development …



The New Taxes (1) (EU-ETS)

Slot Reallocation

The European Union now taxes carbon emissionsby aviation operators, both general aviation andcommercial. The EU offers tax credits on emissions,which are bought and sold on the open market andpresents several problems for European businessaircraft operators. While airlines are given generouscredits, paying only approximately 15 percent oftheir emission fees, business operators must payup to 96 percent of the tax on their emissions.

As per the European Commission’s decision, thefuture allocation of slots will be based solely on thenumber of passengers carried. Operators that usetheir slot less than 85 percent of the time will be indanger of losing their slot altogether. This use-it-or-lose-it slot allocation plan will favor scheduledcarriers and costing jobs and isolating remoteregions of Europe.

Note: (1) EU-ETS stands for European Union Emissions Trading Scheme

In Europe especially, the addition of operating costs to the Corporate aviation industry is very challenging…



Facility for luxury business travel

Access to the infrastructure

In the region, it is a need for developing hangarfacilities to provide some needed infrastructure inCorporate aviation. There are about 85 UAEregistered Corporate jets and many highdemanding visitors and the main very crowdedInternational airports are most probably not thebest place to arrive. In that perspective Al BateenExecutive Airport is for sure the way to follow.

One of the main problems facing Corporate jetpassengers is really access… As illustrativeexample, Dubai remains the most active hub forbusiness travel in the UAE, with its ExecutiveFlight Centre handling 6,060 arrivals anddepartures and 19,797 customers in 2011. Dubaiairport's overall success with business jets,commercial aircraft and air cargo has come at acost as its airspace becomes congested in peakperiods, causing some delays for Corporate jetpassengers…

… whereas in the Middle East the corporate aviation infrastructure is very challenging - Al Bateen Executive as the way to follow



The ongoing sibling rivalry between airliners and Corporate aviation is not to underestimate and for sure one of the challenge

O Every passenger in a Corporate jet has to be viewed by the airlines as one more unsold business-class ticket or even one more unsold First-class ticket –and that high-margin ‘fare-market value’ represents the butter and jam on the bread of the airlines…

O So the airline trade groups lobby to promote the logic that anyone not subject to the ticket tax is not only clogging up the airways but also not paying a fair share. They maintain that each airplane exacts the same "cost" in air-traffic servicesand that Corporate aviation gets off easy with the fuel tax as opposed to the airlines' per-passenger ticket tax.

O But practical – and affordable – navigation technology now exists for small aircraft to be able to use small airports in what used to be impossible weather, increasing their utility. Maybe we are a few steps closer to the day when ‘airliners’ will be like ocean liners or wagon trains…



Anybody remembers about American aerospace engineer Burt Rutan crazy speculation: ‘What if there were no airliners’?

Note: Elbert Leander "Burt" Rutan (born June 17, 1943) is an American aerospace engineer noted for his originality in designing light, strong, unusual-looking, energy-efficient aircraft. He is famous for his design of the record-breaking Voyager, which was the first plane to fly around the world without stopping or refueling, and the sub-orbital spaceplane SpaceShipOne.

Burt Rutan once speculated that, someday, people might look back and say:"For a short period in history, people traveled en masse in giant airplanes called 'airliners.' They only used a very few crowded runways, and traveling to and from the airports often took longer than the flight itself." In Rutan's version of the future, we would further develop the general aviation infrastructure such that people could fly on light airplanes to and from the thousands of small airports near their homes and destinations.So what would an air-transportation system look like without big airliners? And could it be more cost effective?How different would our airport and air-traffic infrastructure be if airliners disappeared? Would it really cost less? And if so, how much less?

Less ambitious, ‘What if there were no airliners with First-class‘?



Is the Corporate aviation able to take over the First-class of the airliners, especially considering the high end Business-class trend?

O Some airliners already focus on 2 class aircraft, for the entire fleet or for some destination only. Following recent impressive offering improvement for the high-margin Business-class, some airliners are considering to move toward this 2 class offering using the usual First-class space to offer more Business-class seats.

O Some other airliners are continuously improving their 3 class offering to attract more passengers in a very challenging market and in parallel launched premium travel service portfolio with a Corporate jet provider to further enhance the airline’s premium services offering to its guests (as example Etihad Airways ‘Premium Connect` with Royal Jet).

Purely marketing or testing the First-class market? That’s the question…



Business aviation is a proven productivity tool used by corporations worldwide and airliners are not able to compete with their First-class

Flexibility and immediate response Travel time savings for executives and staff Efficient use of time for high net worth individuals and high

salaried staff Total cost savings in many examples Face to face business deals Corporate security

Business aircraft are symbolic of successful corporations; business where aircraft go, jobs and prosperity will follow.

Business aviation provides an effective air transport option and not in direct competition with airliners.

Business aircraft fly to where business is conducted. They operate to the closest airport, where no scheduled service exists, usually a local or dedicated business aviation airport.

New business means jobs and economic stimulus.



Last but not least, the corporate Aviation Industry is an important contributor to society, its Corporate Social Responsibility (CSR)

Emergency medical services, medical transfers and humanitarian aid in efforts to provide relief for the people everywhere around the globe...

General and Business aviation provides closely tailored, flexible, door‐to‐door transportation for individuals, enterprises, and local communities, increasing mobility of people, productivity of businesses and regional cohesion…



Summarized, six main challenges facing the future of the corporate aviation industry in 2012

With four primary sub‐sectors, not the same challenges The additional costs (for the on‐demand charter providers) Importance of hiring highly-trained professionals Improvement areas on climate change The access to the infrastructure (airports, facilities, etc.) The ongoing sibling rivalry with the airliners

Exciting industry challenges with free space to create ‘One B l u e H o r i z o n‘…

Source: 1BlueHorizon Group Analysis



On top of the challenges previously discussed, we might mention the supersonic business jet (SSBJ)(1) : ‘Dream or Reality’, that’s the question!

Note: (1)A supersonic business jet (SSBJ) would be a small business jet, intended to travel at speeds above Mach 1.0.Source: 1BlueHorizon Group Research & Analysis

Several manufacturers believe that many of the old concerns like relatively high costs, high noise, low range and some environmental concerns can be dealt with at a smaller scale. In addition, it is believed that small groups of high-value passengers

(such as executives or heads of state) will find value in higher speed transport.

Richard Branson looks for an alternative with the Virgin Galactic that will offer Space Cruise through Aurora Borealis…



LEONARD FAVRE, 1BlueHorizon Group Managing DirectorLeonard Favre is an experienced senior management advisor with over 10 years experience inthe aviation industry, having started his involvement in this particular field of business when theSwiss National carrier Swissair collapse as one of the Swiss ministry of Economy adviser.He is based in Abu Dhabi (U.A.E.) and Bern (Switzerland). He holds Political Sciences &Economics degree from Lausanne University in Switzerland and two MBA, in Public Sector fromIDHEAP Lausanne and in management from INSEAD Fontainebleau (close to Paris, France). Heparticipated recently in postgraduate programs from the prestigious Harvard Business School(Boston, MA) in the field of Leadership and competitiveness.Leo combines hands-on experience with strategy management abilities, strong peoplemanagement skills and motivational leadership qualities to archive results (ex Booz & co). Whileworking for two prestigious management consulting boutiques, the last one as Principal RegionalHead of aviation - transportation for the Middle East and South East Asia, he has worked on awide range of issues at clients with significant experience in Europe and the MiddleEast, including several successful Low Cost Airlines (LCC) set-up or air carriers (passengers andcargo) restructuring and enterprise improvement, due diligence screenings, strategicsourcing negotiations, cost reduction mandates, mergers & acquisitions advisory, financialadvisory, program office management, and strategic reviews. Until recently, he was vice-president Business development & Strategy for an all cargo company in the UAE and wasinvolved in the lease (ACMI) of dedicated freighters with sound achievements and customersatisfaction.Leo is a regular contributor to conferences and forums and his vision of airline industry is alwaysa valuable and knowledgeable input to create Blue Horizon.Leo is fluent in English, French and German with good command of Italian.

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