In the first of our two reports on threats to business aviation, Benét Wilson says a proposed US flight tax appears to have been shelved – but other perils await
A number of legislative and regulatory issues potentially threaten the US business aviation industry as it looks to maintain its slow recovery from recession. Last year, 55.7% of the general aviation aircraft delivered worldwide went to North American customers, but 2011 was not the expected turning point for the sector. Demand for business aircraft and services, especially in the established markets of North America and Europe, remained soft and customer confidence in making purchase decisions in these regions remained weak, according to the General Aviation Manufacturers Association (GAMA).
In its annual report, GAMA notes that general aviation manufacturers continue to pin their hopes on the international marketplace, and expect demand from emerging markets to lead the industry towards recovery.
“Overall, shipments declined in all three industry segments from the previous year, but the declines reached single digits which indicate general aviation is reaching the trough in this cycle,” GAMA chairman Caroline Daniels told a press conference in February. “The large-cabin, long-range business jet category remained sound and midsize business jets saw growth. This resulted in a small uptick in billings for 2011.”
Daniels noted several positive market indicators, including an improvement of almost 8% in US corporate profits in the first three quarters of 2011, with cash holdings close to record levels. Historically, company results have correlated closely with the business aviation industry’s performance. But buyers were still in “wait-and-see” mode, she said, reflecting lingering economic uncertainty – and 2012 began with the industry under twin attack from the US government.
The Obama Administration’s budget for the new fiscal year included a proposed fee of $100 per flight. Meanwhile, a halving in the depreciation benefit for acquisition of corporate aircraft, signed into law two years ago, was still in place. The business aviation community has vehemently opposed both measures.
Mike Pompeo – Representative in the US House for the Wichita district of Kansas, which is home to manufacturers such as Cessna, Hawker Beechcraft and Bombardier Learjet – made his objections to the proposals clear in a speech on the floor of the House. He noted that the industry, still one of America’s manufacturing jewels, had become “a political punch bag”.
Companies involved in business and commercial aviation know that user fees are a bad idea, says Dan Hubbard, senior VP of communications for the National Business Aviation Association (NBAA). “But it’s an equally lasting truism that in Washington, it’s impossible to kill a bad idea,” he adds.
Kent Jackson, managing partner at Kansas-based aviation law firm of Jackson & Wade, whose clients include corporate jet owners, lessors, investment banks, manufacturers and government agencies, is puzzled by this latest attempt to introduce user fees. “Business aviation does a remarkably good job of uniting and stopping these efforts, but they keep coming back,” he notes.
The industry has seen both Democratic and Republican administrations propose this kind of tax, Hubbard explains. “In recent years, user fees were proposed as a separate way to fund the Federal Aviation Administration [FAA] apart from fuel taxes,” he says. “Congress sees user fees as a means of deficit reduction.”
Another reason government keeps coming back to the idea is because it is attractive to promote user fees as a “pay as you go” system, Jackson says. “The government is broke, and user fees, in some minds, are something that can be done to raise revenue, but also allow the administration to claim it didn’t raise taxes. In some corners, people believe that user fees are not a tax, but payment for a service. I have a hard time getting my mind around that.”
Hubbard is concerned that the idea has never been tried or tested. “The current system of fuel taxes works well, compliance is total and they are efficient to collect and pay. With user fees, you need to create and maintain a large collection bureaucracy and the FAA doesn’t need to be in that business. It needs to focus on safety,” he says.
A suggestion that the industry has made its voice heard came in the shape of a bill to fund the FAA through to 2015 that was finally passed by Congress and signed into law by President Obama in February after a record 23 extensions, stretching back to 2007.
“We’re delighted that Congress finally passed a bill after five years because the FAA needs long-term authorisation in order to properly plan in terms of strengthening and modernising US aviation,” says Douglas Carr, VP of safety, security and regulation for NBAA. “In that new law, Congress clearly decided to set aside user fees, instead preserving the existing fuel tax.”
The other main financial issue on which the business aviation industry has been lobbying is “bonus depreciation” on purchases including aircraft. GAMA credits the provision, which allowed 100% depreciation of qualifying aircraft sold in 2011, with helping boost sales in North America.
Industry groups united to circulate a letter to Congress asking it to extend the bonus depreciation scheme, and bills aimed at doing just this have been introduced in both the House and the Senate.
“A long list of economists believes it helps stimulate the purchase of assets for business, and we hear evidence of that from aircraft manufacturers,” Hubbard says. “When you shorten the tax schedule of a business asset, whether it’s an aircraft or a large medical device, you stimulate the incentive to make that purchase. In a time where aircraft manufacturers are still experiencing severe economic turbulence, we should do anything we can to stimulate an aircraft purchase and preserve jobs.”
Almost every time the question comes up, bonus depreciation emerges as a last-ditch victory for NBAA and GAMA, Kent Jackson comments. “Because of the history of these associations snatching victory, I wouldn’t count on the bill to extend it out,” he said. “If we get it, I’ll give credit to those who lobbied for it. It’s one of the toughest environments, but the priority must be jobs, jobs, jobs.”
Detroit, historic home to the motor industry, has been the focus of much government attention. “But it has been hard, from Wichita, convincing people of the business aviation crisis,” Jackson says.
Further evidence of the industry’s lobbying power, however, is that Congress included measures in its new FAA reauthorisation package to restore the Block Aircraft Registration Request (BARR) programme. This allows business aviation users, on request, to block aircraft movements from being tracked in real time over the internet. The US Department of Transportation had decided to restrict participation in BARR, administered by NBAA, to aircraft operators that could demonstrate a valid security concern.
“We saw flight tracking as a real security concern for the industry,” Carr says. “People aren’t subjected to this when they drive on the highway. But they had to forfeit their right to security and privacy when they got on a plane.”
Congress recognised that the programme worked well for the authorities and the business aviation community, he adds. “Under BARR, the government still has access to tracking aircraft in a safety or law enforcement capacity.”
The problems arising from the European Union’s Emissions Trading Scheme (EU-ETS), which came into force in January, will be less easily resolved. NBAA is still studying how business aviation can comply and what the impact of the scheme will be, but is alarmed that the scheme was implemented unilaterally.
“It has been long understood that aviation is a global industry and any policies covering it are done under ICAO,” Carr says. NBAA is opposed to EU-ETS on these grounds alone, but the fine print is also of concern.
“As it is set up now, emissions taxes are charged to aircraft operators for the entire duration of their flight. If you take off in Los Angeles and fly into European airspace, you are charged a fee for emissions from Los Angeles until you land in Europe, which is a stark departure from long-understood policies on the sovereignty of airspace.
“We’re just not sure of the true cost, because it depends on a number of factors. That, coupled with the notion that people are paying a tax to Europe for a flight that didn’t start in Europe, is a problem,” Carr says. “We’re working with the International Business Aviation Council and ICAO on developing a global, market-based programme that would reduce emissions. But it’s an enormous undertaking that involves all ICAO states, and will take time to create and review.”