Commentar y
VLJs and Air Taxis
Balancing the Opportunities and the Challenges
By Gerald W. Bernstein, Founding Partner, The Velocity Group
The May/June 2006 issue of Managing The Skies provided two contrary perspectives on Very Light
Jet (VLJ) and Air Taxi prospects in articles written by Bill Strait (“What are Very Light Jets and Are They
Safe?) and Vaughn Cordle (“Dot-Coms with Wings: A Fun and Exciting Opportunity to Lose Money”).
he two authors took extremely
different positions. Vaughn
Cordle is a well-reasoned industry
veteran and his comments invariably
reflect informed points of view. That
being said, there are some points that he
addressed somewhat weakly or did not
address at all that really should be considered in developing a realistic outlook
for VLJs and air taxis.
Conversely, Bill Strait summarized
very well many of the efforts undertaken in anticipation of large numbers
of VLJ’s entering the general aviation
and Part 135 fleets. However, he is
perhaps a bit reliant on others’ opinions on some of the key issues rather
than his own analysis. In this chasm
between Bill’s unalloyed enthusiasm
and Vaughn’s litany of potential pitfalls lies much room for a more balanced, research-based consideration
of both the opportunities and the
challenges provided by this new category of aircraft. You be the judge.
T
VLJ and Air Taxi Are
NOT Synonymous
Perhaps the only point of agreement
between the two articles was that a Very
Light Jet (VLJ) is a small jet of 10,000
pound or less maximum takeoff weight.
Managing the Skies conveniently summarized the twelve major programs in
an accompanying table.
First, one can consider how VLJ’s
are likely to sell in the existing market
of turbine-powered aircraft. Both
authors cited other sources on this
point – I will fill in some details. This
www.faama.org
Table 1:
Turbine Aircraft Purchases by Price, 2003 – 2004, Worldwide
PRICES
< $500
<$1000
<$2000
<$3000
<$4000
<$5000
<$10,000
All other
Total
Annual TTL
$0.5M - $4 M
JETS
22
127
262
187
126
117
19
423
1,618
2003
TURBOPROP
91
413
310
173
60
17
0
0
1,104
2,722
1,658
JETS
29
145
217
155
104
117
22
337
1,396
2004
TURBOPROP
79
336
300
147
57
27
0
0
1,004
2,400
1,461
Source: Velocity Group analysis with information from AvData, a JETNET Company; transaction estimates are based on Aircraft BlueBook® values.
Table 2:
VLJ Operating Cost Comparison
Price
Hourly Variable Costs
Annual Fixed Costs
Cost Per NM
Cost per Seat NM
Ratio of Eclipse Cost per
NM to Citation S/II Cost per NM
ECLIPSE 500
$1,093,626
$401
$267,579
$3.77
CITATION S/II (1988)
$2,400,000
$1,203
$361,868
$6.68
$0.94
56%
$0.95
Source: Conklin & deDecker Spring 2005, Book Depreciation, with adjustments for Eclipse co-pilot, fuel to $3 per gallon, Eclipse with 4 passenger
seats, aircraft utilization at 500 hours per year.
briefly sets aside the added application
of air taxi to which I shortly will return.
In 2005, there were 750 new jets
and 365 new turboprop aircraft
delivered worldwide (GAMA General
Aviation Airplane Shipment Report,
End-of-Year 2005). But this data is
not the proper context for assessing
prospects for VLJ’s; rather one needs
to consider the new and used market
that totaled almost 3,500 transactions
in 2005. This market includes no new
turbofan aircraft that list for less than
$4 million (there are none as yet), but
does include used turbofan aircraft as
well as new and used turboprop aircraft. TABLE 1 supplies estimated
information by price category for two
recent years.
VLJs Supply Turbine Aircraft Buyers
with a New, Low-Cost Alternative
VLJs will provide the approximately 1,500
annual turbine aircraft buyers in the $0.5
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million to $4 million price category a new
choice – a new, factory-supported, lowcost light jet of modest capability. The
trade-off is not unlike what buyers consider
when purchasing a car. Do you want large
capacity for lots of folks and luggage as well
as comfort traveling long distances at a high
acquisition and operating cost, including
used car headaches? Or, might you be interested in a new, low-cost alternative?
Although the alternative is smaller, it also is
highly economical and free of problems for
the duration of its warranty period.
Intuition and some survey work show
that the VLJ will capture a share of the
existing market or approximately a 20 percent share of sales in the $0.5 million to $4
million price category. Thus, sales of 300
units a year can be expected from existing
customers without depending on entirely
new operating models such as air taxis.
Can there be additional sales to piston-engine buyers? Absolutely! User surveys identify interest in VLJ’s by buyers
of twin-piston aircraft, too. We have
found about 30 percent of twin piston
buyers would seriously consider a VLJ.
When applied to the 140 piston twins
delivered in 2005, up to 40 additional
VLJ purchases per year can be identified.
In summary, we identify the private
(non-air taxi) VLJ market to average
340 aircraft per year, or 3400 over 10
years. We expect a higher rate in the
first few years as new models are certified and launch-orders are delivered,
and lower rates in later years once the
initial pipeline is filled.
Taxi or Charter: It Is Mostly
About the Economics
According to the National Air Transportation Association (NATA), there are 3,000
on-demand air taxi operators in the US
operating more than 11,000 aircraft. Separately, the Air Charter Guide® recently estimated that there are approximately 2,000
jets in the US charter fleet. Here-in lies the
first hurdle for air taxis: what’s new? With
all this existing air taxi activity, why hasn’t the business already taken-off? In
reply, two points quickly can be made:
branding and economics.
Of the 3,000 NATA-identified air taxi
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Figure 1
No. of Passenger Markets without Nonstop Air Services (300-600 Statute Miles) – 2005
businesses, NATA reports 90 percent are
classified as small businesses. From other
estimates, only about 330 of these firms
are considered “first tier” in that they
meet the criteria of professional independent audit groups (such as ARG/US and
Wyvern). Which leads us to the first point:
the national branding of charter or air taxi
services has been woefully inadequate.
Despite the professionalism in larger
firms, the public view (especially in
medium and smaller communities without the large chain operations) unflatteringly links charter, air taxi, and the
local “mom and pop” FBO operation.
In this environment, creating brand
awareness by emphasizing safety, professionalism, cost-competitiveness, and
business substance on a regional or
national basis can indeed generate a
new level of market interest.
Can a new air taxi operation utilizing
VLJ’s deliver on the cost premise? It will
indeed be challenged as Vaughn Cordle
suggests with future fees and cost creep,
but the VLJ provides an attractive starting point. Consider the comparison in
Table 2. Using information prepared by
Conklin and deDecker’s “Aircraft Cost
Evaluator” (April 2005 edition), the costs
of the Eclipse 500 VLJ are compared
with a typical existing light jet used in
charter operation, a Cessna Citation S/II.
As indicated, the cost of operating the
Eclipse 500 per aircraft (nautical) mile
appears to be slightly over half (56 percent)
that of the Citation (at $3.00 per gallon
fuel and 500 hours of annual utilization).
If the S/II’s seats were filled, there would
be little difference in per seat cost. But with
four or fewer seats occupied, the per-seat
cost reduction is significant.
A VLJ operated by a well-branded
entity adds a product with both a new
image and new cost to the air travel
mix. This opportunity is not restricted
to air taxis. Existing charter operators
may use the VLJs to expand business by
emphasizing new, lower-cost services.
Other models can be developed such as
fractional VLJ plans as announced by
London, Ontario-based OurPLANE. We
can expect competition to lead to more
such innovations and alliances; the
exact outcome and business mix will be
determined by marketplace dynamics
enabled and impelled by these new,
lower-cost aircraft.
If There is Demand for Cars
and Buses, There Likely is
Demand for Air Taxi Service
I share with Vaughn angst about the source
of the air taxi passengers. Can I go to my
corporate travel department and obtain
approval with the good news that for a
www.faama.org
mere doubling (tripling?) of my air fare, I
can increase the quality of my life (and
become a more productive employee) by
undertaking a two day trip in only one day?
It remains difficult for those of us who have
not conducted extensive customer surveys
to identify exactly who these riders will be.
If there is demand for cars and buses, it
seems there should be demand for a taxi
service in between.
Consider first the aerial equivalent to
buses and cars: the aerial bus traffic. In
the US, there were approximately 452
million one-way domestic airline trips
conducted in 2005 (not enplanements
of which there are more, thanks to the
hub-and-spoke system).
Of this total, 41 million are higher
yield, by which I mean the passenger is
traveling on a first class, discounted first
class, business class, discounted business
class, or full-fare coach ticket based on
DOT’s 10 percent ticket sample. These
are passengers who pay a premium for
added comfort, privacy, or the need to
depart without advanced planning. On
average, these passengers pay $0.25 to
$0.35 per mile, with coach fares on
some routes exceeding a dollar a mile.
The aerial equivalent to the car is the
existing business jet and turboprop
fleet. There are approximately 16,800
of these aircraft in the US (according to
AvData Inc, a JETNET Company for
NBAA’s Business Aviation Fact Book).
Though not tallied, using a variety of
industry sources, we estimate approximately 13 million one-way trips are
conducted annually on the turbine-powered business aircraft in active use. Cost
of these trips depends on how many
seats are occupied, but at average load
factors these aerial auto’s cost from
$1.40 per seat nautical mile (NM) up to
$7.00 per seat NM; at low loads, the
price can go to $35 per seat NM.
An on-demand taxi-like service at
$1.50 to $3.00 per seat mile (independent of load factor) would fit between
the existing aerial bus and car alternatives. And demand should likewise if
service is comparable. It would appear
that this lower-cost alternative suggests
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an air taxi opportunity of over 13 million passengers per year. This would be
the case if an air taxi system were fully
available on a national basis. Yet, on
this assumption, I have my doubts.
Sweet Home Alabama, or
Do I Have Georgia on My Mind?
All states are not equal in their prospects for
supporting an air taxi-type service. We have
looked at the ability to fly directly from one
commercial service airport to another –
between all commercial hubs and non-hubs.
To paraphrase Willie Sutton and his rationale for robbing banks, passengers will
travel to locations because there are others
for them to meet. Measures of commercial
airport-to-airport connectivity provide one
useful index of the connecting locations to
or from which people want to travel.
We have tallied the number of commercial-service airports within 300 to
600 miles of each commercial service airport in the 48 contiguous states to which
one can not fly directly. Thus, the higher
the tally, the poorer the connectivity with
other cities within this distance band.
The results are provided in FIGURE 1.
The analysis indicates that Georgia’s
airports have the poorest connectivity to
other airports and cities in this range.
Another way to phrase this finding is that
if any state needed some form of direct,
supplemental, point-to-point service, that
state would be Georgia. And the states
surrounding Georgia.
How Many Angels Can
Dance on the Head of a Pin?
So we return to the question of the air taxi
and VLJ market; we can use some of the
above findings for a rough estimate. The
prime geography for an air taxi system
appears to be Georgia and its five bordering states. (Other influences such as
income might be added for a more detailed
analysis.) These states comprise 17 percent
of the US population (2000 Census).
We combine the assumption that a
national air taxi fleet might generate a
volume of passengers equal to the number
making trips on today’s jet and turboprop
fleet and the six-state population share.
The result is a demand estimate of about
2 million trips per year from this six-state
region for an air taxi type service.
If one operator (or more) could serve
this with average loads of 1.5 passengers
per trip and 5 trips per aircraft per day, a
fleet of 750 air taxi’s could satisfy this
prime region’s requirements, or twice this
number with utilization restrictions of
1,400 hours per aircraft per year. Order of
magnitude, VLJ demand for air taxi services might be about one-half that of the
private demand first described. The resultant total is 5,000 aircraft over 10 years:
higher earlier and lower in the later years.
The middle estimates cited by Bill
appear plausible from this review. But
even at this level, Vaughn’s warning “this
volume does not support the number of
VLJ manufacturers that are entering the
space” remains applicable. There are far
too many participants (12 companies!)
for sales under any reasonable scenario.
We saw a similar phenomenon following deregulation in the early 1980s
when eight manufacturers jumped into
the 30–60 seat regional/commuter turboprop market. Remember British Aerospace, ATR, CASA/IPTN, deHavilland,
Dornier, Fokker, Saab, and Short Brothers? Only two of these survive today on
civilian sales. Once again the excitement
of filling the infamous “hole in the market” attracts more participants than can
be financially supported.
A lot has been written on the air taxi
concept. And much analysis has been
undertaken on both market opportunity
and operating procedures. The industry
is at the point where delivery of the
promised product is the next test. Will
the buzz from early users convey enthusiasm and excitement, or will they be
disappointed and deprecating? Will the
volumes emerge enabling operators to
make the returns anticipated? Æ
Gerald W. Bernstein is a founding partner of The Velocity
Group aviation consultancy with offices in Washington
DC, San Francisco, Orlando, and Tokyo. Mr. Bernstein
has over 25 years experience in the development of
business strategies for manufacturers of all types of civil
aircraft, and for key component suppliers. Mr. Bernstein
is immediate past Chairman of the U.S. National
Research Council’s Transportation Research Board
Aviation Economics and Forecasting Committee. He is
an instrument-rated private pilot, and is listed in Who’s
Who in America.
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