Surviving in the Aftermath

Surviving in the aftermath

A canvass of aviation businesses on the current, future state of activity

By Lindsay M. Hitch, Assistant Editor

November/December 2001

Insurance After September 11Tom Coughlin, president of Air-Sur, Inc., explains the rates and categories for the new war risk insurance perils. FBOs fall into four categories that determine their war risk premiums: • FBO at a GA airport with no scheduled service — 20-25 percent of airport liability premium. • FBO at airport with airline service; FBO does not provide services to airline — 30 percent of airport liability premium. • FBO at airport with airline service; FBO provides fueling, maintenance, etc. to airline — 50 percent of airport liability premium. Those providing catering or cleaning — up to 100 percent. • FBOs providing security, passenger screening, baggage handling services to airlines — coverage not available. War risk "hull" insurance is running at about $0.25 per $100 in value for aircraft up to $1 million in value. Anything above $1 million is charged $0.15 per $100 in value. War peril liability premiums for aircraft are at 20 percent of the annual aircraft liability.

The economic impact the weeks following September 11 on airport-based businesses is best described as a mixed bag. Some charter operators report increased interest and opportunities, while FBOs relying heavily on fuel sales have been hit hard. Maintenance shops have been busy due to backlog, but aren’t sure how much longer that will be the case. All are hoping for a more stable economy and renewed interest in general and business aviation, but recognize that it will not be a quick recovery.

"FBO businesses throughout North America are quite fragile in the best of times," says Harry Holt, president of Columbia Air Services in Groton, CT. "They require all the elements of the FBO working in harmony, and they rely on the synergy of the departments to make the company profitable."

BUSINESS TODAY
For Leonard Concepcion, owner of SkyLink Charter LLC in Hawthorne, CA, the grounding and changing flight rules have completely altered the focus of the business.
"We were very heavily involved in Grand Canyon tours," says Concepcion. "It went from 100 percent of what we were doing to 5 percent. That whole business structure went upside down, so we’re now focusing just on on-demand charter for the bulk of our business."
To aid the company’s cash flow without jeopardizing employees, Concepcion is in the process of selling one of the airplanes in his fleet.
FATA survey results
The Florida Aviation Trades Association (FATA) conducted an economic impact survey of its membership. Here, a summary of the 250 responses received.
• 89 percent of Florida aviation companies have suffered "significant" to "devastating" impact.
• 80 percent of Florida aviation companies will lay off some employees.
• Jobs lost in the first 30 days could reach as high as 30,908.
• Approximately 727 companies (49 percent of Florida’s aviation industry) may reduce employee pay as much as 26 percent.
• Lost revenue anticipated to be as high as 52 percent in the 30 days since September 11, equal to nearly $735 million in one month.
• 23 percent of Florida aviation businesses (340 companies) may close or seek bankruptcy.
*Survey conducted by Enterprise Florida. Complete results available at www.fata.net.

For Elliott Aviation in Moline, IL, the effect has been mixed, says Al Nitchman, vice president. "We have seen areas where it has had a positive effect — charter, aircraft management opportunities. But there’s definitely been a slowdown.
"A lot of that is fuel driven. There definitely has been a slowdown in line services, airline opportunities, the airline fueling we do. And our shops have slowed down," says Nitchman.
Like other FBO chains, Signature Flight Support had some bases heavily affected by "no-fly zone" restrictions, while others just outside those areas benefitted from increased traffic.
"We found ourselves with quite a few locations that were closed entirely to Part 91 or entirely to everything for the better part of a month. It has had a big impact," says Steve Lee, vice president for marketing and business development.
"Having said that, we also saw an increase in activity in places like Morristown (NJ), White Plains (NY), that were picking up slack in the New York area. We saw an increase in activity in Baltimore when Dulles and DCA were closed. And now that Dulles is back open we’ve seen quite a bit of activity there picking up slack for DCA," says Lee.
Duncan Aviation in Lincoln, NE, which focuses primarily on aircraft maintenance, has seen little effect thus far, says Lori Johnson, marketing communications coordinator. "We had a few days where we had trouble getting parts... But really, September did not turn out to be a bad month."
Johnson notes that fuel sales and line services were down, while charter was operating at nearly normal levels.
Receiving Instructions
The grounding of U.S. aviation on September 11 was a foreign idea to all involved. Of note is how aviation businesses knew what to do.
"We heard it on the news first," says Leonard Concepcion, owner of SkyLink Charter LLC of Hawthorne, CA. "So I just called the control tower at the airport and they told me that everything was being shut down.
"Nobody contacted us from the airport at all; that was really generated on my side. An operator, especially a heavy operator, on an airport should be notified. What if we didn’t turn on the news?"
For Al Nitchman of Elliott Aviation in Moline, IL, information came from the flight department and industry association websites. "The information that we got from NATA and NBAA has really helped us, in checking our checklist, making sure that we had covered all the bases… And I think it was very helpful to be actually giving that information to the people who have a need to know the information."

At the time of these conversations, most businesses had not yet examined their September books. John Enticknap of Mercury Air Centers, however, estimates that September revenues across Mercury’s bases would be off "in the neighborhood of $2 million."
For Mercury, jet fuel and avgas dropped to about 50 percent of normal, but have been steadily climbing in the last few weeks. Airline servicing is also far below normal, but Enticknap says that a few locations are almost back to 100 percent.

AN OPPORTUNITY FOR CHARTER

Charter companies are reporting near-normal activity levels, and in some cases, growth.
"The economic impact over the last month has been positive for us," says Charles McLeran, executive vice president and CEO of TAG Aviation. "Our charter revenues and overall interest in our aircraft management services have been impacted positively. I guess somebody has to benefit from even tragedies like this."
Fort Lauderdale-based Air Partner USA, a charter brokerage firm, also views the changing market as an opportunity for charter and corporate aviation. "We have seen an increase in other inquiries; we’ve seen an increase in first-time inquiries. I think as we move forward and we get through the next few weeks, and we see more business activity ... I’m hoping that there will be more and more of these first-time interests in using a charter jet," says Mike Guina, president.

RETAINING ASSETS

Assisting with the Business of Airports
A number of airports, faced with economic challenges of their own due to lost revenues brought on by reduced passenger counts, are nonetheless taking initiatives to help tenant operations weather the financial storm. Here’s what two major airports and a private strip are doing.

LOS ANGELES
The Los Angeles World Airports (LAWA), which oversees LAX, Ontario, Van Nuys, and Palmdale airports, has created an Economic Impact Assessment Task Force to work with air carriers and other tenant businesses, it was reported.
The task force is working with the L.A. Board of Airport Commis-sioners and the mayor’s office to implement measures that will lessen negative impacts on airport employees following the terrorist attacks.
It is estimated that the LAWA system is suffering daily losses of some $1.4 million due to lost revenues and increased security costs.

DENVER INT’l
Meanwhile, at Denver Interna-tional Airport, the airport is offering terminal merchants rent cuts and loans to assist businesses. Mayor Wellington Webb announced in October that concession operators would be eligible for $4 million in low-interest (2 percent) loans and have the option of terminating lease agreements without penalty, according to the Denver Post.
DIA also announced that it will not allow additional concession start-ups until traffic rebounds.

HAMPTON ROADS (VA)
In Chesapeake, VA, the privately owned, public-use reliever, Hamp-ton Roads Executive Airport — the second largest non-towered airport in the state — formed a Disaster Relief Loan Fund that is being made available to corporate aviation tenants based at the facility.
The airport’s owners are offering companies low interest (4 percent) loans with 90-day deferred payments, with the goal of helping tenants get back into daily operations, according to the airport.
Explains Steven Fox, one of the airport’s principals, "We have received interest, and distributed loan proceeds to our first recipient, a large fixed-wing flight school. Subsequently, they made good use of the funds by bringing all outstanding debts current."

Like Concepcion, many are looking to alternative cost-saving and revenue-generating measures to avoid employee layoffs.
"On the FBO side, we didn’t lay off anybody; we did cut some hours," says Dean Harton, president and CEO of Piedmont Hawthorne Aviation. "We cut back the numbers of people on shifts... We sent a number of our line people from Dulles over to Leesburg because Leesburg was getting a lot of traffic as a reliever."

Clive Lowe, senior vice president of aviation, says AMPORTS took similar steps. "We did have to cut hours. We did get people to use up vacation time, cut overtime and part-time hours. We did everything we possibly could do to avoid taking more permanent, drastic measures."

SKYROCKETING INSURANCE COSTS
Shortly after the September 11 attacks, aviation insurance companies cancelled war risk coverage to all aviation businesses. The federal government’s bailout bill included provisions for war risk coverage for airlines, but not for most aviation-related businesses. Coverage is now being offered to some of these businesses, but at much higher premiums.
"It’s going to have a major effect on all the larger companies that really don’t want to operate without full insurance coverage. It’s an expense that nobody ever had before," says Harton.
While coverage is now available, it is not available to everyone, and is not economically feasible for many.
"Our CFO has been heavily involved with our insurance agent and insurance carriers on that issue," says Nitchman. "It’s going to be too expensive for us to go on and carry that war risk coverage. We’re going to, through our security plan, try to ensure that that doesn’t impact us."
For Signature, Lee explains that getting coverage has not been as big a problem as getting sufficient coverage. "We have coverage. We were notified on the 17th, cancelled on the 24th. And we had coverage by Thursday, the 27th. We’d like some additional coverage, it’s just not available in the marketplace."

WHAT LIES AHEAD
Though the next few months will likely be rocky along with the economy, most are expecting good things for aviation in the long run — particularly business aviation.
"I think that the outlook into the future looks good, but it will not be a fast recovery," says Holt. "It will take time for people to recognize the advantage of the 5,000 GA airports throughout North America. It will take time for them to recognize the tremendous capability of our general aviation aircraft, safety, and utility."
"I hope that the on-demand charter business will improve, and I believe that there are going to be more larger businesses going to private charters and re-establishing their own flight departments," says Concepcion.
Johnson echoes those sentiments, saying, "The economy is still unpredictable. But I think in the long run, corporate aviation can really only see an increase in business interest."
There are still many uncertainties, however. Lee says, "I don’t think any of us understand what the true impact of the additional security is going to be. I think that the verdict is still out on what impact that’s going to have." NATA Economic Impact Membership Survey
Clif Stroud, director of communications at the National Air Transportation Association (NATA), says that over 600 member companies responded to a recent economic survey, reporting nearly $500 million in lost revenue. Here are a few of their comments.
• Southwestern FBO & flight school: Aircraft traffic has dropped; "If things do not improve drastically they may have to close business."
• Northeastern flight school: Estimate $20,000 lost revenue; "Business is in jeopardy; very high risk for failure."
• Southeastern aircraft management company: $50,000 lost revenue; "Believe things will improve."
• Midwestern avionics sales & service company: Revenues down by 50 percent; "Bankruptcy."
• Northwestern fuel sales & aircraft rental company: Business not open — 100 percent loss of revenue; "Will have to close business."
• Southwestern FBO: Lost revenue in fuel sales only; "Do not think they will be seriously affected in the long run."
• Northeastern maintenance company: No economic impact; "Do not forsee any economic impact."
• Southeastern FBO: Estimate $250,000 in lost revenue; "Short term will be negative — 10-20 percent; long term should be positive."
• Midwestern air charter company: Business as usual; "Worried about what the long term effects will be."
• Mid-Atlantic air charter company: Full week of no income; 29 percent of employees laid off; "Drastic cuts — possibly bankruptcy."