Now Fortune 500 companies conduct business on the fly

0 Comments | Insight on the News, Oct 21, 1996 | by Kenneth Silber

State-of-the-art corporate jets can fly from New York to Tokyo in 15 hours but can cost up to $35 million. Still, the industry is ready for takeoff -- unless new federal and state taxes keep it grounded.

Fed up with volatile airfares? Tired of long waits in airports? Displeased by airline cuisine? An alternative to commercial flights is becoming ever-more popular among the globe-trotting executives of America's largest companies: the corporate jet.

The $2 billion-a-year corporate-jet market grew by nearly a quarter in 1995 and is expected to register a 10 percent increase this year. Some 8,000 business jets are operating worldwide, more than half of them based in the United States. (A similar number of corporate propeller planes also are in use, although sales have leveled off.) Companies operating their own aircraft cite numerous advantages:

* Efficiency Corporate jets reduce flight time by providing direct service and using smaller airports located near final destinations. In addition, executives bypass the lengthy check-in procedures required for commercial flights. The interiors of business aircraft often are designed to function as office space, allowing travelers to work en route.

* Flexibility Companies control the scheduling of their own planes rather than conforming to airline timetables, allowing for last-minute, even mid-flight, changes in course.

* Security Corporate aircraft enable companies to reduce the risk of their executives being kidnapped and guard against lesser dangers such as stolen luggage.

Such benefits do not come cheap, however; business jets range in price from several million dollars to as much as $35 million. Moreover, companies must contend with a perception among the public -- including stockholders -- that such aircraft are an unjustified luxury. "The corporate jet is the most prominent thing in a company," says Robert Miers, an analyst at Avmark, an aviation consulting firm in Arlington, Va., "so it's the first thing to go when the company starts tightening its belt."

Indeed, such visibility makes corporate jets a frequent target for federal and state tax hikes. In late August, President Clinton proposed that business aircraft be taxed $225 per flight to raise revenues for education and literacy programs. This measure -- which the National Business Aircraft Association argues would "substantially reduce" the use of corporate jets -- would be added to existing fuel taxes, registration fees and other charges.

Efforts to improve the public image of corporate jets have taken a variety of forms. Some companies make their aircraft available for charitable purposes, such as transporting donations of food or medicine. Moreover, industry groups point out that corporate jets boost the performance of the country's overall economy and transportation system; a 1987 study concluded that 336 Fortune 500 companies operating their own aircraft posted higher profits than the 164 companies that did not.

Competition is heating up in the corporate-jet market. Boeing recently announced plans to offer a version of its popular 737 airliner as an executive jet. Other aircraft makers are experimenting with innovative pricing arrangements, such as "fractional-ownership" deals that allow several corporate customers to have access to a single aircraft at far less than the cost of an outright purchase.

Western companies interested in expanding their business in East Asia are particularly interested in high-speed, long-range jets that can travel nonstop on routes such as New York-Tokyo or London-Singapore. Traditionally, most corporate jets conduct flights of only several thousand miles and were used primarily for domestic travel.

Gulfstream Aerospace, based in Georgia, and Bombardier Inc. of Canada are the chief players in the long-range jet market. The Gulfstream V, a twin-engine jet that can make the New York-Tokyo trip in some 15 hours, will be delivered to customers this year; Bombardier's counterpart, called the Global Express, will fly in 1997. Both planes cost around $35 million and are capable of traveling at high altitudes to avoid adverse weather and air traffic.

The rivalry between the two companies has been fierce. In December 1993, Gulfstream took out full-page newspaper ads offering a $250,000 discount to any customer that canceled its Global Express order before the end of the month. Currently, Gulfstream has orders for 63 jets, while Bombardier has 52. The companies need to sell more than 100 planes each to make a profit, say analysts.