In the past decade, the small aircraft market experienced a significant decline in production and a loss of thousands of jobs. Manufacturer blamed this decline primarily on product liability costs, which they say forced companies to charge higher airplane prices (although they presented no verifiable evidence to support this claim). The general aviation industry contended that if Congress protected them from litigation, airplane prices for consumers would drop due to savings from decreased product liability costs, and within five years, more than 25,000 jobs would be created."
In 1994, after years of lobbying by manufacturers, Congress finally passed the General Aviation Revitalization Act (GARA). This law imposed an 18-year cut off for liability (statute of repose) for defective non-commercial general aviation airplanes (light and business aircraft). It is similar to a proposed statute of repose contained in broad federal product liability legislation Congress is now considering.
Manufacturing interests pushing product liability legislation are making sweeping claims about the impact of GARA's limited provision, enacted only three years ago. "We are now enjoying a resurgence in the entire industry brought about by the passage of GARA," testified Paul A. Newman, Chief Financial Officer of the New Piper Aircraft, before the Senate Subcommittee on Consumer Affairs, Foreign Commerce and Tourism on March 6, 1997. Testifying before the Senate Commerce Committee on March 4, 1997, Victor Schwartz, lobbyist for the General Aviation Manufacturers Association and the Product Liability Coordinating Committee, asserted, "[GARA] restored life to the general aviation industry and has already produced over 9,000 new jobs."
However, a close examination of the facts reveals that GARA has led to neither an industry resurgence, nor lower airplane prices, nor tens of thousands of new jobs, because product liability was not the industry's problem in the first place.
Manufacturers point to the growth in the general aviation industry between 1972 and 1979, and the decline after 1979, and conclude this decline was caused by product liability litigation. However, this decline fit the cyclical pattern of the industry's production, which has always experienced periods of growth and decline for reasons wholly unrelated to liability costs. Pre-1972 data reveals that the general aviation industry is a "boom and bust" industry, experiencing cyclical growth and decline. For example, it experienced a significant production increase between 1960 and 1965, and a significant decline between 1965 and 1970.
Before 1979, the industry's growth was fueled by a number of factors that artificially boosted demand and led to a flooding of the market with new aircraft. U.S. general aviation production peaked in 1978 with 17,811 airplanes -- mostly piston powered small planes. This was due in part to a dramatic increase in student pilot starts between 1977 and 1979 as a result of changes in the G.I. bill and coverage of flight training for veterans. This was especially critical for single-engine aircraft. Also, higher inflation rates in the late 1970s created an incentive for brokers to speculate and order new aircraft. This created artificial or unsustainable demand.
The general aviation industry's decline in the early 1980s was based on a number of economic factors. Economic difficulties hit the industry while it suffered from a saturated market. The general aviation cost index peaked in 1980, in large part as a result of increased fuel costs. Interest rates topped out in 1981, and general economic conditions bottomed out.
After the early 1980s, while other industries bounced back, the small aircraft market -- one segment of the general aviation industry -- remained in the doldrums due to several factors other than product liability lawsuits, including the industry's own behavior.
Limited Demand. For the most part, the industry produces high quality products, so the used aircraft market has provided an attractive alternative. As Paul A. Newman, New Piper Aircraft's Chief Financial Officer put it, "Another factor causing the decline was our own success at building long lasting products. Our airplanes are well designed and well built, often remaining in service for 30 years or longer." Pilots, businesses, flying clubs, and fixed based operations had no incentive to buy new airplanes because they could get essentially the same thing for half or a third of the price in a used airplane.
Decline in Pilots. There was a major decline in the number of active pilots after the early 1980s. The pilot to aircraft ratio went from 7 pilots per aircraft to 3.5 pilots per aircraft. Student pilot certificates dropped from 200,000 in 1977 to 101,000 in 1995. According to Cessna, 1995 showed the lowest number of individuals taking flight instructions in over three decades and similarly, the lowest number of licensed pilots since the Federal Aviation Administration began keeping those records in 1968.
Other Factors. The industry seemed unable to keep pace with technological demands of aircraft enthusiasts, who turned their attention and money to the experimental and kit aircraft market. And by their own admission, the general aviation industry dropped the ball in marketing and developing the next generation of pilots and aircraft owners.
While the small aircraft market remained depressed, the general aviation industry began to grow on the strength of high-priced turboprop and jet aircraft. General aviation industry demand shifted towards high value business jets and turboprops. As a result, in 1986, Cessna made a calculated business decision to focus production on these products and to halt production of its smaller piston aircraft. In 1993, the average business jet pulled in about $7.4 million per unit sold while the average piston aircraft pulled in only about $140,000. Cessna realized it could make a lot more money producing a few high-priced jets rather than a large quantity of piston aircraft. The year after the decision to focus on business jets and turboprops, Cessna became profitable and by 1991, its estimated pre-tax profits were about $130 million. At the time of GARA's enactment, total revenues for the general aviation industry had increased to over $2 billion per year -- the highest levels since 1981.
Small aircraft prices have not dropped as the general aviation industry promised, because the industry has realized no product liability "savings" due to GARA. A new Mooney single engine plane that sold for $165,000 in 1994 is selling for $209,000 in 1997. A new Piper Saratoga that sold for $209,000 in 1991 is selling for $349,999 today. The same can be said of most small aircraft. As John E. Moore, Cessna's senior vice president, acknowledged before the Senate Commerce Committee on March 6, 1997, the company has experienced no decrease in their product liability insurance costs. Therefore, no cost saving have been passed onto consumers, as manufacturers avowed would occur.
The small aircraft market has experienced a very modest revival over the last two years, but nothing that even approaches the robust demand of 20 to 30 years ago. According to the General Aviation Manufacturers Association, piston shipments were up 11.9% in the first half of 1996, compared with the same period in 1995. But this is still only in units of hundreds, not tens of thousands as in the 1970s. In reopening its single engine line, Cessna projects total employment at its new plant of only 600 employees by the middle of 1997, and predicts it will produce 2,000 new aircraft per year. Even so, this would be only from 15 percent to 20 percent of its high point in the late 1970s.
Because small airplane prices have not dropped, this modest increase in demand can be attributed to other factors. For example, the used fleet is finally beginning to wear out. In addition, foreign markets have begun to open up for U.S. manufactured small planes. In late 1995, Cessna's dealer in Brazil made a surprise order for 100 single-engine piston-powered aircraft. At the time, that doubled the number of orders Cessna had in hand for its new single-engine airplanes.
The effects of GARA cannot be isolated from the effects of other efforts by government, industry and organizations of aircraft owners and operators to revitalize the industry. The general aviation industry is improving its marketing in order to develop the next generation of pilots and aircraft owners. By their own admission, specific firms, such as Cessna and the New Piper Aircraft Company, have restructured the way they do business. In addition, NASA and academia have joined forces with the general aviation industry through the Advanced General Aviation Transport Experiments (AGATE) consortium, to help develop new technologies and disseminate information to industry. One aim of this project will be to create piston engine technology that will cut the cost of flying 160 knots in half, creating a great demand for new airplanes.
Cessna's decision to resume single engine manufacturing in 1994 was not the result of any financial savings due to GARA, but because Cessna's Chairman, Russell W. Meyer, Jr., promised Congress that production would resume if GARA were enacted. John E. Moore, Cessna's senior vice president, testified on March 6, 1997, that the company "made the commitment that if meaningful product liability reform was enacted, Cessna would reenter the single engine business." Calling GARA meaningful product liability reform, Cessna began manufacturing again, with the state of Kansas providing financial and other "incentives" to the company. However, as he acknowledged during questioning, to date, the company has experienced no decrease in their product liability insurance costs.