Numerous reports involve rising inflation in the last year. What’s driving this? Despite public spending at levels never seen before, inflation had seemed tame and the economy appears remarkably strong even after the last year and a half of dislocations and restrictions?
However, trillions cannot enter an economy without impact. The lion’s share of those immense sums found their way into financial assets, including stocks.
What has this to do with Light-Sport Aircraft? Over many years of ups and downs, I’ve noticed a high correlation between stock market buoyancy and airplane sales. Both are soaring right now.
Unfortunately, some dark clouds are gathering.
Insurance Rates — Do you pay an insurance bill? If you answered yes, then you know about a significant increase in your premium. Maybe you can’t find insurance for your special aircraft. Maybe you can’t even get an insurance agent to give you a quote. Is the cause for this price gloom because LSA or Sport Pilot kit aircraft are falling out of the sky? No, that’s not it.
Loss claim ratio is one reason rates go up but the reasons today are more complex. View the video below for more on this subject.
Like so many industries, insurance has many complex factors and the video at the bottom of the page will fill in even more blanks. Yet the main cause of rising prices is a departure of four insurance companies that once took the risk. Consider that when things were good — say in 2018 when rates were still quite reasonable — Aviation Insurance Resources (or AIR) said they had a dozen companies that would quote. Losing four of 12 is serious and, as you might expect, when the supply lowers and demand is increasing, prices tend to rise.
Aluminum Prices — Some years ago when Flight Design and their CT-series were selling more than 100 units a year in the USA alone, a problem arose. Boeing had completed their Dreamliner 787, ground-breaking because it used loads of carbon fiber to keep weight down and strength up — the same benefits that appealed to Flight Design and other LSA designers that used it.
Aluminum is being sequestered in China as supplies become tight after a military coup in Guinea.
Yet after Boeing starting buying whole mill runs of raw carbon fiber material, prices rose dramatically. Even worse, since Boeing kept emptying the shelves, so to say, supplies tightened. Higher costs and reduced availability was a major problem for smaller producers like Flight Design.
In 2021, aluminum prices have risen to the highest level in 10 years due partly to a military coup in mineral-rich Guinea which is snarling the lightweight-metal supply chain. Guinea is (or was) the world’s largest supplier of bauxite before the military recently suspended the country’s constitution. Bauxite is crucial for the manufacturing of aluminum.
Shipping Costs — FedEx on Monday said shipping rates would go up an average of 5.9% next year across most of its services, the first time in eight years that it or rival United Parcel Service has strayed above annual increases of 4.9%. That will affect your shipment of goods ordered online for delivery to your house. Regrettably, it does not end with FedEx and UPS.
Numerous importers of LSA and other products have told me how their container shipping expenses have shot skyward faster than a Blue Origin space flight with a billionaire on board. I’ve heard many quote between double and triple the rates per container compared to a couple years ago. Welcome to the world of inflation-stimulated price increases combined with tariffs, sanctions, and taxes… all of which are on the rise globally.
Lead Times — After three days of the Midwest LSA Expo, I don’t think I would be exaggerating to say that perhaps 20 aircraft sold during the event. Considering this event draws a relatively small group of attendees, that many aircraft sales is amazing, I believe. Many of the same vendors reporting sales at Midwest say they never do that well at Oshkosh, which is orders of magnitude larger.
Previously, airplane representatives at EAA AirVenture Oshkosh 2021 reported solid business and a growing backlog of orders. That’s good for them but means longer waits for pilots who went forward with a purchase but now must cool their jets as they await delivery.
Many of these producers have learned that it doesn’t pay to expand their enterprise to build more airplanes when demand is high because it is hard to get smaller quickly when demand slows. Some of the best producers instead prefer a steady pace where they can control quality better. It’s hard to fault that approach but it does mean longer waits as we are now experiencing.
Regulatory Uncertainty — The good news is… the wait for the new MOSAIC regulation will eventually end, probably by December 31, 2023.
The bad news is… until then, uncertainty is the watchword. When people don’t know what is ahead — either on the producer level or at the consumer level — individuals tend to hesitate. Aircraft sales people have full order books right now and hopefully that will sustain them through any dry spell.
I’ll end this dreary review by quoting a favorite author of mine, Harry Browne, who wrote, “Anything can happen. Nothing has to happen.”
Can We Beat This Thing?
Are these five choke points the end of it? Regrettably, no. The sheer unsustainability of government expenditures far beyond revenue, especially with much of it funded through debt, predicts rising interest rates and that forecast always proves threatening to the stock market.
Although larger now, this image of BRM Aero’s personnel shows a common staff size for a light aircraft producer.
If my theory about high correlation between stock values and airplane sales is correct, any stumble in equities could bring difficult times.
On the plus side — because a plus side always emerges — this industry of relatively small businesses has already shown itself to be remarkably resilient, through the 2008 financial recession as well as the Covid panic. Businesses able to survive those two body blows can probably continue straight and level despite additional turbulence.
The last line of defense in any unknown future is actually you, you and your continued interest in recreational aviation. I believe “where there’s a will there’s a way” and with a growing number of used aircraft and other affordable choices that could be flown out of a farmer’s field, no problems can snuff out a pilot’s enjoyment of flight.
I’ll have to look up this Harry Browne fellow. I’m guessing he has his own version of Murphy’s Laws, or at least a few things to add to the list. A couple classics:
“In order to get a loan, you must first prove that you don’t need it.”
“Whatever can go wrong, will go wrong.”
Dan, thank you for that insightful article. We’ve experienced all the points in your note above, although shipping costs increases have been even higher. I was unaware of the Guinea coup. It is always a lesson in international economics when you are awed by its expansiveness, only to see an event in a single country clog the system. Epoxy shortages have also affected the composite airplane kit delivery intervals. The most stultifying of all your points for Light Sport seems to be your opening point….insurance. I had already accepted that I would be taking on the hull damage risk, but liability as well? That will be a real downer for the industry in the interregnum.
I wish you had asked about medical status. I had my former insurer deny me saying they no longer covered pilots over age 78 unless they had a current FAA Medical Class Three or better. No insuring for pilots using Basic Med. no insuring pilots flying under Driver License.
This eliminates a LOT of Light Sport Buyers/ Flyers.
What is the thinking/reasoning? The FAA finally agrees to these methods of medical after many years of proving there is little to no need for actual FAA Medicals and now insurance companies require it.
That is a very valid question and one without a satisfactory answer at present. The good news… insurance companies are private and can pivot on trends quicker than bureaucrats.
I wish you would have touched on insurance for Gyrocopters or actually ask someone at these shows what they pay. I’m starting to think a lot of Gyro pilots go uninsured due to the crazy price.
You make a good point. What I wrote applies to all sectors, even including Standard Category aircraft (Part 23). Yet gyro pilots appear to be significantly affected and older pilots have a tough time ahead. Check with AIR’s Gregg Ellsworth because the present situation will eventually ease; it always does in a free enough market.
Until then, two suggestions: stick with any company that insures you now, or if you are seeking insurance now, consider buying liability only (though even that tactic has eluded some pilots). Be advised a liability-only policy exposes you to hull damage or loss.
It’s even going to get worse if the Congress approves another 3.5 trillion stimulus package; they want to raise taxes even further to pay for it. All these fat cats in Congress should be thrown out of office next year.
Actually, the Proposal is to levy taxes on all the corporations that don’t currently pay taxes, and the very wealthy. If that applies to you then you’re right!