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Remarks of W. W. Boisture, Jr.
to the Aero Club, September 26, 2000 

Distinguished guests. Ladies and gentlemen. My thanks to the aero club for providing this forum today. I appreciate the opportunity to speak with you.

Cover the following:

• Our company 
• The business aviation market
• Factors driving that market
• Briefly new tech.
• Special mission applications
• International issues

Gulfstream 

If you are not familiar with gulfstream aerospace, we became a general dynamics company last year. 

• One of 4 major groups
• Marine
• Combat 
• IS&T
• Aerospace
• $3.0 billion
• 35% revenue
• Almost 45% earnings

Gulfstream is the pre-eminent designer, developer, manufacturer and marketer of business aircraft. We currently produce the most technically advanced large-cabin, long-range business jets available: the Gulfstream IV-SP and Gulfstream v. Gulfstream has demonstrated its leadership for over 40 years. From the GI, the world's first aircraft designed for corporate aviation; to the GV, the world's first ultra-long range business jet, there have been nearly 1,200 Gulfstreams delivered to customers in over 50 countries worldwide, 85+ GVs & 400+ GIVs. They enjoy an unparalleled reputation for quality and reliability. Gulfstream will deliver over 70 new aircraft this year and maintenance service will account for approximately $400 million of our revenues. We currently employ 8,300 people in eight North American locations, including our headquarters in Savannah, Georgia. We have sales offices and service facilities worldwide. 

Today, our earnings, production, and service revenues are at historical highs. The fact is Gulfstream is in the midst of its most sustained and prosperous period ever. Our backlog is in excess of $3.3 billion. We have reached the production rate mentioned earlier with a plan to sustain this in light of a very firm market. 5-6 years ago our production was roughly a third of what it is today, our employment less than 1&Mac218;2 and our revenue a little more than 1/4. I stand here today and tell you i am unabashedly proud of the craftsmen, technicians, and the management team that have grown & changed this proud old company. To grow we have introduced a range of associated businesses including our Gulfstream shares fractional ownership program with our very strong partner executive jet international. Gulftream lease with GATX Capital and Gulfstream Charter Services. We are growing our service and refurbishment business for Gulfstreams and other aircraft at over 20% per year. And, we have significant and increasing interest in special mission versions of our aircraft - a growing market for us - more on that later. 

Business aviation market overview

According to the NBAA, 1999 was a record year for corporate aircraft deliveries. It certainly was a strong year for Gulfstream. Over the next three years, most industry analysts project that OEMs will produce aircraft at the 1999 level or higher. 

Several industry forecasts show continued strong interest through the early years of the decade followed by a modest downturn for several years and finally a general recovery toward 2010. There is an assumption of no worldwide recession during the period. My own opinion is the projected downturn is based on absence of information not the presence of it. I am not saying no cycle, but I am saying things have changed. 

The demand for large-cabin, long-range business jets is being fueled by several factors, which have changed.

1. Strong broad based economic expansion & new markets opening
2. This economic expansion has been and is being borne on the shoulders of productivity. The business aircraft is now being appropriately regarded as a productivity tool. Business aircraft make efficient use of time, money and people - i.e. They create improved results. Equipped with SATCOM, wireless LAN, fax and printer, and direct TV, the large airplanes have become productive offices for creating, exchanging and receiving ideas; or an increasingly restful environment as 6-8 timezones can be crossed in a single flight. The aircraft are seen as a productivity tool and not a luxury. Companies in North America are expanding to meet the worldwide market. Many see their future growth dependent on international expansion. And companies outside of North America increasingly want to expand to our markets. This growth of international business, together with declining levels of service provided by airlines and the air traffic system, and with a greater need for security, all cause corporations to realize that a business aircraft is a necessary tool for competition, productivity and success.
3. The third major reason for sustained demand in our case - the Gulfstream shares fractional ownership program. Fractional ownership has reduced the price-of-access for many new customers and expanded the installed base of owners. Industry wide, 70-80 percent of shares owners have never owned a business aircraft. In the Gulfstream shares program, 60 percent are first time buyers and 85 percent have never owned a Gulfstream. People who would never have purchased a Gulfstream in the past are now in this class of aircraft via the fractional alternative. Gulfstream shares has created a new, lower entry price-point for hassle-free ownership.
4. Finally, business jets, even in our large-cabin class, have become less expensive to own and operate through systems improvements, greater engine efficiencies and overall reliability, and OEM programs to minimize downtime and maintenance hours. 

In my opinion the fractional ownership concept, backed by OEM maintenance, is providing business aviation the opportunity to achieve some of its potential as an efficient, random access, point to point transportation system. Other steps are coming that will consolidate & upgrade the efficiency of charter, corp shuttles, airline supplements - hopefully business aviation will be more readily accepting of these changes than we were of fractional ownership. There's great opportunity here. 

Special missions

While the success of Gulfstream business jets is well known the utilization of Gulfstream aircraft in government and military service is not as readily apparent. Sales of our special missions aircraft represent less than 10 percent of our business. But that business base is growing and there are a host of new opportunities. Our experience in providing aircraft and support to government customers is substantial. For more than 36 years, Gulfstream has produced very capable and effective special mission business aircraft, which are currently in operation with over 30 world governments and military services. Gulfstream aircraft have been outfitted for a variety of special mission applications including electronic intelligence, maritime and border patrol, airways navigation verification, hurricane hunting, logistics support, photo-reconnaissance, medical evacuation and VIP transport.

Today, the Gulfstream V is capturing a healthy share of this growing world market. We have delivered five Gulfstream Vs to the U.S. government, three to the government of Kuwait and we have delivered the first special mission GV to our valued international customer - the kingdom of Saudi Arabia - for medical evacuation. The Gulfstream V is particularly well suited for Medivac applications. Its high cruising speed facilitates an expeditious mission, while the low cabin altitude adds to the patient's comfort level.

You may see C-37s, the military designation for a GV, with the 89th airlift wing nearby at Andrews AFB. Two are being used to provide fast, safe and reliable worldwide transportation for cabinet members, members of congress, senior government officials and dignitaries. A third GV was purchased for the u.s. army and a fourth aircraft was acquired for the department of defense regional commander-in-chief (CINC) support mission. The two most recently delivered C-37as are being used for U. S. Government quick-reaction and disaster relief missions. The GV is particularly well suited for these missions and represents a very cost efficient solution for our government. As a result, we expect that further C-37 orders will be placed in the near future.

Tactical surveillance applications will extend the government and military market for the Gulfstream V beyond more traditional roles of VIP transports and support aircraft. The Gulfstream V, with one-tenth the life cycle costs of older airline size aircraft, is generating interest for signal intelligence and other special mission applications. 

The Gulfstream V offers unique advantages as a military sensor/emitter/recon platform and we believe we will capture a significant portion of the worldwide market for this application. It's combination of a high operational altitude capability to 51,000 ft.; long-range and high endurance (14+ hours) offer mission flexibility. This performance, along with the new generation miniaturized mission electronics, eliminates the need for large, expensive to maintain aircraft as signal intelligence platforms which the U.S. and many other nations use today. Again, change will be hard fought, but force structure, economics and improved capability in a smaller package make the gv the special mission platform for the future. 

Three years of operational experience with the Gulfstream V in a variety of uses has verified its reliability, maintainability, performance and now life cycle costs. 

The Gulfstream IV-SP is also has been an extremely successful platform for special mission purposes. Approximately 50 Gulfstream IV and IV-SP's are in service with governments worldwide. 

R & D - GIV, GV, SBJ

While the GV has captured a healthy 70% of the market share in the ultra-long range class and the GIV sustains over 60% in its category, we have every intention of ensuring a continuing performance advantage for our aircraft, the excellence of our services, and the growth of our market share. We are continuing to add advanced technology to improve our current line of aircraft. Recently we've introduced a very significant innovation in safety with the first infrared enhanced vision system for pilots to improve their ability to see at night and in poor weather. It will be available for both the GIV and GV. And it will significantly improve situational awareness and safety some say. For the cabin ILS, we are now introducing a wireless local area network option that brings even more convenience and utility to the productive office environment for our passengers.

With the GIV & GV, we are approaching the performance limit of what can be achieved with subsonic, ultra-long range business jets. We are watching closely as our GV customers use the hi-speed capabilities. The next significant step in this class of airplane will be to go supersonic - quietly. After studying the concept over the last two years, there appears to be a solid business case for 200 aircraft market for a supersonic business jet. Time is the coin of the realm here and eventually the QSJ will respond to this imperative. We believe the technologies could be within reach to minimize the sonic boom and permit random supersonic flight over land without disturbing people on the ground. The key challenges are boom suppression and engine life. Research and development efforts are being applied to these. There are a host of regulatory and certification issues to overcome, but we will and when the quiet supersonic business jet becomes operational in the next 10-15 years, we feel confident that Gulfstream will be a part of an international industry team that designs, build and supports it. 

JAA issues

While Gulfstream business and special mission sales are strong and growing, the regulatory scene internationally, for Gulfstream and other U.S. aerospace companies is not as favorable. Allow me to put on my industry hat for a few minutes. 

Since Kitty Hawk, the U.S. has been the undisputed world leader in virtually every aspect of aviation. The national research council estimates that aerospace contributes $436 billion per year to the total output of the U.S. economy. It makes up 9.4 percent of all U.S. exports and provides a trade surplus of $41 billion. Business aviation is a significant part of these numbers. 

However, the Europeans have targeted aviation as an industry they would like to dominate. This is a legitimate goal for them and real competition always improves performance. But over the past few years, we have seen the Europeans attempt to use their aviation regulatory process to tilt the competitive playing field well in their favor.

This premise can be supported by looking at several regulations that have been proposed by the joint aviation authorities, Europe's equivalent to our federal aviation administration. These regulations have been proposed in the name of safety. In fact, many have no safety impact, but do have serious trade implications. I think what we are seeing is a concerted effort by the Europeans to benefit eu companies to the detriment of u.s. companies using technical and safety issues as a basis for the debate.

One of the recent examples involves regulations for extended range twin-engine operations or ETOPS. In early 1996, the JAA operations committee proposed a rule that would have required all twin-engine jets under 100,000 lbs. To remain within 120 minutes of an airport at all times. No safety justification was ever presented and the rule clearly benefited the three-engined aircraft built by Dassault in France. After a long and focused effort by NBAA, GAMA, NATA, it appears this risk is past. 

Earlier this year, the European union adopted a regulation on the use of noise reduction technology known as hushkits. It imposes arbitrary design requirements rather than a performance based environmental standard. It targets u.s. aircraft and imposes staggering economic costs on u.s. aviation industry while doing nothing to lower resulting noise. In our view the hushkit regulation is a protectionist measure masquerading as an environmental initiative. 

ETOPS, hushkits and even an attempt to regulate flight training, underscore a pattern whereby the Europeans seem to use their regulatory process in an attempt to influence the competitive marketplace. Another area where we believe this is happening that is of particular concern to Gulfstream is in the area of aircraft certification and validation process.

Aircraft certification and/or validation are necessary prerequisites for any aircraft manufacturer wishing to enter a given market. In this case, the market at stake is Europe-the second largest business aviation market in the world. At Gulfstream we feel strongly that European regulators use the certification and validation process to delay the entry of our products into the European marketplace or make them exceptionally expensive to base and operate in the European region if their certification is not validated by the JAA.

Before I detail the difficulties that Gulfstream has had in getting our GV approved, I need to give you some background information on the FAA certification and JAA validation process. It revolves around a concept called harmonization. 

Harmonization recognizes the competency of the FAA and the thoroughness of the FAA's certification process in light of which, the JAA is supposed to conduct a more abbreviated review of the product. The premise is that, while the JAA should have ample opportunity to "validate" or audit the FAA's work, and to conduct certain tests not covered by FAA, manufacturers should not have to undergo the expense and delay associated with a second certification program. Particularly one where JAA member countries have difficulty agreeing in a timely manner on the standards. In short, what is good enough for the FAA should generally be acceptable to the JAA - this is the concept of harmonization. 

Unfortunately, in our experience, the JAA has given less than appropriate recognition to the work or standards of the FAA. And frankly we'd like to see the FAA stand more firmly in support of U.S. Companies which have met their standards. Although progress is reportedly being made on harmonization and current certification and validation processes, U.S. Business aviation companies are still having a very difficult time with this situation. Gulfstream is a very strong supporter of the FAA's new partnership for safety program and trust that our adherence to and support of that program will result in a more effective harmonization effort on future aircraft certification/validation programs. 

Is this a reciprocal environment? We don't think so…European manufacturers with new products do not seem to face similar treatment by the FAA. The result is a major competitive advantage for European manufacturers because they can get their products introduced into the lucrative north American market - which represents 75-80% of the business jet market -- more quickly and inexpensively than u.s. manufacturers can enter certain foreign markets. 

Let me give you some facts to help you understand the scope of what we are talking about. 

On a program like GV

• 5.5 million Gulfstream hours go into development of a GV
• 1.1 million are certification related - approximately $62.5 m
• The FAA puts approximately 16,000 manhours in to: 
• Oversight h delegation hhands on testing 
• JAA validation will cost almost $20.mm 

This current JAA validation cost figure now represents almost 30% of the cost we incurred to obtain FAA certification and one can very reasonably argue by looking at the technical facts that no real safety benefit is being achieved by having to fully comply with the JAA mandates. It's alarming to see that we are being required to expend such an enormous amount of money to validate our designs for the JAA while several existing FAA type certified airline aircraft which have similar compliance issues, have been granted allowances and alternate means of compliance with the JAA requirements. Our experience certainly does not support the concept of a simplified validation process that the FAA and JAA have supposedly agreed to.

U.S. business aviation needs help in leveling the playing field - help from the dept of commerce, dept of transportation and from the FAA. We think our industry has earned and deserves that help. 

Business aviation

The market for our products is strong, backlog gives us visibility into the future, flying rates are up significantly, new markets are open with fractional ownership and special mission applications. Business aviation is showing all the signs of being an integral, essential part of commerce in the new millennium. As an industry we must be confident and proactive in the face of chance.

Many who went before us in our industry had to fight for acceptability. As a mode of transportation, had to articulate the impact of our industry on local, state, regional and national economies and had to achieve tort reform where vitally needed. These things being done the opportunity for this industry to participate in expanding worldwide markets has never been better.

At Gulfstream, we are excited about the opportunities