General Aviation Revitalization Act: its effect on manufacturers.

• Author: Kister, Thomas H.

The general aviation industry is rebounding as a result of GARA, but will the legislation also have unintended consequences?

THE AGE of flight began in America with the Wright brothers. It continued through the 20th century with American manufacturers at its helm. In the 1960s and 1970s, the United States led the world in the field of general aviation, but in the 1980s and 1990s, this industry weathered a major downturn in retail sales and a significant increase in product liability lawsuits.(1) Seeing a connection between the decline of the general aviation industry and the increase of tort litigation, Congress enacted the General Aviation Revitalization Act (GARA), 49 U.S.C. [sections] 40101, in 1994.

Did product liability actions against manufacturers of small aircraft lead to the severe downturn of the general aviation industry? Was this legislation needed and will it accomplish its intended purpose as embodied in its title?

WHAT IS GENERAL AVIATION?

General aviation is a catch-all label for aviation activity that does not fall under the Federal Aviation Administration's (FAA) regulations for scheduled and nonscheduled airline operations.(2) General aviation includes "business aviation, air cargo, flight training, pleasure flying, agricultural aerial application, air taxi and air charter, aerial law enforcement, air ambulance service, and countless other aviation activities" that do not include the airlines.(3) For the purposes of GARA, general aviation includes aircraft that have been issued an airworthiness certificate by the FAA, at the time of receiving this certificate had a maximum capacity of less than twenty passengers, and at the time of the accident was not engaged in scheduled passenger carrying operations.

RISE AND FALL OF GENERAL AVIATION

1. The Fall

   During the 1970s, the general aviation industry in the United States was at it high point. Its best year was 1978, when more than 14,000 single-engine airplanes were built. In the late 70s, there were 29 manufacturers producing general aviation aircraft , and the industry had revenue of more than $2 billion a year.(4)

   By the 1990s, however, the industry came full circle to the brink of extinction.(5) Industry employment fell by 65 percent. The largest manufacturers were having trouble keeping production going.(6) Cessna, the manufacturer of one of the most widely recognized planes in the world, the Cessna 172, had stopped building piston single-engine aircraft and had decided to concentrate on jets and multi-engine turboprops. Piper, the maker of the Piper Cub, was forced to file for bankruptcy in 1991.(7) Since 1978, unit sales had dropped 95 percent.(8) From 1976 to 1986, claims paid, defense costs and expenses in products liability suits rose from $24 million to more than $210 million for three leading manufacturers.(9) In total, the industry produced only 555 aircraft in 1993.(10)

   Explanations for this trend were many, but one thing was certain, the manufacture of piston single-engine aircraft was in serious jeopardy.

2. Product Liability Litigation

   The primary cause of the decline of the general aviation industry cited in the debate over GARA was the increased liability imposed on the manufacturers of small airplanes.(11) Speaking about the decline of sales of airplanes in the 1980s, an executive at Cessna said that the "major factor was the continuing and escalating cost of defending product liability suits."(12) Another executive at Cessna stated the "unlimited exposure to litigation is the sole reason" that Cessna closed its single-engine production lines in 1986 and the "sole reason those lines are still closed."(13)

   This unlimited exposure to litigation is called the "liability tail." These manufacturers were being sued over crashes of airplanes that were 30 and 40 years old. By 1980, Piper had a liability tail of 135,000 active light piston aircraft and untold thousands of inactive and damaged aircraft that could be returned to serviceable condition at any time.(14)

   Virtually all suits filed were vigorously defended by those in the industry. Consumer confidence in airplanes is extremely important. An airplane maker that has its name associated with crashes or defective products will get a damaged reputation that will adversely affect sales.(15) When the liability for a manufacturer's product is "predictable, it becomes insurable, and when it becomes insurable, then you can attract investment. People don't mind investing in an industry if they know they're not going to get wiped out with one lawsuit from one plane crash."(16)

   This kind of potential liability made insurance very difficult for these companies to afford. By 1985, the world insurance market

   began to withdraw product liability insurance

   coverage for U.S. general aviation

   manufacturers. As one prominent Lloyd's

   aviation underwriter put it: "We are quite

   prepared to insure the risks of aviation, but

   not the risks of the American legal system."

   By 1987 Piper was entirely uninsured for its

   product liability exposure, Cessna was

   uninsured for the first $100 million annual

   aggregate loss ... and Beech [Aircraft Corp.]

   was self-insured for losses and defense costs

   up to $50 million a year.(17)

   One of two remaining family-owned airplane manufacturers in the United States was forced first to drop liability insurance because it priced their planes out of the market and then to go into bankruptcy because it had no insurance to pay claims filed against the company.(18)

   One of the most disturbing aspects of this trend was the lack of instances in which the aircraft were the cause of the crash. At the request of the House Aviation Subcommittee, Beech Aircraft Corp. conducted a study of airplane crashes in one four-year period. Of 203 crashes, all of which were investigated by the National Transportation Safety Board or the FAA, not one was attributable to...