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UNITED STATES COURT OF FEDERAL CLAIMS

INNOVAIR AVIATION, LTD. , Plaintiff,

UNITED STATES,
Defendant.

) ) ) ) ) ) ) ) )

Docket No.:

96-408C

Pages: Place: Date:

1033 through 1291 Washington, D.C. October 24, 2007

HERITAGE REPORTING CORPORATION Official Reporters 1220 L Street, N.W., Suite 600 Washington, D.C. 20005-4018 (202) 628-4888 [email protected]

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headed.

It's always fun and interesting. THE COURT: Okay, Mr. Edmunds. MR. EDMUNDS: Thank you, Your Honor. BY MR. EDMUNDS:

Q

Mr. Arvai, what did the government ask you

to do in this case? A In this case, the government asked me to

estimate the market for the BT-67 in the Innovair market territory from the period of 1991 through 1998 -- I believe there was a half a year in there, so it was sort of a seven-year period in between those two years -- and also to review the expert reports supplied by Plaintiff. Q Okay. The first part of your answer,

referring to the first sentence that you gave; does that mean predicting the number of sales that Innovair would have sold, had the TLA not been seized? A Q That's correct. And simply to summarize here, although we'll

get into this later, what was your ultimate conclusion in this case? A My ultimate conclusion was that there would

be sales of two to three aircraft per year in the Innovair territory, none in the commercial airline market, as the plane was obsolete for commercial Heritage Reporting Corporation (202) 628-4888

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airline service, even in some Third-World countries; none in the cargo market because of the economics of the aircraft vis-&-vis the base DC-3; and a few in the special missions market, for which the airplane was well suited. Q And did you also conclude that Basler

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captured the sales available in that market? A Yes. I believe Basler captured the

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available sales in that market during that time period. Q A And how many planes was that? I believe 16 was the count that we had

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during that time period. Q Do you also have a conclusion with respect

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to whether Innovair would have sold as many planes as

Basler? A
Q A Yes, I do. And what is that conclusion? I don't believe Innovair would have sold

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any. Innovair didn't sel! planes; they sold kits. Q Okay. But do you have a conclusion as to

whether Innovair would have sold as many kits as Basler sold planes in the market? A Yes. I have a conclusion, and the answer

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is, no, they wouldn't. Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 4 that's been previously referred to, and this

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particular page lists the options that were going to be offered for the BT-67. We've seen this document before, Mr. Arvai. THE WITNESS: I believe this document was on the screen during Mr. Clark's testimony. BY MR. EDMUNDS: Q Yes. Mr. Arvai, is it possible to search

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STC ownership in an easy way? A Q Yes. It's available on.the FAA Web site. So you can go onto the FAA Web site and

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research the ownership of STCs. A Yes. There are options to search by STC

number, by aircraft type, and also by ownership on the FAA Web site, and it comes up with a list of owners. Q And did you perform such a search for these

options and for options owned by Basler? A I looked for both Basler Flight Services and

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Basler Turbo Conversions in finding the Basler options. Q Which of these options does the FAA Web site

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reveal are owned by Basler? THE COURT: What is the exhibit number? MR. EDMUNDS: I'm sorry, Your Honor. It's

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JX-70, page 7.
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think. have -Q

THE COURT: Thank you. THE WITNESS: I believe there were seven that I found that STCs were issued to Basler for, including the ground proximity warning system, the top cargo door, electric cargo wench, long-range fuel tanks, metal control surfaces, and the passenger interior and air conditioning, or at least the airconditioning portion of that. BY MR. EDMUNDS: So it's your testimony, contrary to Mr.

Clark's testimony, that you found STCs in Basler's name for seven of these options. A That's correct. MR. EDMUNDS: Okay. Your Honor, I actually

THE COURT: I think I missed when I got to six. "Ground proximity systems, top cargo door, electric wench, long-range fuel tanks, metal control surfaces, and passenger interior." I think that's only six. MR. EDMUNDS: I think there is a supplemental oxygen system. THE WITNESS: An oxygen system as well, I

MR. EDMUNDS:

We missed that.

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They own I0 STCs. "Geared aileron"; that

wasn't on DX-77 -- is that correct? -- but it is another option owned by Basler. A Q Yes, it is. And the installation of the cockpit blower

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system, not on the original list. A Q A Q That's correct. But it is also an STC owned by Basler.

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Yes. And the flight crew restraints; were they on

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the original list? A No, they were not. But that is also another option owned by Basler. A Yes. That's an option and a requirement for

selling an airplane into Canada. MR. EDMUNDS: Thank you, Mr. Arvai. THE COURT: Let me, if I can, Mr. Edmunds, clarify in my own mind the nature of the ownership of the STC. Let's say I'm Basler and own this particular STC. What does that mean in practical terms? Whatever I want to charge someone else to use it, they have to pay, or they can't use it. In that sense, is

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it like a patent? THE WITNESS: It's very much like that. Heritage Reporting Corporation (202) 628-4888

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While STCs are not exclusive like a patent, and anyone can go get an STC that's of an identical thing by reverse engineering, provided all of the engineering drawings, analysis, and mountains of paperwork that the FAA requires, there is considerable expense in doing that. So, in recognition of the STCs, one would attribute an economic value to them, and the owner of the STC can charge whatever he likes, and if someone believes it's too much, they can go.build their own STC as an alternative. THE COURT: Now, if you have an STC, and, let's say, I want to have it in my plane, if I got to Basler and get permission to use it, can I put it in my plane, or do I have to have Basler put it in my plane? THE WITNESS: You would need a licensed FAA repair station to put it in the plane, but that could be a repair station of your choosing, should Basler wish to share the data and the instructions with that facility. THE COURT: Or I would have to, if I found someone else who had an STC and the licensed repair station, I could have them put it in my plane. THE WITNESS: Yes. If it had a similar STC Heritage Reporting Corporation (202) 628-4888

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converting a second. They have not yet made a sale. So, so far, it's not a resounding success. Conversions of the C-123 have failed and also of the Grumman Albatross. Q Thank you, Mr. Arvai. I want to move on.

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You had testified earlier that your ultimate conclusion was that there would be virtually no sales of the BT-67 into the passenger aviation market. A Q That's correct. And that was one of the markets that

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Innovair identified that it wanted to sell the BT-67 into. A They identified the commuter market, which

is a regional airline market, as well as combination passenger-cargo markets. Q sales? A Based on my. experience in working with How did you determine that there would be no

airlines and looking at the mission requirements for airlines vis-a-vis this airplane. Q What are the mission requirements for the

passenger market? A Well, the mission requirements for the

passenger market are getting a passenger from Point A to B as quickly and as safely and as comfortably as Heritage Reporting Corporation (202) 628-4888

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Okay. Right, of course. How does the need

to carry a passenger comfortably affect the BT-67's marketability? A The BT-67 is unpressurized. Therefore, it

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can't fly above the weather making for a turbulent ride. In addition, the lack of pressurization can cause ear popping. If you're flying around with a cold -- if Plaintiff's table were to be on a BC-3, and we went up to 8 or 9,000 feet, there probably would be excruciating ear pain for most of the people. Q Thank you, Mr. Arvai. THE COURT: Mr. Arvai, planes are pressurized to what, 7,000 feet? THE WITNESS: Yes, generally to 8,000 feet by the time you get to altitude. But the pressurization kicks in rather gently as you climb. So, as you're climbing through 8 or 9,000 feet, you might be at a 3,000-foot altitude, unless you're climbing up. It's a gradual ascent and descent. And today's modern pressurization systems, that are computer controlled, maintain the atmosphere even much better than the first generation of jets, in which you used to get more ear popping. Today, it's not quite as bad as it used to be. Heritage Reporting Corporation (202) 628-4888.

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There were some of the older pressurized

aircraft that had prices below a BT-67. Q Okay, thank you. Is there a second reason

that passengers might be uncomfortable flying in a BT67? A Much of it is passenger perception that the

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airplane is simply old and less safe. In many surveys we've done in looking at the turboprop versus jet market, surveys of passengers perceive that jets are more modern and safer than turboprops. Even when we see the picture of an old jet and a brand-new turboprop, the perception remains that turboprops are older and therefore less safe than jets in the public's mind. And that's been the problem that the turboprop manufacturers have been fighting for the last I0 or 15 years. Certainly, they're modern, efficient, but people still think they're old because they have propellers. Jets equa! new; propellers equals old. That's one of the reasons that the regional jets have been so successful. Q In terms of the BT-67 being perceived as

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old, it is because? A I think for two reasons. One, it's got

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propellers; and the second, it sits on its tail and it Heritage Reporting Corporation (202) 628-4888

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Okay. You mentioned speed or the need to

carry passengers quickly as one of the mission requirements for this. How does the BT-67 rate in terms of speed to its competitors? A The BT-67 is a relatively slow turboprop at

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about 200 knots because it's got a wing that wasn't designed for a high-speed operation. Some of the more contemporary turboprops fly at 300 to 350 knots; and the regional jets will fly up to 500 knots, so they're much faster. Q During the time in question, was that answer

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germane to the time in question? A Yes, it was. The regional jets were

introduced in 1993, and there were certainly orders for regional jets from the time of the announcement in the late '80s that people had regional jets on order from Bombardier and Emery Air. Q Okay. What about safety? Is there

something about the aircraft that makes it harder to fly? A A taildragger is typically more difficult to

fly than a tricycle-gear aircraft because the positioning of the landing gear on a caster at the back of the airplane makes ground-handling of the Heritage Reporting Corporation (202) 628-4888

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In the air, the plane flies the same way. On the ground, however, particularly at landing in a cross-wind, you run the risk of what's called a groundloop. That's when the tail of the airplane hits. It's on a rotating castering wheel. If you've got a stiff cross-wind and you don't correct with enough air around that rudder, the tai! can swing around the airplane, and you do a little donut or three-sixty on the runway, which, more typica.lly, off of the runway, which can get a little bit uncomfortable for the people on board the aircraft. It doesn't happen that often, but the tricycle-geared aircraft aren't susceptible to that. In fact, the DC-3 was the last commercial aircraft built in the United States to have conventional gear aircraft. The DC-4, and every aircraft since, from 1938 on, have had tricycle-landing gear, and it was done for a reason. Q Is it your opinion that these

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characteristics of the BT-67 would limit its use in the passenger market? A Yes, it was. I concurred with the

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assessment that Mr. Clark made in his deposition and Heritage Reporting Corporation (202) 628-4888

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Ms. Beyer in herdeposition that there was virtually no market for this aircraft in passenger transportation. Q A Q Because of these features? That's correct. But about third-world countries, developing

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countries, Mr. Arvai. I believe that Mr. Clark testified that they don't care as much about some of the features. Do you have a different understanding? A I would disagree with that fact; and take a

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look at which people fly in third-world countries. Third-world countries tend to have a bifurcated economy with a class of very rich people and a class of very poor people. The very rich people have typically been to school; they're wealthy; they're well educated. They're the ones who can afford to fly. The people who are at the lower end of the economic scale simply can't afford air transportation. These people are relatively sophisticated and they understand safety -Q A Q The former people and not the latter? The rich sector. Yes. Heritage Reporting Corporation (202) 628-4888

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aircraft. They have been around the world. They're traveled well, and they understand the.difference between an older aircraft and a newer aircraft, and certainly, the preference would be for newer aircraft. But, of course, many of the operators in those countries are cash constrained, and tend to operate older aircraft. .Where you have no choice, you have no choice. But, overall, the preference of passengers in the third world is no different than the preference of passengers in the first world. Q Are there examples of countries that you

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might expect not to have modern aircraft, that do have modern aircraft? A There are a few than have more modern

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aircraft. Papua, New Guinea, for example, there are a couple of airline operators who have replaced DC-3s in service with smaller Cessna Caravans. These are a single engine turboprop that carry about eight or nine passengers rather than the 28 passengers, but they fly them more frequently, and they're equally useful in flying into small, unimproved runways. But they're cheaper than the BT67, and perceived as newer than the BT-67 as wel! by

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passengers.
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Arvai - Direct 1 2 3 4 Q If it helps, that is on page -It's in the back of my --

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-- 43, 42 of DX-322, which i~ your report, if you need it. A I think we identified 82 operators of the

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DC-3; and 61 of those operators had three or fewer aircraft. So there were two problems with that: One is you obviously don't have a lot of capital if that's your fl~et; and second, you would also have to take an airplane out of service to convert it to a BT-67. So if you have a fleet of one, taking the airplane out, puts you out of business. If you're flying two airplanes, taking one out, reduces your income by half. And if you're flying three, it would reduce it by a third. And virtually no company in the aviation business can sustain those kinds of losses, so there is a disincentive for these airlines to take an airplane out to order a kit. They would rather buy a whole airplane. Otherwise, they've got to take an airplane out of service, and that strategy just.simply doesn't work. Q Mr. Arvai, you've heard testimony, haven't

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you, that the Shorts 360 is the closest competitor on the market available for the BT-67? Heritage Reporting Corporation (202) 628-4888.

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we spoke about earlier that you were trying to admit that had the survey and Census of all our craft in service by those years, .in 1998, I believe the number was 110, as indicated in my report. Q If there were 197 produced and II0 in

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service in 1998, what does that tell you? A service. Q. Does that indicate a decline in demand for It tells me that 87 of so were out of

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the product? A There's no demand for the product if it's

out of service. Q Based on the similarities between the BT-67

and the Shorts 360, does your study for Bombardier indicate to you. that a similar phenomenon would occur for the BT-67? A My knowledge of the situation with the

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Shorts 360, and the market of the Shorts 360, which was a very similar aircraft to the BT-67 at the time, would.indicate that there was -- if there's no market for one that's even a modern version of what the DC-3 BT 67 would have been, that there was likely not a market for the BT-67 either. Q I'm going to turn to the cargo market.

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Again, we looked at Joint Exhibit 677. Do you recall Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 looking at that? Was the cargo market someone Innovair wanted to sell to? A

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Yes, it was. They identified two segments

of the cargo market. One was the small-packageexpress market for feeder routes, and one was the general cargo market. Q Do I understand it correctly that the cargo

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market is not one market, but is many markets? A It can certainly be segmented into many

markets. The basic two segments, we would say the package-express carriers, who operate under a different model than the general-cargo carriers. The package-express carriers operate through a hub, where everything comes into the hub and gets sorted and transferred out to other destinations to meet their 10:30 a.m. morning-delivery deadlines. So you've got, For example, FedEx has a large hub in Memphis that flights speed in from all over the United States about midnight. And from midnight to about 3:00 a.m, they're busily transferring cargo, and Memphis is the busiest overnight airport in the country because everything leaves between 2:00 and 3:00 a.m. to go back to their other cities for delivery early in the morning. So that's one style of operation. The Heritage Reporting Corporation (202) 628-4888

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general cargo market is flying from point A to point B without going through a hub. Q So, let me break it down. You said, I

believe, correct me if I'm wrong, there are two market segments that you had looked at: the package express and the general-cargo market? A Q That's correct. And you referred to a hub- and spoke system? Yes, I did. Can you explain that a little more? You mentioned Memphis. Memphis is a hub? A Memphis is a major hub for Federal Express

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in North America. Q Are there some examples of international

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hubs you can provide? A Shanghai. Q Okay, Brussels and Shanghai. So would They would also have hubs in Brussels and

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planes fly back and forth between these hubs, between Memphis and Shanghai, and Memphisand Brussels? I guess my hand gesturing is reverse, but -A Q Yes, they would. I'm not sure if it's geographically

accurate, Your Honor, but -THE COURT: Answer then. Heritage Reporting Corporation (202) 628-4888

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MR. EDMUNDS: My hands signals are not to

scale.
THE WITNESS: You could use that nice map over there if you want it. THE COURT: It's to scale. MR. EDMUNDS: Probably more than we need to
do.

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THE COURT: think Louisville?

Let me ask: Is UPS's hub, I

THE WITNESS: Louisville. THE COURT: I flew in there once and I saw -

used -THE WITNESS: It's a massive complex. THE COURT: And they do the same thing as

THE WITNESS: Yes, they do. They transfer from plane to plane overnight, and they fly them to the various cities, probably a couple of hundred domestic destinations each night. THE COURT: Thank you. BY MR. EDMUNDS: Q Mr. Arvai, what kind of aircraft would fly

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between Shanghai and Memphis, for example? A Long-range, wide-body aircraft for the

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economics, and the size of the cargo. Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 Q A Can you give a specific example?

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For FedEx, it would probably be an MD-II.

For UPS, either an MD-II or 747. Some may still use some DC-10s. Q chosen? A Because they have the range to go across the Why are these large, wide-bodied aircraft

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ocean,, and because they have the capacity to fit large containers and carry a lot of freight. Q A Q A Q Isit more economical to use larger planes? If you can fill it, yes. Can they fill it? Usually. Would the BT-67 be a possible competitor for

these hub-to-hub routes? A Q No, because they can't fly across the ocean. Does it also have the capacity for these

hub-to-hub routes? A Q No, but it's moot anyway. Yes. Now you said there are spokes. Can

you give me an example? Let's take Asia, for example. What would some spokes be from the Shanghai hub? A Q Beijing, Lanzhou, other cities in China. Okay. And in the U.S., what would some be?

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New York, Boston, Chicago into Memphis.
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THE COURT: Memphis. Then it would go from Memphis to a location like Boston. It would go to Boston first and then to Manchester? THE WITNESS: Probably direct to Manchester. There may be a flight into Burlington. It's a larger city, but maybe to Montpelier. It would fly into Manchester. and from Manchester it would be transferred to one of these smaller Cessna Caravans to fly to Montpelier. THE COURT: by truck. THE WITNESS: From there, they deliver it by truck. And then from there, it would go

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BY MR.. EDMUNDS:
Q

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Is the BT-67 competitivefor these what you

called feeder routes, which are routes emanating from, as I understand it, a mini-hub? A No, it's not an effective aircraft for that

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Q A

Why is that? It's too expensive, and a bit large for most

of the operations. Q
used?

So it's more expensive than the aircraft

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A

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aircraft. It tends to price about a million dollars new. It's about half the size cargo capacity of a BT67, but it requires only one pilot. It's a single-engine airplane and because of the time constraints, they would rather fly more smaller airplanes to get them closer to the destination than to fly one airplane to a destination than have it trucked a longer distance.. Because, as FedEx says, it absolutely, positively has to get there overnight. Q Is it your opinion that the. BT-67 could not

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be used in the package-express market? A Yes, it was. There's also an image issue

with Federal Express, which paints its name on all of its feeder aircraft. UPS does not do that, and they fly a fleet of smaller piston, and turboprop aircraft in their routes, with some as small as Cessnas to smaller cities. But FedEx paints their aircraft with a FedEx logo. They are very image conscious. I don't FedEx w~ould paint a logo on an airplane that looked 35 years old. MR. BARTOLOMUCCI: Objection, speculative. THE WITNESS: Well, I've done work with FedEx. I'm an expert in the industry. I've spoken Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 with them. That would be my argument.

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THE COURT: It's opinion testimony. This is not a fact witness. So experts can give their opinion whether it's crossed the line of being speculative or not is up to cross-examination to probe. MR. BARTOLOMUCCI: That's fine, Your Honor. BY MR. EDMUNDS: Q Let me just ask you this: You had mentioned

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that the BT-67 was too large for feeder routes. And just to be clear for the record, when we were talking specifically about Manchester and Maine, but that would also apply to international feeder routes as well? A It would apply to many international feeder

routes. Although, in some international markets, the feeder cities are a bit larger because of the lack of development in many of the smaller cities for packageexpress service. There are some cities in China, it's very difficult to get an express package to on a timely basis. They may tell you it will take two or three days for an outlying province. Q Thank you, Mr. Arvai. Now let me turn to

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Arvai - Direct 1 2 3 4 cargo market sounds kind of nebulous? A

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It's many markets, but it's fundamentally

flying cgrgo from point.A to point B. Of course, one can segment that in many different ways: by distance. Certainly, the BT-67 can't compete on an intercontinental basis as it lacks the range and speed to do that. It can't compete on a transcontinental basis. It's a little bit too slow for that. So it would be more on a regional operation, and in an operation that's geared more towards its size in terms of capacity. Q Just to be clear: What kind of materials are

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transported in the general-cargo market? What are we talking about? A Almost anything you can think of. Your

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computer, or your iPhone coming {rom China would fly across the ocean, and probably be delivered within a day or two by a carrier. Bananas coming up from Central America can be flown into Miami. Almost anything can be carried by cargo. There is a thriving market in auto parts that serves the auto plants and the automobile industry from their 'suppliers, taking just-in-time inventory to make sure that they don't shut down the assembly line because a shut down of an assembly line they've told me can cost Heritage Reporting Corporation (202) 628-4888

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They can't afford to have that happen, so just-in-time parts are flown around the country by smaller airlines. Q And that would apply to other countries in

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addition to this country? A Q Yes, it would. So there are a bunch of uses. How would you

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break it down to determine where, in this wide variety of uses, the BT-67 would compete? A Well, the BT-67 would compete for cargo

routes that meet its range in capacity. Cargo is generally scheduled through a carrier by a freight forwarder, and you'd generally let the freight forwarder know when you have capacity available. They tend to be the booking agents, and fil! it with cargo. Then you fly that particular route at a particular price. The important consideration in there is economics, and the price at which you can carry cargo, and what you have to charge the customer. Q What are the general factors, I guess, that

bear on whether the BT-67 could fulfill the mission requirements of any particular cargo market? A One would be range; one would be speed.

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Another, in third-world countries, maybe the type of Heritage Reporting Corporation (202) 628-4888

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If you're delivering relief supplies to an improved grass strip in Africa, you need an airplane that can handle that grass strip in Africa. The BT-67 is one of the aircraft that does that quite well. Q A Does payload also come into play? Payload, of course. If you want to carry a

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100,000-pound piece of equipment, that won't fit on a BT-67. In fact, you may need the Russian Antonov 224, the world's largest airplane, to put something like that in it. Q So, in considering where the BT-67 would be

competitive, if it were competitive, you would look at airplanes with similar characteristics I suppose? Is that what you would do? A We would look at the mission requirements

for the operator. Q Well, you wouldn't compare the BT-67 with

the Boeing 747? A Q No, of course not. One of the things that you mentioned was

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runway capability. How does that affect an operator's decision of what aircraft to buy? A If you're operating from a short field, or

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an unimproved field, you need an aircraft that can fly
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And the BT-67, I believe you said has that

capability? A Yes, it's one of the aircraft that has that

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capability to perform admirably in sub-Saharan Africa, and in difficult climates. Q Are there other aircraft that have the same

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capability? A Yes, there are. The Cessna Caravan is good

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in short-field operations, as is the Dehavilland Twin Otter or DHC-6. Also, the Lockheed C-130, which is used by many militaries around the world, I think 78 at latest count, is a larger transport that also has excellent short-field capabilities, and can land on unimproved runways. Q Are there Russian aircraft that would also

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compete in this market? A Yes, there are, particularly in some parts

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of sub-Saharan Africa where the Soviet block had some influence early on. There are a series of turboprop aircraft that the Soviets have built, including the Antonov AM-24 and AM-26 in this size range, the larger Antonov AM-12, and there are several older Aleutian types as well as some Yakala regional jets that might

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be appropriate.
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Were these aircraft available for purchase

in 1991 through 1998? A It depended on your political relationship

with the Soviet Union, and what later became Russia. Q A But in some countries? In some countries, they certainly would be

Competitors. China also was similarly offering its home-built versions of -- well, basically, the Chinese versions were copies of the Russian design. So they were also available for the Chinese where they had influence in some African countries. Q How did the BT-67 compare with some of the

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aircraft that you mentioned in the short- and unimproved runway category? A With the Twin Otter, the Caravan, and the

DC-3. Well, it's a different size class than the Caravan or the Twin Otter. In a passenger configuration, the Caravan would be about eight to I0 seats; the Twin Otter would be a 19-seater; and the standard DC-328 seats -- the BT-67, 32 to 36 seats, just to give a relative range in size. Q A How about price? Price, they would all be much lower than the

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BY-67 at the time.
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dollars at the time. The DC-3s were going for about $125,000 according to the price guide or roughly $150,000 for one in good condition. The Dash-6, the Twin Otter, was going for less than a million dollars, at that point. It depends on, you're ranging from half a million to a little over a million, depending on the year built. Q A Q And these are smaller aircraft generally? Yes, they are. Do you have an opinion as to whether smaller

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aircraft, or the larger BT-67, would be appropriate for most airfields in underdeveloped countries? A It depends on the payload of mission that

you require. But, typically, the economics play a factor here. And, given the low acquisition cost of the DC-3, and the price twenty times higher for a BT-67, and the relatively low utilization rates that you have for operating an aircraft in third-world countries, the economics .become twisted. In fact, if you did a cost-per-ton-mile calculation, the basic DC-3 was actually a cheaper airplane to fly than the BT-67 that was converted.

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Obviously, the BT-67 is a better aircraft, but,
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amortizing that difference over flying so few hours a year. And I did a calculation of a 500-mile mission at four hours a day, and I believe it was Mr. Wilson testified that some of these operators operate only one hour a day, the economics are simply better for the basic DC-3. Q Would you clarify whether that calculation

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is in the witness's report or any other matter in evidence? A No, of course not. The calculation itself is not, but your

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report does refer to cost-per-ton mile, doesn't it? A Q I believe it does. I'm not certain. .Since it's been brought up, let me turn you

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to -- I will find it at the break and bring us back to this. THE COURT: What do you think is the prognosis on our time? MR. EDMUNDS: ~hat time moves slower than the previous one, Your Honor, I would think that we would have probably another hour with Mr. Arvai. THE COURT: Okay.

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MR. EDMUNDS: Shall I continue?
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range, of the lower level, it's a bit more expensive to acquire and operate than the Cessna Caravan, the Dehavilland Twin Otter at 19 seats, the base D-3, a little less expensive than a C-130, which is a much larger aircraft. Q Okay, in the international markets with

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destinations that have short fields, unimprQved fields, do they typically tend to be boom areas of economic activity? A Q Typically not.. Generally speaking, would higher or lower

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capacity be preferable there? A It depends on the type of material you're

carrying and the frequency with which you're carrying it. If you're flying every day, low capacity is probably fine. If you're flying in once a month or once a year, you may want to bring a year's worth of relief supplies to a small ~illage. It depends on what you're doing and what your mission is. Q The market for the BT-67 in the area, how

would you characterize it? A Quite limited. MR. BARTOLOMUCCI: Objection, asked and answered, Your Honor. THE COURT: I don't think in this context it Heritage Reporting Corporation (202) 628-4888

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Air Atlantique was one of the companies that

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was visited on the demonstration trip. During the mid-1990s, Air Atlantique acquired four Lockheed Electras for their fleet, and did not choose the BT67. Q Did you compute the cost per ton mile of the

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Lockheed Electra? A The cost per ton mile of the Lockheed

Electra, which is a 400 knot airplane and significantly larger, would be significantly less than the BT-67, given that it had lower price. Q In addition to these economic factors, are

there any other reasons why, in your opinion, the BT67 would not be a viable competitor in the general cargo or the package express cargo market? A One of the reasons is that it's more

difficult to load, being a tail dragger sitting on its tail, and you're walking up an incline like walking out of the gargge at night here. I was happy to be watching a television show about a month ago on the history channel about the Berlin Airlift. They were talking about how, since airplanes landed every minute, they had to quickly and

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re-position aircraft.
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THE COURT: Well, that's why we haven't been able to sell that ramp to any other airlines. (Laughter.) BY MR. EDMUNDS: Q Indeed, one of the options available for the

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BT-67 was the cargo wench. A Yes, that would be essential if you're using

it in the cargo operation; rather than to try to push things uphill.. Q A Q And that's not included in STC 4840. That's under a separate STC. Thank you, sir -- now I've put this up on

the screen, just for ease of ease, and you can turn to it. It's Defendant's Exhibit 67 at page 7, if anyone would like to turn to it. But just to go through the remaining aircraft, as you understand the remaining segments of the market, you understand that Innovair was going to sell in time, I thought I'd put this up. It's again, JX-67. I think I may have said DX, at page 7. Okay, so the third general category you talked about was special missions, correct? A That's correct. Heritage Reporting Corporation (202) 628-4888

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percentage of the total aviation market, how big the special missions market is? A It's significantly smaller. If we look at

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the civil market, it's significantly smaller than the airline in cargo market; probably in comparison, between two and five percent, depending on whether we had some of these military missions, special missions, or count them as military. Q Okay,. and do you know about how many planes

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would be in use in that market, during the TLA period? A Q Not an exact number. Okay, well, let's look at the markets. What

is the first market up there that you would consider special missions? A Q Fire jumpers. Fire jumpers, okay -- did you evaluate

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whether the BT-67 would be competitive as a fire jumper? A Q Yes, I did. Okay, and what was your conclusion on that?

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Well, first of all, relatively speaking, what is the size of the fire jumper market? A The size of the fire jumper market, while it

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is very small, the fire jumpers is a U.S. phenomenon. Heritage Reporting Corporation (202) 628-4888

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Overseas, fire bombers are used to douse fires with water. But the fire jumping phenomenon, apparently only we Americans are crazy enough to put on parachutes and jump into fires; and the guys are very brave who are doing that in California. But I have not seen that anywhere else in the world. In the U.S. market, there are probably 12 airplanes used for that right now -- between 12 and 20, let's say. It's an order magnitude guess -- but under 20. Q Okay, so how many planes would sell per

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year, do you think, during the time in question? A Replacement cycle, probably less than one

airplane per year. Q A Q Were there competitors to the BT-67? Yes, there were. Okay, can you describe sort of the

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competitive market and how you evaluate it? A A couple of the 19 seat unpressurized

turboprops were very competitive in parachute operations. The Dehavilland Twin Otter is commonly used as a parachute airplane. It's a 19 seat unpressurized commuter aircraft, that's got a very good short field performance, as well; as well as the Dornier-228, which was a relatively unsuccessfu! Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 4 passenger turboprop. But it has found a niche with a lot of

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parachuting clubs and parachuting operations, because of its high wing design. That's also an effective aircraft for jumping out of. Q Okay, you mentioned the high wing design.

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Does the BT-67 have a high wing design? A It has a low wing design, but it has rear

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door. So it really doesn't matter too much. It was a very effective paratroop airplane du}ing World War II. It was designed, in part, for that purpose -- or modified, in part for that purpose -- and it served very well. The DC-3 is known for dropping thousands of troops during World War II. So it's effective in that role. Q Okay, but there are other competitors that

would compete for this. You said less than one sale per year? A Q That's right. Okay, next category, well, you mentioned

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fire bombers briefly. I guess fire bombers would be a specialty mission market that hasn't been considered, at least in this document. What is your understanding of the BTC's capability of performing as a fire bomber during the time period in question? Heritage Reporting Corporation (202) 628-4888

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A

Well, to be a fire bomber, you've got to

modify the aircraft to have tanks to hold the water; and there's no STC yet for the airplane to hold those water tanks. There may be some that you could insert into the cargo area, but you'd need a dropping mechanism, as well. It's not something that would be infeasible to put into this airplane. It would take an STC and take some money. But there are other competitors that are custom designed for that purpose, one of which we've seen flying on the news, the Canada Air CL-415 water bomber. This airplane is a twin turboprop that's an amphibian, and actually can land on a lake, scoop all the water into its fuselage as it's taxiing along, and take off again without have to return to base to reload with water. It's been a very effective airplane. They've sold over I00 worldwide, and it's a mainstay, certainly, of the fleets in Canada and Europe, and growing in the United States. Q On the news, you're referring to the current

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fires in California? A Q Yes, I am. Okay, the next category is oil spill

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surveillance, I will call it. What is that?
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That's basically a detection of oil spills

from the air. Q Does that mean you're checking to see if a

ship, such as the Exxon Valdez, or are there other parts of that? A That's a possibility. Aircraft are used in

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environmental missions in a variety of roles. Most public utilities operate aircraft for pipeline patrol, if they are an oil or gas pipeline, and.even electronic wire patrols for electric utilities. They'll fly airplanes up and down their pipelines to check for leaks. Typically, these airplanes are smaller airplanes that have an observer and a pilot. Many of them use the Cessna 185 and 190 series, which are a series of small four seat tailed regular aircraft that can land on rough fields in the case of an emergency, and are very effective at low speed, low altitude operations, so an observer can actually see what's going on. For the BT-67, certainly it's possible for this type of surveillance. It's.got a large cabin, and by implication, one would assume that a rule in this case would be more sophisticate electronic

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monitoring equipment, similar to that of a geophysical
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survey, where you want to take measurements of the surface below with probes and in.struments. Q A Now is that common to need that equipment? It's not very common, and that's a small

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market segment. Q Okay, the next one is mapping. Mapping,

because I think there's been some testimony. I think Mr. White testified, at least, about geophysical research; let's add that to this category. I think that they're similar, correct? A Q A Yes, they are. Okay, can you tell me what this is? That's basically flying research airplanes

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around to point sensors, cameras, and equipment at the earth. Generally, you'd fly at low altitudes and low speeds; and depending on the sophistication of your equipment, that would determine the size of the airplane that you'd need to do that. Q Okay, well, how big is this market,

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relatively speaking? A This market would be very small. I would

estimate there would probably be even less than 25 research-type airplanes around this for years, in the market worldwide. I think NASA has the Lockheed that they fly Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 4 into hurricanes. There are some environmental

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airplanes from research institutes. There are some oceanographic institutes that have airplanes that fly over certain areas to probe water temperature and other issues. But it's certainly not a Main Street market. Q When you say about 25 worldwide, does that

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include the United States? A Q Yes, it does. These also would include the planes with

skis that flew to Antarctica that Mr. White testified about? A They would include those. Those may not be

the only applications for airplanes with skis in Antarctica, because that's a unique special mission, which requires an airplane that can accommodate skis. Q Depending on the size of your mission

requirements, the twin otter, the DC-3, the BT-67, and even the Lockheed Hercules could accommodate skis. So pick your size and mission requirement, and you can pick an airplane to fit your payload. Okay, now moving over the other column, military use, in JX-67, page 7, for military use, they refer to the general cargo and passenger military use

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market. Since passenger is on there,, let me ask you,
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is there a difference between military troop transport and general commercial passenger use? A Q A Q A Q Yes, there is. And what is that difference? Military people don't have a choice. Don't have a choice of? Not going. In other words, do you mean they are forced

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to fly on the plane that the military orders them to fly on? A Exactly. THE COURT: It's sort of like you have some airplane advantage miles, and you may have to fly on a choice. BY MR. EDMUNDS: Q Could the BT-67 have been used in this

market segment? A Q A Q Yes, it has. It has been? Yes. Are there any barriers to the use of the BT-

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67 in this market segment -- economic barriers? A Economic barriers from countries that can't

afford it, and there are also competing aircraft in the market, that are simply more cost effective, Heritage Reporting Corporation (202) 628-4888

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including the C-130 Lockheed Hercules that's now used in, I believe, 78 countries at last count. Q afford it? A Some militaries.can't afford it very well. Okay, and you said that militaries can't

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They've required foreign military support from the U.S. Government to acquire these aircraft. Q A So capitalization becomes an issue, again? Capital becomes an issue. It's a matter of

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budget appropriation, and even the U.S. military doesn't get everything that it always wants. Q A Q A Q Can you use a DC-3 in these markets? Yes, it could be used in those markets. And, in fact, it is used in these markets. In some of the markets, yes. I will skip to drug interdiction, and I will

combine that with gun ships. Because as I understand it -- and you can describe it -- but as I understand it, those are very similar? THE COURT: There's one you skipped -- is surveillance done the same for military as it is for oil spills? Is there any difference? THE WITNESS: The difference would be sensing and equipment; and also the range of the aircraft comes into importance there, if you're doing Heritage Reporting Corporation (202) 628-4888

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a maritime patrol operation. But how much equipment and how many radars you could put in, and whether you have to hang those on the outside of the airplane or the inside of the airplane and attach hard points for them, there are a series of options and STCs that are required for these aircraft. Virtually every manufacturer has a surveillance version of their airplane today, from the Saab Turboprop to some of the Emery Air regional jets. They all hang pods on them and try to sell them to foreign militaries. BY MR. EDMUNDS: Q We can just go ahead and talk about that

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now, I think, since you've already gotten into it. " So surveillance -- and I'll combine that with intelligence gathering -- could you describe the BTC's competitiveness in the market for these missions? A For those missions, it's certainly not

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competitive with an A-wax or &n E-2 Hawkeye for Western militarize and NATO countries. It would be used primarily by Third World countries, primarily for Maritime patrol applications. Q A Okay, It would require sophisticated radars,

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Arvai - Direct 1 2 3 4 movements, or potential enemy movements. Q A Q A Does it have competitors? Yes, it does. Can you describe some of them? Virtually every manufacturer offers a

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surveillance model of their civilian airliners. Q All right, let's go last to -- and I've

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combined them again -- the Drug Interdiction and Gun Ship markets. What do you understand to be the purpose of those markets? A The purpose of those markets is to basically

be able to militarize the Aircraft, put weaponry on the aircraft to go in and destroy either a drug operation, or an enemy, in a war time situation. Q A So a gun is mounted on the plane? Yes, in the center of the airplane, there's

a large cargo door, and a 50 millimeter machine gun is mounted on the BT-67, very similar to the DC-3 operations during the Vietnam War, when we had a plane that they nicknamed "Puff the Magic Dragon." The DC-3 were fitted with this 50 calibre machine gun, and could circle a village at low speed, and absolutely devastate it with gunfire. It's very effective, as a ground support aircraft, for troops in those types of

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situations
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Okay, and that's what it does. It'circles a

village and basically takes out the village? A There are machine guns on one side. So it

tends to try to find the enemy on one side of the airplane, rather than both. THE COURT: Was it able to carry the 20 millimeter cannon? THE WITNESS: It may have been if they had a hard point on the wing. But I'm not sure that they did that in the Vietnam War. BY MR. EDMUNDS: Q Do you believe the BT-67 is capable of

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performing in this market? A Q A Q A here. Yes, it is. Okay, does it have competitors? Yes, it does. What competitors does it have? The base DC-3 could also be a competitor Certainly, the OCM-235 couldbe made into a

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competitor. But today, we're looking at major countries as competitors; like an A-10 Warthog, which is a jet aircraft to come and provide group support activities. It's somewhat obsolete in terms of its use in Western militaries. It may be still useful to

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places like Darfur.
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And I assume it's useful in Columbia for the

drug mission there, to take out a drug farm or however that is organized. I don't know much about it. Q A I don't know either, but apparently it is. Okay, but in terms of use, do some

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developing countries have access to much better aircraft than this, for the same purpose. Q Some do. I think it depends on what you

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would consider a developing country. Turkey is an example that was spoken about before. Turkey is sometimes considered a Third World country. But from a mil~tary standpoint, it's Air Force is very sophisticated. It provides full maintenance on F-16s, and is probably the most sophisticated air force, outside of Israel and the Middle East. Q A Q So would turkey need a BT-67 gun ship? It would likely have more modern equipment. Okay, and the DC-3, that could also be used

as a gun ship, as it was in Vietnam/ correct? A Q It could. Okay, so ultimately, what is your estimate

of the demand for the BT-67 in this market? A Two to three aircraft per year, considering

all of the special mission market.

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THE COURT: Could you specify the timeframe?
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MR. EDMUNDS: Mid-1991 to mid-1998, in Innovair's territory, outside of the United States, for aircraft that were not funded by the United States ~overnment, my estimate would be between two and three aircraft a year; if it's that seven year period, 14 to 21 aircraft during that timeframe. BY MR. EDMUNDS: Q Okay, and do you have a check on your

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estimate that you came to? A We have reality of what actually was sold by

Basler during that timeframe. Q A count. Q Let me ask for Defendant's Exhibit 321. THE COURT: looking at? MR. EDMUNDS: page 7, Your Honor. THE COURT: Okay, seven. On the projector, it's JX-67, What is the exhibit we've And how many aircraft was that? Sixteen in Innovair's territory, by my

BY MR. EDMUNDS: Q before? A I have reviewed a documentthat was similar Mr. Arvai, have you reviewed this document

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to this.

It was laid out in the opposite direction,
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aircraft has lost in parentheses. Does that mean that it crashed in your understanding? A That was the aircraft that was involved in

the photographic crash with Mr. Basler. It was about to be delivered to the client. They were taking photographs of the airplane. It had the mid-air collision and was destroyed. Therefore, number 22 was an insurance replacement aircraft for that one that never was delivered. Q analysis? A I did not. I may have counted number 21 and Okay~ so you did not count number 21 in your

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not number 22, given on that was a replacement for one that never got delivered. Q But you didn't double count for the one that

never got the last? A Q I didn't double count. Mr. Arvai, you have testified that 16 or

thereabouts is the demand for the BT-67 in the international market. Is it your opinion that Innovair would have sold that many BT-67s into its market, given its business strategy? A No, Innovair wasn't selling BT-67s. They

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were selling kits.

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Q

Is it your opinion that Innovair would have Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 3 sold 16 kits into this market? A Q A Q No, it's not. I'm sorry? It's not. Mr. Arvai, have you ever known of a kit

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conversion, that converts an entire aircraft, as extensively as this, that's succeeded in the marketplace? A Not to the extent of the kit proposed here -

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- there have been hush kits for engines the wing tip extensions on 737 are a kid that comes on to provide fuel efficieqcy. But those aren't tearing an airplane down to the base, extending its fuselage, changing its engines. It's no where near the extent of this modification. Q Okay, and what is your opinion of the kit

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business strategy? A I think it's flawed. MR. BARTOLOMUCCI: Objection, I don't think that's within the scope of his expertise. MR. EDMUNDS: I believe it is. He's testified that he's an expert, and has worked in the sales of aircraft. He's an expert in the aviation industry. MR. BARTOLOMUCCI: He didn't testify to any Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 expertise or study of kits as a subject matter. THE COURT: It's not a real area of

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expertise, kits -- at least, if you were dealing with model airplanes, there might be a kits expert. But I mean, it seems to me, that's within his area of qualification as an expert in planning and strategy and financing and aircraft sales. So I'll allow the question. I t can be obviously probed to what extend his expertise goes to that or what weight to be given to that. MR. EDMUNDS: Thank you, Your Honor. MR. BARTOLOMUCCI: Thank you, Your Honor. THE WITNESS: Did we answer that question. MR. EDMUNDS: I'm not sure. BY MR. EDMUNDS:

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Q strategy? A Q A

Well, what is your opinion on the kit

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The kit strategy was flawed. Okay, and why is that? First, airlines like to buy kits. As we

mentioned, many of these carriers had only one, two, or three airplanes in their fleets. To take an airplane out of service would basically eliminate a substantial portion of their revenue base. So airlines prefer to buy an airplane that's Heritage Reporting Corporation (202) 628-4888

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finished, bring it into their fleet, and replace an aircraft that they have on hand. It's like buying a car and saying, okay, here are the pieces. In six months, you can have your new car. But in the meantime, you've got to walk or take the bus. You tend to like to have your car. Q So customers would prefer a completed

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aircraft over a kit? A Customers prefer completed aircraft to the

kit. The other two aspects of the strategy -- first, there was no financing provided, which made life in the Third World aircraft difficult. There was no leasing program for these aircraft, that could provide a cost-effective lease. Part of the problem in that is that the residual values of a BT-67 would probably be discounted by financial institutions, given the age of an airplane, making the lease rates unacceptably high. The third factor is warranty and support for the aircraft. If Innovair was selling you the kit, they're responsible for the parts in the kit. If some installation center, Air Asia, is doing the installation, they're responsible for getting that on the airplane. If something goes wrong, who do you point Heritage Reporting Corporation (202) 628-4888

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to; and do Innovair and the installer point to each other, and the customer is left hanging in the dark? Customers like to have one person they can go to, to say, this is the person who is responsible for helping me maintain my airplane; someone who has spares and someone who can support it. Without support, it's very difficult to operate an aircraft. Boeing, Airbus, and even all the manufacturers of turboprop regional aircraft have global support networ.ks to provide spare parts, support, and technical assistance for their operators. I didn't see that evident in Innovair's strategy. Q Mr. Arvai, you've also testified as to STC

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ownership. Absent an agreement with the manufacturer to provide the options that were involved in other STCs, would a person selling the base STC-4840 kit be able to use those options?
A

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Absent an agreement, no. Would that be a problem? To the custome}s who wanted such options,

yes.

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Well, you need to configure an airplane for

a use, correct? A Q That's correct. Now Innovair wanted to set up conversion Heritage Reporting Corporation (202) 628-4888

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Arvai - Direct 1 2 facilities, I believe you've testified. Given the demand that you predict for this, is it likely that such facilities could be set up around the country? A Given the volume of two to three aircraft

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per year in the market that we project, it would be uneconomic to set up those facilities, given the capita! cost and learning curves associated with that. It simply wouldn't be good business. Q Okay, thank you; Mr. Arvai, you have been

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here during the trial. You listened to the testimony of Mr. Cobb, the Plaintiff's expert? A Yes, I did. Did you read his deposition transcript? Yes, I did. Did you read his expert report? Yes, I did. Did you read his resume? Yes, I did. That included his qualifications? Yes, it did. Do you believe that Mr. Cobb is an expert in aviation? A

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I don't believe -MR. BARTOLOMUCCI: Objection. THE WITNESS: ¯ I don't believe he was Heritage Reporting Corporation (202) 628-4888

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Q corr