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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

INNOVA'IR AVIATION, LTD., Plaintiff
VS.

No,: 96-408C

UNITED STATES OF AMERICA, Defendant

REPORT OF THE ARVA! GROUP, INC. July 9, 2007

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TABLE OF CONTENTS

Summary and Con~clusions The Market for the BT-67 Aircraft Supplemental Type Certificates and Technical Requirements For The BT-67 Conversion Process IV. V. Vl. VII. Innovair's Business Strategy Entailed Significant Risk Critique of Other Expert Reports Background and Qualification Documents ahd Other Information Considered 19 22 25 30 37 40

Appendix A: DC-3 in Airline Service in 1990

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.i.

SUMMARY AND CONCLUSIONS

The Market for the BT-67 Aircraft is limited to a small niche market. The modified DC-3 was economically and technologically inappropriate for use by airlines, package express carriers, and general cargo operations during the relevant time period, even in .third-world countries. The aircraft was attractive for special purpose markets in both military and civilian use, for which it had limited market potential in niche and special mission markets. Those markets however are quite narrow. Fifty BT-67 aircraft have been converted and sold into that market worldwide in the last 17 years, or about 3 aircraft per year.

The BT-67 had virtually no market potential as a regional airliner. The BT-67 was technologically obsolete when compared with more modern regional aircraft, and was introduced to the market at a time the market was transitioning to advanced turboprops and regional ~jets. Despite a low acquisition cost, the BT-67 was not attractive to regional airlines, even in the third-world.
The BT-67 had virtually no market potential as a package express feeder carrier. Major package express carriers, including FedEx, DHL, UPS and others operate jet aircraft between major hubs, and utilize smaller aircraft and ground transportation to deliver packages from jet destinations to smaller cities. Because of time sensitive delivery requirements, these networks typically utilize small aircraft to deliver ¯ packages to airports closer to their destinations. The size of the BT-67 aircraft was not appropriate for these operations. The BT-67 had extremely limited market potential in the commercial air cargo sector. Small cargo carriers operated the majority of DC-3 aircraft in commercial service during the relevant period. Most of these operators lacked the financial wherewithal to acquire a BT-67, which was more than 20 times as expensiVe as acquiring another DC-3. As a result, the economics of the conversion program were cost-prohibitiVe to most existing DC-3 operators. Those operators who could afford the BT67 would more likely acquire larger-sized used aircraft, with which they could earn higher revenues at a lower capital cost.

Actual results bear out that limited market potential. Only 26 BT-67 aircraft were converted between 1991-1998, of which 16 were sold in Innovair's market territory1., There were no sales to airlines, general cargo operators or package express carriers during the period. The only sales made in Innovair's territory during the relevant period were special mission aircraft for foreign governments and military organizations.

~ A 17.~ ~ircraft was delivered to replace an aircraft lost in an accident, paid by insurance proceeds.

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i conclude that the likely sales for Innovair would have ranged between no aircraft to a maximum of 16 aircraft. That maximum number matches the sales made by Basler, who had established facilities, multiple STCs including those for popular options, credible experience, was already down the learning curve, and international marketing representatives for the DC-3 modification program. There were numerous obstacles to the success of innovair Aviation Limited. Innovair's was attempting a high-risk strategy that relied heavily on the technical performance and marketing expertise of others, in a market with limited demand, using limited capital resources. Basler, which had conversion facilities, market credibility, international marketing agents, and substantial experience in DC-3 conversions, was able to capture the international demand for the BT-67 between 1991 and 1998. innovair was not selling completed aircraft, but conversion kits. Innovair had planned to sell conversion kits to a network of geographically based service centers to provide conversions in the international marketplace. They failed to develop such a network. lnnovair did not have access to the technology required to supply a full conversion that included options.. Innovair's brochures included a full range-of options for the BT-67 aircraft conversion program. However, while Innovair had access to the basic conversion STC, it lacked the rights to the STCs for optional equipment.2 Innovair would have needed to source those items from Basler, with whom it was in dispute prior to the seizure of the TLA, orto develop similar STCs on its own, which would have required considerable time and expense. Innovair did not have control over pricing for the converted aircraft. There are three steps to the conversion process. The first step is to repair the DC-3 airframe to bring it to =zero time" condition. The second step is to install the basic STC along with any options desired by the customer. These are performed ,simultaneously after the aircraft is prepared for the modification process. The third step.is to in~tall a custom interior in the aircraft that meets the customer requirements, including any special equipment that may be required. Innovair had control only over the price of the kit used in the second step. The attractiveness of the Innovair program to a potential conversion facility would be directly related to potential business volume. A potential partner maintenance facility would recog ,nize that a learning curve would be required to become proficient in BT-67 conversions. Innovair also planned to require its service facilities to provide warranty support, spare parts inventories, and affermarket support for its customers. Having adequate volume to support training, learning curve impacts, and inventory requirements would be important considerations
2 Deposition of Thomas R. Weight, taken 16 July 1997, page 70, li~= 12-15.

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for participation in the Innovair program. Due to the small market size, serious interest in becoming a conversion facility would be limited.
Barbara Beyer and Arthur Cobb each mischaracterized the market potential for the BT-67 aircraft and utilized flawed methodologies in their analyses, causing them to reach erroneous conclusions. Ms. Beyer concluded that a "reasonable number of sales"~ and a "reasonable share"~ of the market for new turboprop aircraft would be achieved. Her conclusion is incorrect, and is based on flawed assumptions and methodologies. Her assumption that the aircraft was competitive for commercial missions is incorrect. Her methodology utilizes the United States regional aircraft market to infer sales in international markets and for cargo, military and special missions applications, each of which have different drivers and different market characteristics. As a result, she mischaracterizes the market for the BT-67. Mr. Cobb incorrectly concludes that a market existed for BT-67 aircraft. He cites that =introductions and deliveries of competitive aircraft into civilian and military markets indicate the ability to enter the market and generate sales."5 The availability of a market of itself does not guaranteesuccess - a product must meet consumer requirements at a price the consumer is willing to pay. Mr. Cobb incorrectly assumes that "the Turbo-67~ was competitive based on speed, range, capacity, performance, and price."7 He fails to consider the lack of pressurization, conventional landing gear, airframe age, and market image fromusing an =antique" aircraft that would negatively impact the competitiveness of the aircraft. As a result, he fails to discern the fact that the Turbo~67 is not competitive for regional aidine, package express carrier and general cargo use, and. grossly overstates the potential market during the relevant period. Ms. Beyer, and Mr. Cobb, each cite the Shorts 360 as the most comparable aircraft to the BT-67. The Shorts 360 went out of production in 19918, at the beginn!ng of the relevant period. Ms. Beyer goes so far as to state that the cessation of production of the Shorts 360 would have a positive impact on the market for the BT-67. That conclusion is illogical. If the market characteristics for the Shorts 360 were being sought in the marketplace, the aircraft would have continued in production. As the characteristics of the BT-67 are similar to the Shorts 360, it is logical to conclude that market demand for the BT-67 aircraft would also be small or non-existent.

Bcycr report, page 24

Bcycr report, page 24 Cobb report, page 37 Mr. Cobb uses Turbo-67 to describe the BT-67 aircrai~ in his report.
Cobb ~:port, page 37 Source: Jancs All the World's Aircraft, 2007 edition

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Mr. Cobb's forecast of 50-90-130 unit sales is optimistic and speculative, failing to consider a number of facts: First, the BT-67 was not competitive for airline, package express, or general cargo service and was well suited only to limited special purpose and military applications. Second, Innovair lacked access to the technology to ,produce the entire BT-67 desc~'ibed in their marketing brochures. Third, United Technologies spent considerable time and expense in marketing the aircraft, including purchasing a demonstrator aircrafL and failed to sell a single kit, single converted aircraft, or convince an investor to participate in the conversion program. Fourth, Basler, with an established program, strong refurbishment and completion capabilities and an active marketing. program with international agents, could not capture more than 16 sales in Innovair's territory during the 1991-1998 period.

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II.

THE MARKET FOR THE BT-67 AIRCRAFT

The potential international market for the BT-67 turboprop conversion of the Douglas DC-3 was quite limited during the 1991-1998 timeframe. The major markets for turboprop aircraft during that period can be categorized into three mission types: commercial airline operations for passenger transportation, commercial cargo operations for freight transportation, and special mission operations which would include the military, fire suppression, geophysical survey and other specialized niche markets. The B~-67 was not well suited to compete in the first two market segments. As a result, it competed effectively only in the very limited niche markets associated with special mission operations. Even on a worldwide basis, the potential market for th.e BT-67 in special mission operations was extremely limited.
A. The Commercial Market for Airline Transportation

While the DC-3 was considered a trunk liner used by major carriers upon its introduction in 1936, its capacity in 1990 would be that of a regional airliner~. The BT-67 passenger capacity is 32 seats, placing it into competition with other 20-4.0 seat class regional transports. The Dc-3 was rarely used as a commercial transport in the early 1990s. Despite a major upgrade to turboprop engines through the Basler BT-67 conversion, the aircraft remained non-competitive for the reasons outlined below: Age: The age 6f the BT-67, despite full refurbishment, is a concern to passengers and therefore to aiHines concerned about operating an aircraft more than 50 years old. The fact that passengers prefer newer aircraft to older aircraft, and jets over turboprops was well established in the airline industry. The converted aircraft, even with modem turboprop engines, still looked like an aircraft from the 1930s or 1940s, its age accentuated by its conventional landing gear (often called a =taildraggeY', which has the aircraft fuselage sitting on its tail, rather than nose.) As a result, since passengers would choose to fly on other airlines with more modem equipment than to fly on a BT-67, the vast majority of major airlines, or affiliated regional carriers, in both developed and third-world countries, would not consider this aircraft, as reVenues would be negatively ¯ impacted.. Market Perceptions: Airlines are concerned about their images, which are carefully crafted in marketing and advertising campaigns. Image management impacts the livery in which the aircraft is painted and colors and textures of interior fabrics used for seat coverings and cabin dividers. Image management also impacts the selection of aircraft. Many developing third-world countries that lacked traffic for large aircraft chose to fly the.Boeing 747 to present a modern image to the rest of the world and to boost national prestige. Because most third-world countries have two Classes of society, the very wealthy
9 Major airlines such as Am~ican, United, or Delta arc considcrc.d trunk carriers, providing service between roajor cities. In 1990., those carriers utilized jet aircraf~ with more fl~an I00 seats to serve those markets. Regional airlines
p .rpvide service to smaller cities, typically with smaller aircraft.

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and the very poor, with the very wealthy comprising the market for air transportation, modern equipment has become important even in developing countries.

The BT-67 looks like an aircraft from the era before World War II, Which passengers would shun, due to a perception that such an old style aircraft would be less safe than a newer model. An airline cannot profitably operate an aircraft that passengers will avoid, unless it provides monopoly service into a market.
Pressurization. The BT-67 was not pressurized, and could not fly "above. the weather" in less turbulentmeteorological conditions. A pressurized aircraft provides better passenger comfort than a non-pressurized aircraft for two reasons. First, pressurization enables an aircraft to fly higher1°, and to fly above rather than through turbulent weather, limiting rough flight that occurs when flying in unstable atmospheric conditions that occur at lower altitudes. Second, air pressure is maintained at a constant level in a pressurized aircraft, reducing pressure changes that cause ears to "pop." Many smaller turboprop aircraft in use during the 1980s were not pressurized. However, by the early 1990s, most regional airlines had entered code-sharing agreements with major carriers for joint marketing and passenger connections1~-, typically re-Painting their aircraft with the name of the major carrier along with an identification of a code-sharing relationship, such as-express or commuter. As major carriers often .had their names on the aircraft they exerted their influence, pushing their affiliates to upgrade their fleets. Pressurization became a de-facto market requirement as a result. ~ Landing Gear. The DC-3 and BT-67 were configured with conventional landing gear. Such aircraft are often referred to as a '~aildragger" because they are configured with landing gear under each which and a wheel that supports the rear of the fuselage. As a result, the aircraft sits at a nose-up angle while parked or. taxiing, with its tail on the ground. A conventional gear aircraft is more difficult to land in crosswind conditions than a tricycle gear aircraft, and more susceptible to "ground loop" accidents in which the rear end of the aircraft can fishtail, causing the aircraft to leave the runway. No commercial airliner since the DC-3 has been equipped with conventional landing gear and beginning with the DC-4 in 1938, all subsequent commercial aircraft have used the more modern tricycle configuration.12 Conventional landing gear aircraft, while suitable for certain special missions and operations into unimproved fields, are viewed as technologically obsolete.

~o Non-pressurized aircraft ar~ typically limited to 10,000 ft. without passengers using oxygen masks. Many
pressurized turboprops typically can climb to 25,000 ft., modem airliners to 41,000 ft. and modem business jets to 51,000 fL Turbulence is typically lower at higher altitudes. ~t A regional carrier would typically be painted in the colors of its major affiliate along with an identification of the cede-sharing relations, such as express or commuter. 12 Tricycle landing gear is the standard today, with a nose wheel and main gear under the wings. Almost all aircraft fi'om small trainers to the largest Boeing 747 and Airbus A380 models utilize tricycle gear.

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Code Sharing.- The market for regional aircraft was changing dramatically du~ng the 1980s and 1990, and those changes were unfavorable for the BT67. In the 1980s, code sharing between regional airlines and major airlines was a key element to success in the United States and Europe, and that concept expanded worldwide in the early 1990s. Regional carriers coordinated marketing and scheduling with their major airline partners, utilized the same ticketi,ng code and distribution systems, and even utilized the colors of their major affiliates in painting their aircraft, typically labeled an =express" or "connection" operation. A major airline may have its image impacted negatively by the type of aircraft operated by a regional partner. As a result, most regional carriers were forced by major carriers to upgrade their fleets. A major carrier would not risk having its feeder carrier operating a 50 year-old aircraft wearing its colors, as the impact on its market image would be quite negative.

Changing Marketplace: In the 1980s pressurized 30 seat turboprops from Embraer, Saab ; Bombardier and A TR began to replace older aircraft in regional operations. The 20-40 seat market was characterized by more modern turboprop designs that provided more comfort, speed and capability than previous models. These models were used by regional airlines to expand-their operations in the early 1990s. Non-pressurized 30 seat aircraft such asthe Shorts 330 and 360 had begun to be phased out during the early-to mid-1990s in favor of newer models. In the early 1990s, regional jets were introduced. A new generation of small regional jets was announced inthe late 1980s and orders were placed for deliveries beginning in late 1992. These aircraft revolutionized the regional market and were rapidly introduced into the fleet, providing jet speeds and comfort for passengers on traditionally regional routes. Because of their speed, they were able to expand the reach of regional airline service from a hub city significantly, and open new markets unavailable with slower turboprops. The introduction of regional jets expanded the regional aircraft market dramatically, outselling turboprops significantly by the end of the 1990s. Turbopropsales faltered in the mid to late 1990s amidst the changeover to regional jets for manY routes. The worldwide inventory of regional aircraft was changing dramatically in the 1990s. New turboprop models were available that were pressurized and available in the 30-40 seat range that would compete directly with the BT-67. These models included the Embraer EMB-120 Brasilia, Saab 340, ATR-42 and Dash 8-300, each of which had market success. Exhibit II1-1 shows the inventory of competing turboprop and regional jet models from 1990-1998. The data show a shift in the market from older turboprops into new models, and a move away from non-pressurized models to pressurized aircraft.

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EXHIBIT II1-11~ INVENTORY OF COMPETING AIRCRAFT IN PASSENGER AND CARGO SERVICE WORLDWIDE BY YEAR14
Aircraft Type Turboprop A'iroraft in Production ATR-42 ATR-72 BAe ATP BAe Jetstream41 CN-235 Dash-8-100 Dash-8-300 Domier 328 EMB-120 Fokker 50 SA~B 340 SAAB 2000 Turboprop Aircraft Out of Producfion HS-748 Convair 580/600 Dash-7 F-271FH-227 ¯ L188 Electra NAMC YS-11 Shorts 330 Shorts 360 Regional Jets in Production Embraer 145 Canadair RJ NIP NIP NIP NIP 19 NIP 43 NIP 67 NIP 115 18 172 83 253 MD 110 91 414 71 105 '75 179 MD MD MD MD MD 101 49 140 MD 87 90 458 . 84 95 53 135 121 93 90 338 56 .87 57 131 MD 95 79 331 62 76 54 125 114 81 68 307 62 72 49 107 111 80 76 305 57 69 48 104 122 94 72 321 58 73 42 118 118 106 66 309 56 66 35 110 137 4 25 NIP 4 197 23 NIP 128 87 184 NIP MD MD MD NIP MD MD, MD NIP MD MD 254 NIP 235 42 50 NIP 23 167 63 NIP 244 133 330 NIP 245 100 51 NIP 23 248 81 1 263 149 335 NIP 256 125 54 34 . 24 256 92 10 273 162 348 1 267 147 52 56 26 268 103 26 275 172 357 15 275 168 52 85 26 270 109 46 287 174 374 33 306 181 52 88 25 274,. 119 71 305 183 385 43 301 211 48 93 24 279 126 89 315 185 423 51 1990 1991 1992 1993 1994 1995 1996 1997 1998

NIP NIP 1 Note: NIP = not in production, MD = missing data

m3 Source: Flight International magazine, annual World Airliner Census issues, 1990, 1992-1998
14Data from 1991 were not readily available. Inclusion and exclusion of some models in the publication changed

during the period, resulting in missing data for some models in some years.

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My conclusions are that (1) there was virtually no market for the BT-67 as a passenger airliner during the relevant period from 1990-1998, given its technical and economic characteristics, and (2) Innovair would have received no kit'or converted aircraft sales from this market segment. An airline not currently operating a DC-3 in passenger service would be extremely unlikely to choose the BT-67 under any circumstances, eliminating virtually all major airlines. ¯ An airline currently operating a DC-3 in passenger service is unlikely to be able to afford the BT-67 conversion, which typically costs 20-40 times the fair market value for the raw DC-3 airframe.

¯ An airline currently operating a DC-3 in passenger service, other than for "museum" flights, would evaluate more modem used equipment prior to converting a DC-3 to a BT-67, given the strong passenger preference for more modem equipment, and' likely choose an alternate aircraft rather than proceed with a BT-67 conversion. o innovair's expert, Barbara BeyerTM as well as fact witness Robert Clarkis each indicated that there would be little market interest in the BT-67 from passenger airlines in their depositions. B. The Commercial Market for Air Cargo Transportation

Cargo transportation operates with a different set of economic dynamics than passenger carriers. Cargo airlines do not need to deal with a "passenger preference" factor or bias against older aircraft. Fleet planning decisions for cargo operators typically take into account capital costs, maintenance costs, operating costs, fuel bum, dimensional capacity, useful load, speed and other factors. Two metrics are typically used to compare aircraft economically - cost per aircraft mile and cost per ton-mile. While the BT-67, with capacity for five LD3 containers, is larger than theoriginal DC-3, it has not become an aircraft of choice for commercial freight operators. The air Cargo market is bifurcated into two segments, the package" express carriers and general cargo carriers. Each has differentmission requirements that imPact the suitability of the BT-67 to their mission requirements. Package Express Carriers The package express segment has a significant need for feeder cargo aircraft in both domestic and international operations. Package express carriers operate large hub and spoke systems, and often have regional mini-hubs that use a number of smaller aircraft to serve smaller cities and feed a larger jet aircraft that flies to and from its major hub. The BT-67 is not a viable competitor in this sector. The BT-67 competes against smaller and more modern aircraft chosen by or operated by affiliates of Federal Express (FedEx), United Parcel Service (UPS), DHL, Airbome Express
Depositiot~ of Barbara Bey~r taken 26 June 2007, page 148, lines 3-9 Deposition of Robert Clark taken 22 June 2007, page 54, lines 20-25

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and other package delivery operators. There are a number of reasons the BT-67 is not competitive in this market: ¯ The BT-67 is too large and too expensive to operate for smaller destinations. Because package express carders are time sensitive, they utilize air service with smaller aircraft to bring packages to smaller airports as close as possible to the destination. This allows them to reduce the ground time required to move the package from an airport to their final destination. As a result, package carriers utilize small aircraft that require only a single pilot for these feeder operations, which do not typically have the cargo volume to fill a BT-67. Two smaller and less expensive single pilot aircraft can operate to two destinations in the same time it would take a BT-67 to serve one destination.
FedEx evaluated a number of potential aircraft for its feeder routes, and

chose the Cessna Caravan as the most cost-effective model. With a single turboprop engine and single pilot capabilities, adequate capacity for smaller markets, a modern image, and a price for a new aircraft less than half the price of a converted BT-67, the economics of the Caravan are ideal for feeder markets and far superior to the BT-67 within FedEx network. Federal Express contracted for more than 250 Cessna Caravans for use in their operations, which they mandated for use by, and assisted in financing for, their regional operators. FedEx was the launch customer for the Ayres Loadmastet~7, a turboprop designed specifically to meet its regional requirements. In 1996, FedEx placed a launch order for 50 aircraft plus 200 options for this aircraft, which was larger than the Caravan and smallerthan the BT-67. The Loadmaster would accommodate 3 LD-3 containersis (as qpposed to 5 for the BT-67), was designed for single pilot operation, and with tricycle landing gear could utilize standard cargo Ioadingequipment¯ The aircraft is unique in that it operates two turboprop engines through a single propeller, with the ability ¯ 19 . for one engine to continue in operation if the other fa~ls. After Ayres acquired the Czech Aircraft manufacturerLET, it ran into financial difficulties and abandoned the program in 2001. While that aircraft was never produced, it was clear that FedEx was highly focused on turboprop aircraft that most closely met its mission requirements for its feeder routes, particularly with respect to size, speed, and ease of loading. UPS, DHL, and Airborne Express have similar requirements to FedEx, but had less operational control over their regional operators. Regional operators for these carriers had more freedom to choose their own aircraft than FedEx feeders, for whom the aircraft choice was mandated. Regional operators for UPS, DHL and Airborne utilized a variety of piston and turboprop aircraft on feeder routes, typically with used aircraft that were less
Flight International 27 November 1996 issue, article ~tifl~ FedEx launches Ayres Loadmastcr
Source: www.luftfahrtmuseum.com - the Virtual Aviation Museum Flug Revue, Janual'y 1997, article: ~g~aort from NBAA '96

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expensive to acquire than a BT-67. Contracts from these carriers were typically paid on a per mile basis, resulting in those carriers being quite cost conscious. The BT-67, with higher capacity and higher costs than smaller piston and turboprop aircraft, did not fit well with their mission profile, and, as a result, none of these carriers chose the BT-67 for their operations.

Package carriers are also concerned about image. FedEx feeder aimraft are typically painted with the FedEx logo and paint scheme. It would have been quite unlikely for FedEx to put its logo on a 50 year-old aircraft with an antique image, irrespective of the modern engines employed on the BT-67. An antique looking aircraft does not provide an image that connotes speed and efficiency, nor market leadership. My conclusion is that there was virtually no market for the BT-67 as a feeder aircraft for package freight operations. The aircraft simply lacked the characteristics desired by FedEx and other operators, including operating economics and size, and that other aircraft were better suited to their market needs.
General Cargo Carriers

The air cargo industry operates a mix of new and used freighter aircraft. New wide-body jet freigh~e~: aircraft are built by Boeing and Airbus, and represent the top level of cargo aircraft. The majority of ca¢geaircraft serving the industry during the period from 1991-1998 were former airliners converte~l to cargo service. Typically, as a passenger aircraft type begins to age and become economically obsolete for airline service, cargo conversion programs add cargo doors, floors and other equipment tO extend the useful life of these aircraft. These former passenger aircraft converted for freight operations join the purpose built freighters and form the array of aircraft competing in for freight Operations. Older aircraft are commonplace in the air cargo industry. The air cargo industry is like the younger brother to the passenger airline segment, receiving "hand me down" aircraft as new aircraft are introduced into airline service. Each new generation of passenger aircraft has a ripple effect on the used aircraft market, including the market for air cargo aircraft. During the late 1950s and early 1980s, piston powered Douglas DC-6 and DC-7 and Lockheed Constellation aircraft were replaced in passenger service by turboprops and subsequently converted to freighters. Similarly, turboprop Lockheed Electra and Vickers Viscount aircraft ~ere replaced by jets in the mid 1960s, and were subsequently converted to freighter, aircraft. Later, early jets, such as Boeing 707 and Douglas DC-8 aircraft were replaced by newer models and were subsequently converted to freighters. With each new generation of passenger aircraft, retidng aircraft from the prior g.eneration were converted to freighters to extend their useful life. As aircraft have become larger and faster, cost per ton-mile has decreased. Aircraft have become larger and faster with each generation. As a result, older and slower models could carry less freight at lower speeds. The BT-67, with limited capacity, is more expensive to operate than larger competing jet aircraft

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that can carry additional cargo at higher speeds. Each new generation of aircraft tends to be larger and more expensive to operate than earlier generations, but cost per ton-mile is lower, since higher speeds and larger capacities grow proportionally faster than incremental costs. While the BT-67 conversion adds both speed and capacity to the DC-3, it remains lower in productivity than other alternative aircraft. As a result, the potential cargomarket for the BT-67 is restricted to regional operations for which demand better matches the capacity of the aircraft and in which higher cargo yields can accommodate its cost structure.

The BT-67 is difficult to load. Because the BT-67 is a taildragger and sits at an angle, cargo must be loaded through the side door at the rear of the aircraft and pushed forward up an incline. While the optional cargo winch2° can aid in repositioning cargo, the incline prevents the use of standard cargo loaders to raise cargo, which would be the case with a tricycle gear aircraft. As a result, cargo must be tilted to be moved on-board the aircraft, creating difficulties for cargo handlers in loading and unloading the aircra~1. A typical Douglas DC-3 in 1991 had a fairmarket value of between $90,000$150,000~2, depending on age and condition. This Value range would be for an aircraft mid-way between airframe and engine overhauls, and the value of an airframe would vary.from this midpoint based on maintenance status and time remaining until the next required overhaul. By 1991, obtaining spare parts for the DC-3 was becoming more difficult, particularly for engine parts, and some airframes had been retired for use as spare parts, rather than continue in flying condition. Nonetheless, a large number of retired DC-3 aircraft were available for spare parts, as more than 10,000 military versions were produced during World War II and several hundred aircraft remained in storage worldwide. Existing DC-3 cargo operators comprise virtually all the potential customer base for the BT-67 conversion. Operato.rs that are already using more modern aircraft are extremely unlikely to consider the BT-67, due to its taildragger design and airframe age. These operators would be unlikely to seriously consider a 50 year-old aircraft, even if converted to a turboprop with enhanced systems, avionics and other improvements, and would be unlikely to add the BT-67 to their fleet. As a result, existing DC-3 operators are the most likely to consider a .conversion. DC-3 operators tended to be at the bottom of the air cargo market in terms of capitalization and financial wherewithal. Those operators who could afford newer and more modern aircraft had a wide variety of USed aircraft to choose from, and typically selected a type newer than the DC-3. No large air cargo service continued to operate the DC-3 in 1991. As a result, only those operators who could not afford to acquire new aircraft, or had unique requirements to operate-into unimproved fields, continued to operate the DC-3. Appendix A contains a list of existing DC-3 operators in 1990 from Flight International
20 B~lcr offcrc, d an optional cargo winch system, covered by STC number SA1756GL ~ The optional cargo winch system was not covered by the TLA
:2 Sou.rce: The Airliner Price Guide, various editions

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Magazine. The vast majority of those operators would not be recognizable brand names and generally represent the bottom end of the industry in terms of capitalization and financial strength. The price of the BT-67 conversio'n, which started at $2.9 million, was approximately 20 times higher than the market value of a DC-3. As a result, this conversion was cost-prohibitive for many operators who were capital constrained, and flew the DC-3 because they could not afford more modern aimraft. While the conversion would have dramatically increased the performance of the DC-3, it was about three times more expensive than the cost of a significantly larger Lockheed Electra turboprop freighter model at the time, which were selling for approximately $1.0-$1.3 million23. It was about three times the price of the slightly larger Convair 580 turboprop freighter, which was selling for approximately $.1.0 millionz4. Although equipped with older turboprop engines, these models provided operators a viable option to the BT-67 at a lower price, and were readily available in the used market in 1-991. As a .result, several DC-3 operators evaluated the BT-67 conversion, but chose instead to purchase other aircraft. For example, Air Atlantique in the UK, which evaluated the BT-67 conversion and was considered a strong prospect by Innovair, chose instead to purchase additional used Lockheed Electra aircraft rather than to convert their existing DC-3 aircraft25. My conclusion is that there was an extremely limited potential for the BT-67 in the commercial general cargo market. The conversion was too expensive for many DC-3 operators, who lacked the capital for more sophisticated aircraft. The B'F-67, with its conventional landing gear andside cargo door, was more difficult to.load than aircraft with tricyc~le landing gear. The ability of the BT-67 to fly into unimproved fields was matched by other aircraft witli unimproved field capability, and the combination of its advantages and drawbacks, on balance, made it uneconomic for commercial freighter service. "C. Special Mission and Military Applications The Special Mission and Military markets for the BT-67 were available and well suited to the BT-67. These markets, however, are quite limited, even on a worldwide basis, in Innovair's marketing materials, several civilian special " missions for the BT-67 were identified, including fire suppression, oil spill surveillance, and mapping/geophysical research. In addition, several military missions were identified, including general cargo/passenger, surveillance and intelligence gathering, drug interdiction, and gunship operations~ Each of these. markets are special purpose in nature, require the installation of s~.ecialized equipment, and are typically quite limitedin terms of the number of aircraft required. While some military markets are quite large, the niche markets addressed by the BT-67 remain a limited subset of a larger markeL
The fire suppression market is quite limited. Competing aircraft used for
source: Akliner Price 6uide Winter 1989-1990 Edition
source: Airliner Price Guide, Winter 1989-1990 Edition source: Flight International Annual World Airliner Survey, various years

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firefighting are larger and deliver additional payload, making them more costeffective than the DC-3/BT-67 for fire suppression operations. Those aircraft include the Lockheed C-130 four engine turboprop and larger DC-6 piston powered airliners. In addition, newer specialized aircraft exist, including the Canadair CL-415 water-bomber, a purpose built amphibious turboprop designed to land on water, fill its tanks, and quickly return to firefighting duty. That aircraft is viewed as one of the most effective aircraft for fire suppression, since it can quickly scoop water and return to service rather than wait to be refilled. This aircraft has been quite successful in international markets. With strong competitors that deliver better payloads, the potential market for the BT-67 in fire suppression activities is quite limited.

Aircraft to support fire jumpers and to lead fire-bombers are equally well suited, and less costly, than the BT-67. Fire jumpers utilize parachutes to land in positions that would not be accessible via land to assist in fire fighting operations. Other aircraft such as the deHavilland Twin Otter and Domier 228 are smaller and less expensive yet still enable a typical complement of 12-19 fire jumpers to undertake a mission. Each of those high-wing aircraft provides better downward visibility than the low wing BT-67. The lead aircraft mission is o_n.e that utilizes an aircraft to fly a route to a fire and act as a "follow-me" aircraft for firebombers following behind. Smaller piston aircraft that are less expensive to acquire and operate than the BT-67 are typically used for those missions. As a result there is little potential for the BT-67 in those roles.
The potential for the BT-67 in oil spill surveillance missions is quite limited. Oil spill surveillance missions, .as well as pipeline patrol and similar aerial surveillance operations, are typically Conducted with visual observers in small aircraft. Many pipeline patrol operations utilize the Cessna Caravan, which is one-third the price of a BT-67 conversion, and some even utilize smaller, less expensive Single piston engine models. The high wing design of the Cessna and some other competing aircraft provides better visibility than the low-wing BT-67. As a result, the potential market for the BT-67 in oil spill surveillance missions is quite limited, as other aircraft are better suited to the mission, less expensive to acquire, and have lower operating costs. Mapping and geophysical research operations are well suited to the BT-67 if they operate in remote regions or require operation into unimproved runways. The BT-67 can operate on skis, which makes the aircraft quite suitable for Arctic and Antarctic operations in which takeoffs and landings are made on ice, rather than runways. The BT-67is th'e mid-sized competitor among the deHavilland Twin Otter and Lockheed C-130, which are Smaller and larger, respectively, for these types of operations. It can serve as a Cost-effective aircraft for.geophysical and scientific research institutes that ope-rat~ in a polar region or in sub-Saharan Africa. Worldwide demand for such aircraft from research institutions is quite limited. The military cargo and troop transport mission is a potential market BT-67 for those military organizations still operating the DC-3. A significant nqmber of DC-3 aircraft remained in service in 1991, with militaries in third-world

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countries providing a potential market opportunity for the BT-67. Converting that potential to reality, however, requires an economic decision, given the low market value of a C-47/DC-3 versus the cost of a BT-67 conversion. Many of the sales that were achieved during the relevant period had US government support, either directly or indirectly. Factors influencing this include:

o The BT-67 conversion remained expensive for many third-world governments. Basler Turbo Conversions converted several DC-3sinto BT-67s for El Salvador, Mall, and other countries that, on their own, could not afford a conversion. Those aircraft were financed by Foreign Military Sales grants from the United States government. Under the Technology Licensing Agreement, such international sales funded by the United States govemment would be considered to be in Basler's, rather than Innovair's territory. ¯ The decision process for a third-world military operator often hinges on the availability of external financing. A third-world government considering whether to convert a DC-3 into a BT-67 or to replace it with a more modem aircraft will place strong consideration in the availability of attractive financing for each alternative. While lnnovair included references to external financing in its business plan, there is no evidence that it had ever established a viable financing or leasing program to provide customers an alternative to a cash purchase. Many financial institutions would be concerned about financing a 50 year-old airframe, despite the completerefurbishment and upgrade. Because major competing aircraft companies have such programs in place, they appear more attractive, since they can be financed, even if they are more expensive than the BT-67. ° Mission requirements and comparative economics typically drive the decision process. Mission requirements include the volume of cargo to be carried, number of troops to be transported, speed, and range. The BT-67 has several smaller and larger competitors that are more modern in design. The smaller Shorts Sherpa (C-23), Casa-Nurtanio CN-235, and larger Lockheed C-130 Hercules each have relative advantages and disadvantages. The difficulty in loading cargo into the BT-67, versus competing aircraft that have ramp access, is a significant drawback to military cargo operations. Since its introduction in 1956, the C-130 has expanded its market to military operators in 77 countries26, reflecting its high suitability for military transport and cargo missions. Innovair. and Basler were competing against larger organizations with highly sophisticated marketing and aircraft sales operations that included availability of customer financing. As a result, the BT-67 was effectively relegated to be a niche competitor for general transport andcargo operations. ° The military surveillance/intelligence mission is quite competitive
Aviation Week and Space Technology 21 May 2007, page 42

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and not well suited to the BT-67. A large number of aircraft have been modified to provide radar platforms and Forward Looking Infrared Radar (FLIR) installations, camera equipment, and monitoring technology. Many turboprop and small jet manufacturers, including Embraer, BAe, Bombardier, Dassault, CASA, ATR, Lockheed, Mitsubishi, Piaggio and Cessna2z offer special mission versions of their civilian aircraft that are equipped with intelligence gathering equipment, including turrets for FLIR devices, radar pod installations, or anti-submarine warfare equipment. The BT-67 competes in this market against regional jets, modem turboprops, and business jet variants that are typically much faster, enabling them to provide surveillance for a larger area than the BT-67.

The military drug interdiction and gunship market is a specialty niche for which the BT-67 is anappropriate candidate. The large cargo area of the BT67 design can accommodate 50 mm weaponry and in low altitude, low speed operations can circle and destroy a ground target very effectively. During the Viet Nam war, C-47 aircraft converted to gunships were nicknamed =Puff the Magic Dragon" and performed quite effectively in that role. The larger C-130 can also be an effective gunship, and provides the capability for 105 mm weaponry with significantly greater destructive power. Most westem countries in the 1990s operated the C-130 or other more modem aircraft, while third-world countries that cannot afford theC-130 chose the DC-3 as a gunship platform. The market for; BT-67 gunships is quite small, given the wide range of-US military financing for countries worldwide and the relatively few countries for which a lack of capital would make the BT-67 a viable altemative.- Nonetheless, a potential exists for sales in that market. The BT-67 has a low infrared signature, making it more difficult to detect than other competing turboprop aircraft. The BT-67 is not a stealth aircraft, and can be detected by radar. The Slow speed of the air(~raft makes this advantage moot, as the BT-67 (or any turboprop) would be unlikely to be able toeVade or outrun a jet combat aircraft, or a shoulder fired anti-aircraft missile. Once detected, the BT-67 is extremely vulnerable to enemy fire.
Overall Market Conclusion

T~he BT-67 is a niche market aircraft that is appropriate for the special missions market,, but Can not effectively compete with contemporary turboprops or jets for the air transport or general cargo sectors. I estimate that the market demand for the BT-67 in Innovair's territory between 1991-1998 was fully met by Basler Turbo Conversions; which was familiar with special mission and military applications for the BT-67.

:~ Aviation Week and Space Technology, Annual Aerospace Sourc~ Book Issues, various years, and Jancs All the World's Aircraf~ various years

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III. SUPPLEMENTAL TYPE CERTIFICATES AND TECHNICAL REQUIREMENTS FOR THE BT-67 CONVERSION PROCESS

Specific technology is required to modify an aircraft, including technology to install the basic conversion and optional equipment. In this section, the technology requirements for each element of the conversion process - overhaul of the airframe, installation of the conversion kit and options, and completing the aircraft interior - are described. Modification of a certified aircraft requires approval by the FAA or other appropriate international regulatory authority. Such approvals are normally accomplished in one of two ways, through a Supplemental Type Certificate, when a modification is to be installed on two or more aircraft, or through a field approval, which is typically utilized when a modification is not to be extended to multiple aircraft. The FAA defines a Supplemental Type Certificate as follows: =A Supplemental Type Certificate (STC) is a document issued by the Federal Aviation Administration approving a product (aircraft, engine, or propeller) modification. The STC defines the product design change, states how the modification affects the existing type design, and lists serial numbers for which the STC is effective. It also identifies the certification basis used, listing specific regulatory compliance for the design change. Information contained in the certification basis is helpful for those applicants proposing subsequent product modifications and evaluating certification basis compatibility with other STC modifications." A Supplemental Type Certificate (STC), number SA4840NM was issued to Basler Turbo Conversions. That STC enabled a DC-3 to be converted into a BT-67 aircraft. SA4940NM covers the installation of Pratt & Whitney of Canada PT-6A-67R engines, Hartzell HC-B5MA-3/M11276 propellers, a modified fuel system, a revised electrical system, and a forward fuselage extension. This STC enabled the conversion of a DC-3 into the BT-67 without optional equipment, and the remainder of an aircraft converted using only this STC would conform to DC¯ 3 specifications for unaffected components. .~ Every customer for a Basler conversion elected to include optional equipment. Innovair advertised these options in its brochures and marketing materials. The long-range fuel tanks, in particular, were quite popular since the ¯ fuel burn with the turboprop engines was 35.2% higher at standard cruise (119 GPH vs. 88 GPH) and aircraft range would be significantly reduced without larger tanks.

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Basler Turbo Conversions also obtained STCs for a number of "options" that were sold with the aircraft2~. These options included:
STC Number SA2-438 ' SA996GL SA1253GL SA1756GL ST01796CH ST173CH ST302CH SA1548GL Description Installation of mid-range, long-range outer wing lanks, with or.without dump chutes Iristall aluminum skin on control surfaces Install auxiliary cargo d~or Install cargo winch system Install geared aileron Installation of cockpit blower system Installation of flight crew restraints Installation of Sundstrand ground proximity t~aming system Installation of Freon air conditioning system Installation of supplemental oxygen system

SA1734GL ST8CH

It is my understanding that the Technology Licensing Agreement between Basler Turbo Conversions and Innovair provided Innovair with the marketing rights outside the United States.only for STC SA4840NM, and did not cover the STCs for aircraft options. As a result, Innovair did not have the rights to provide the optional equipment covered by the aforementioned STCs, and would either need to make separate arrangements to obtain those rights from Basler or alternatively develop STCs on" their own. lnnovair and Basler were M dispute, casting doubt as to whether Innovair would have been able to obtain the n'ghts to use these. Innovair and Basler were in dispute and had sued and countersued each other in 1991. If Innovair had been unable to strike a deal with Basler for the right to utilizethese STCs, it would have needed to independently develop or acquir~e equivalent capabilities to be able deliver aircraft With the options that customers would demand. The fuel_ tan~ ~TC, in particular,, would be difficult to reproduce. Basler Turbo Conversions purchased the design for STC 2-438 from Pan .~nerican World Airlines, which had introduced long-range fuel tanks for their DC-3 aircraft in 1953. That purchase Provided Basler the exclusive rights to install that STC. .This STC is complex, as it entails extensive modification to the basic structure of the wing to accommodate the additional fuel tanks and the additional weight. Reproduction of an STC requires the same steps that were taken to Obtain the STC, including structural analysis, engineering of the design and production of blueprints and process documentation, and a flight test and analysis of the
2s Sour~: FAA Website, www.faa.g6v

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results of the test flight.

Reproducing the fuel tank STC would be expensive and a material additional expense for Innovair. Without the structural analysis or engineering documentation for the existing STC, producing a similar STC would require engineering effort to duplicate those analyses. Such efforts would be likely require six to twelve months to complete, depending on the level of effort placed on the project. Because a conforming BT-67 aircraft would be required for flight test, which would require an additional $2.8 million to acquire, the total investment would likely be in excess of $3 million. While Innovair may have been able to utilize the demonstrator aircraft for that purpose, it would have needed to pull that aircraft from marketing efforts, leaving the company without a demonstrator aircraft for a considerable period of time. In addition, the longrange tanks installed on that aircraft would need to be replaced with the new design and placed through flight test. Innovair would not have been able to simply utilize the existing STC owned by Basler nor any component of the longrange tanks that had been installed on the demonstrator aircraft.
Similar efforts to duplicate STCs would be required for other optional equipment as well. Basler had a number of STCs for optional equipment that would need to 'be duplicated for Innovair to have the capability to deliver an aircraft with all of the options advertised in its sales materials. Virtually all of the customers for the BT-67 selected some of the optional equipment subject to STCs. While some options could be installed on a field approval Form 337 basis, such activity would require development of blueprints and approval.of structural analyses, engineering drawings, and installation ¯ processes. This would increase the cost of a BT-67 ~conversion at an Innovair designated conversion facility versus simply installing an approved STC owned. by Basler. As a result, the conversion facility would need to have appropriate FAA Designated Engineering RepreSentatives (DER) and Designated Approval Representatives (DAR) on staff to sign off on the modifications for each aircraft. Because Innovair was in dispute with Basler, it is unlikely that lnnovair could have entered the market to supply kits for the BT-67, with all options, until mid-1992 or 1993. Obtaining- STCs for all of the options would likely have required Innovair 1-2 years to complete, with an investment in excess of $3,500,000 including the test aircraft~

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