Oshkosh 2011: New Money Helps Quest Aircraft Plot New Course to Same Destination for Kodiak Turboprop

 - August 4, 2011, 9:26 AM
Quest Aircraft hopes an executive interior for the Kodiak will entice more commercial operators to buy its rugged turboprop single. (Photo: Matt Thurber)

Quest Aircraft Co. of Sandpoint, Idaho, introduced an executive interior for its rugged Kodiak turboprop single at EAA AirVenture at Oshkosh, Wis., last week. Meanwhile, following a corporate recapitalization and restructuring earlier this year, the company’s new chairman is steering the small OEM on a new course aimed at making Quest profitable, while also achieving its original goals.

The prototype executive interior, designed and installed by Wipaire of St. Paul, Minn., included air conditioning and a Garmin GWX-68 weather radar. The new interior reduces seating capacity by only two seats, from the standard cabin’s 10 to eight, but provides a more comfortable ride, while the airplane still provides the capability for remote, off-airport operations for which it was designed. Quest is also developing a factory-installed executive interior.

“We want executives and owners who step off their business jets and then need to fly to remote worksites, hunting lodges or other locations to feel at home stepping into the Kodiak,” said David Vander Griend, new chairman of the board, acting CEO and majority owner of Quest. He is also a long-time private pilot.
The standard Kodiak interior is more utilitarian, like a pickup truck, Vander Griend said, while the executive interior is more reminiscent of a high-end SUV. Another Kodiak on display at AirVenture featured the standard interior, with cargo flooring and examples of the company’s Tundra and the Timberline seats.

New Commercial Focus
While Quest expects the executive interior to broaden the marketability of the Kodiak, the company’s primary focus–to provide an airplane specifically designed for humanitarian operations in remote areas of the world–remains unchanged. The major difference between the “new” Quest and the original Quest is a revised corporate structure that places a greater emphasis on earnings from sales to commercial operators.

“We are gravitating to a commercial-customer-focused company rather than a humanitarian-customer-focused company,” Vander Griend explained. “Please don’t think of that as a negative. We are a commercial airplane company that is going to generate a profit and will use this profit to deliver humanitarian airplanes for a significant global need.”

This gives Quest a different focus for business decisions, he said. “We need to be successful and to achieve our goal as a profitable company. Then we can do what we want to do with our profits.”

The restructuring was made possible by additional investment money. Colwich, Kan.-based ICM, a company that engineers, builds and supports ethanol plants around the world, is now Quest’s largest investor. Vander Griend, ICM’s president and CEO, founded the successful, family-owned company in 1995.

The corporate recapitalization also resulted in creation of a new board, with Vander Griend as its chairman. He also serves as acting CEO of Quest (replacing Paul Schaller, the previous CEO) until the board appoints a new CEO. The rest of the management team is the same.

A manifestation of Quest’s new focus on marketing to commercial customers is the appointment of dealers and authorized service centers. Previously, the company used five independent sales reps in the U.S. “Right now we have five domestic dealers, who also serve as authorized service centers,” said Steve Zinda, director of sales and marketing. “We also have four international dealers and expect to sign four more. The goal is to establish 20 service centers [the five dealers, plus 15] throughout the U.S.”

After reducing the production rate last year, Vander Griend said, “We’re now moving the production rate from one to two airplanes per month and plan to move to three early next year. He added, “Depending on sales, we plan to move it to four later in 2012. We’re not going to build whitetail airplanes.”

Good Plan, Bad Economy
Quest’s minimal focus on commercial sales and marketing was a function of its original business plan and structure, but it also exacerbated its financial problems when the recession hit.

The plan involved nonprofit mission operators investing in Quest for an amount equal to half the expected cost of the airplanes they wanted to acquire, with the other half of that cost being matched by donations to a nonprofit foundation that was associated with the company. The mission operators’ investments, along with that of other investors, would cover the cost of developing and certifying the Kodiak and putting it in production, Vander Griend explained. The mission operators’ investments would be “paid” back to them in the form of delivered airplanes.

Meanwhile, Quest would also be building and selling Kodiaks to for-profit, commercial operators, the revenue from which would keep the company afloat. The original plan called for every tenth Kodiak airplane delivered to go to one of its mission operator/investors.

This plan worked while times were good. The

 

Kodiak received FAA certification in 2007 and the first delivery took place in January 2008. Then the worldwide economy fell off a cliff.

The recession affected Quest in the same way it did other small airplane manufacturers: customers deferred or cancelled orders and new orders dried up. Quest, however, had the additional problem of its orders from mission operator/investors, whose airplanes were, in effect, already paid for. Delivering an airplane to them resulted in zero revenue.

Of the 54 Kodiaks now in the field, 10 went to mission operator/investors, or almost one in every five deliveries. (Two other mission operator/investors took delivery of their airplanes after paying for the other 50 percent of their aircraft.) The company now holds a backlog of 40 aircraft for mission operator/investors.

With little revenue from commercial sales coming in, Quest had to slow down production and lay off most of its original 345 employees in four rounds of layoffs in 2010. In December, all but a handful of the remaining 120 employees were furloughed. So recapitalization was clearly needed for Quest to survive.

“The company now has three kinds of equity: call it A, B and C stock,” Vander Griend explained. “The A stock is held by the new investors who came onboard since the first of the year. B stock is that of the mission aviation companies that invested in Quest to help develop the airplane and will be paid back to them in airplanes. The C stock is owned by the previous investors.”

In accordance with the restructuring, B stock will be paid back first [meaning the mission operator/investors will get their airplanes], the C stock next and the A stock last. “A major objective of the restructuring was to preserve the mission investors,” Vander Griend said. The restructuring and new investment also resulted in moving the mission/investor aircraft from debt to equity on the company’s balance sheet, he said, strengthening the company’s credit with suppliers.

Vander Griend and his wife have been involved with Quest for about six years, both personally and via ICM. ICM is the majority A stockholder and a C stockholder, which combined gives ICM and the Vander Griends more than 51 percent ownership of Quest. The Vander Griends also contributed to the nonprofit foundation to provide matching funds for mission aircraft.

Although ICM operates its own flight department, which includes a Citation CJ2, four Cessna Conquests and two Cessna 310s (one of which is Vander Griend’s personal airplane), the company has not ordered any Kodiaks, Vander Griend said.