Aircraft builders are facing mixed outlook

 - February 26, 2009, 11:36 AM

Is the light at the end of the tunnel of our economic crisis a reality, or merely the triumph of wishful thinking over reality?

Even as Congress haggles over the details of an $800 billion economic stimulus plan there are some signs of movement in a positive direction within the business aviation industry.

At the same time that Bombardier announced 350 full-time employee layoffs starting in February and revealed plans to reduce the rate of production of the Learjet and Challenger series, the Canadian manufacturer said that “in consideration of current market demands” it has no plans for similar cutbacks for Global 5000 and Global Express XRS production.

In fact, said a company source, “It’s important to note that we’re actually in a recruitment phase for the C Series airliner and the new Learjet 85.” Both programs have been officially launched and are in varying phases of development. Bombardier is also “looking for 230 interiors specialists for its Montreal cabin completion center.”

Also to be filled are 600 other permanent new positions–100 in Belfast and 500 in Montreal–all associated with the Learjet 85, C Series and CRJ1000 new-aircraft programs. And while the company plans layoffs of 1,360 over a five-month period starting in February, 1,010 are temporary contract employees.

At Gulfstream, the production outlook is bleak for the midsize cabin line–G150, G200 and G250–with a reduction from 69 aircraft last year to 30 this year. However, in the large-cabin category–G350, G450 and G550–production is expected to increase
from 87 last year to 94 this year. While the production cuts represent a considerable reduction in terms of total aircraft, said a company source, the higher profit margins for the large-cabin aircraft means “it will not unduly affect our financial performance.
“We have no plans for reductions [in force] in our Savannah facility or in any of our other large-cabin facilities,” he added.

It’s Getting Worse, but Not As Quickly

The UBS Business Jet Survey for January had some relatively good news: while the business jet market continues to decline, the rate of decline has slowed somewhat from the previous period. “The month’s incremental move higher indicates the pace of deterioration in market conditions slowed relative to November-December,” according to the report. The change, it noted, “reflects a market with still-limited actual transactions, but significant price declines appear to have stimulated modest incremental interest.”

Sparta, N.J.-based Brian Foley Associates president Brian Foley foresees a recovery of the business aviation industry in the middle of next year, but not before unavoidable pain. Foley suggested that the aircraft order backlog, shaken in recent months by cancellations and deferral of delivery dates, actually might not have shrunk as much as some had feared. “It may be that the backlog has not so much gotten smaller as it has gotten stretched. The center of gravity that might have been in 2010 may now be as far out as 2012.”

Shifts in large, multiple-aircraft orders by fractional ownership providers and large charter operators are at least as threatening to the backlogs as are cancellations and deferrals of single-airplane orders. According to an industry source, fractional operator NetJets has already reduced the number of deliveries of Cessna Citations scheduled for this year.

On the other hand, said Foley, “aircraft sales, for all intents and purposes, have just about come to a halt.”

In a statement released early last month, Foley noted that bad news is starting to come from all segments of the business aviation industry. And he predicted that “an economic perturbation of this magnitude will surely challenge the weaker players,” those that lack sufficient capital to ride out a prolonged downturn.

Recent start-up air taxi, charter and fractional programs, he said, are potentially short-lived, and “there will even be some level of shakeup among those that are established.”

In fact, “the possibility of financial turmoil within the big six business jet manufacturers [Bombardier, Cessna, Dassault Falcon, Embraer, Gulfstream and Hawker Beechcraft] cannot be entirely ruled out,” said Foley.

In late January, Cessna Aircraft announced plans to lay off another 2,000 workers, or about 13 percent of its workforce. The Wichita-based OEM had earlier announced 2,600 job cuts. All the layoffs are expected to be completed by the end of this month.

Hawker Beechcraft has also revealed plans to lay off as many as 2,300 by year-end. Chairman and CEO Jim Schuster blamed the crumbling economy, tightening credit and the negative public portrayal of general aviation for the layoffs. In a letter to employees, Schuster said, “While I wish I could commit to you that this will be our final action, I cannot do so at this time, given the extreme volatility in the marketplace. The bottom line is that we must be prepared to do whatever is required to make certain that we successfully emerge from the downturn.”

Despite predicting a strong market for its Global 5000 and Global Express XRS, Bombardier anticipates business aircraft deliveries to be down “approximately 10 percent” in 2009-2010 from fiscal year 2008/09. Perhaps more indicative of the current market nosedive is the company’s decision to reduce production rates
for the Learjet and Challenger programs.

Late last year Gulfstream sampled economic conditions and subsequently told employees in Dallas that layoffs were a possibility. “We subsequently let go a number of contract employees and have advised that unless there is a turnaround, regretfully, full-time employee status will be reviewed at the end of the first quarter 2009,” said a spokesman.

Dassault Falcon has been quiet on the subject of production cutbacks and layoffs. The only news came in early January from the French daily Les Echos, which quoted a company spokesman as saying, “We confirm that we are revising down the production pace.” The newspaper reported that there would be a 25-percent reduction and delay of the launch of a new generation of Falcon corporate aircraft, being referred to as the Falcon SMS (super-midsize).

Honda Forges Ahead, Embraer Remains Quiet

If any manufacturer is forging ahead with apparent disregard for the sagging worldwide economy, it is Honda Aircraft, which expects to start production of its HondaJet as early as next year. As of last month, the company was hiring some 100 engineers at its Greensboro, N.C. plant and looking for people with experience in new aircraft design, development and certification. The company already has a staff of more than 300 and is building a $100 million facility at Piedmont Triad International Airport. Observers speculate that the company, substantially vested in the very light jet program, anticipates an economic recovery to begin next year and be on the upswing in time for the anticipated certification of the HondaJet later in 2010.

Brazilian manufacturer Embraer is playing it close to the vest. Despite an admission that the company is reducing production of its E-Jet line by 15 to 20 percent this year, Embraer Executive Jets, the company’s business jet division, has revealed little.

In December, Embraer president and CEO Frederico Fleury Curado, reacting to stories in the Brazilian media, dismissed as “pure speculation” reports that Embraer was preparing to lay off 4,000 employees. Saying that “the future belongs to God,” he nevertheless suggested a need to understand that the worldwide economic crisis “will affect us in some way.”

Embraer had been on track to deliver more than 170 business jets this year but has already revised that number to 145–a total of 110 Phenom 100s and Phenom 300s and a combination of 35 Legacy 600s and Lineage 1000s.

Asked what plans Embraer might have for production cutbacks, a spokesman noted that the Phenom 100 and Lineage 1000 have only just been certified, and that “in 2009 our challenge is to ramp up their production.”

Embraer claims not to issue official sales forecasts. It does, however, suggest a further drop in demand for business jets through this year, a readjustment period next year and the beginning of a recovery in 2012. Embraer has combined orders for more than 800 of the Phenom 100 and Phenom 300 stretching into 2013; orders for more than 20 Lineage 1000s; and letters of interest for more than 100 of the in-development Legacy 450 and 500.

While times may be tough, the manufacturers are, of necessity, looking well into the future and the next economic upswing. “It will come,” said one executive, “and when it does, they all want a new product to fill the demand.” Bombardier, with its certification of the Learjet 85 anticipated in 2012, is not the only company funding the future. Cessna is continuing development of its large-cabin Citation Columbus and anticipates certification in 2014. In Brazil, progress continues on development of the company’s two new business jets, the Legacy 450 and 500, with certification expected in 2013 and 2012, respectively. Gulfstream’s new G650 flagship is on schedule for first customer deliveries in 2012.

Bizav Trickle-down Theory

Remember the “trickle-down” theory of economics from the Reagan era? Welcome to 2009 and a new trickle-down theory for hard times: when the aircraft builders start to cut production, they also start to cut vendor and supplier orders.

Acorp Industries, a major airframe structures supplier in Vancouver, B.C., is a supplier for most of the business aircraft manufacturers. In February, the company announced that “a continuing softening of the order book and rate reductions from its major customers” have prompted a review of operations and resulted in the termination of approximately 100 management, staff and union employees, representing 12 percent of its current workforce.

Rockwell Collins, a major avionics and electronics supplier, announced the layoff of 300 full-time employees and 100 contract workers, as well as other cost-cutting measures, including delays in merit increases and cuts in research and development.

The latest round of layoffs calls for a reduction in force of 500 full-time employees and 100 contract employees. The company has also announced a salary freeze and a hiring freeze, “except for certain specific skill requirements.” Most of the job losses were in production, said a company source, “and mostly as a result of reduced orders.”

In late January, Honeywell said sales have been hurt by a one-percent decline in the division responsible for aircraft radar and engines.

Engine manufacturers are also feeling the squeeze and applying their own measures.
General Electric, the world’s largest jet-engine maker, has plans to eliminate more than 1,000 salaried jobs at its GE Aviation division as orders continue to decline. Last year’s engine orders (for all aircraft types) fell to 2,908 from a record of 3,414 in 2007.

Competitor Pratt & Whitney Canada announced in early February that it will lay off as many as 1,000 workers, beginning this spring. But according to a spokesman, business aviation has been the segment most affected. Just a day earlier, Louis Chenevert, CEO of parent company United Technologies, said the company had reduced its engine production forecast for 2009 from 5,000 to 4,000.

The UBS survey in its conclusion added a number of comments by business jet professionals queried. Among them:
• “It appears there is a smattering of interested and willing buyers. However, lack of available financing, regardless of the buyer’s strength, is precluding most from moving forward.”
• “Completed sales since your December survey were mainly a result of pricing low enough to catch buyers’ attention and all were cash transactions.”
• “A lot of vulture buyers out there look for the steal, but few are actually diving down to eat the carcass.”
• “A difficult market as buyers want to pay a lot less than sellers are willing to accept, but we are still doing business.”
• “The vastly reduced pricing opportunities of immediately avail- able new or almost new equipment have attracted some Middle Eastern and European buyers who are willing to talk, considering buying and making offers again.”

In other words, there is a light at the end of the tunnel, but it remains to be seen whether it is the proverbial on-rushing train, or whether the corner has been turned and the worst is behind us.