There’s good news on the horizon, but the horizon’s a long way off
With layoffs, furloughs, production cutbacks and cost controls, the industry is adjusting to the stress of the recession and the reduced demand for business aircraft.
Despite a rising stock market, a decline in new unemployment filings and other signs that the economy is recovering, the business aviation market is still bouncing along the rocky bottom, according to some analysts.
The most recent General Aviation Manufacturers Association (GAMA) numbers for the first quarter show a sharp fall. Business jet deliveries dipped from 297 in the first quarter of last year to 191 in the first quarter of this year, a 35.7-percent drop that takes the industry back to pre-2007 delivery levels. Billings for the first quarter 2009 were $4.34 billion, nearly a billion dollars less than for the same period last year.
Describing times as “extremely difficult,” GAMA president and CEO Pete Bunce explained, “We are dealing first and foremost with the severe negative effects of a worldwide economic downturn, but also with unwarranted criticism focused on the industry.
“The result,” he added, “has been the cancellation of orders for new airplanes and the loss of more than 15,000 high-paying jobs for American workers over the last several months.”
But that’s not the whole layoff picture. Analysts estimate that across the industry, from vendors to OEMs, FBOs to charter to fractional operators, total layoffs and furloughs are closer to 25,000, and climbing.
At Dassault Falcon, as at other OEMs, the bottom had begun falling out of the order book late last year, but not until mid-March was the impact of the recession revealed. The value of the Falcon order backlog dropped from $8.52 billion in 2007 to $7.91 billion in 2009, sales went from $5.54 billion to $5.09 billion and profits sank from $518.9 million to $506.7 million. It might have been worse had it not been for a heavy order book for the Falcon 7X, the company’s newest and most expensive aircraft at $47.4 million per copy.
Dassault Falcon president and CEO John Rosanvallon blamed the slumping orders at least in part on the growing criticism of private jet travel that followed the trip to Washington, D.C., in corporate jets by the heads of the three U.S. automakers. Among companies that subsequently cancelled orders for Falcons were Citigroup, Royal Bank and American International Group. Charles Edelstenne, CEO of parent Dassault Aviation, was later quoted in The Wall Street Journal as saying those orders “are now worthless.”
In mid-April, the Teterboro, N.J.- based OEM announced that it had laid off 35 workers at its Wilmington, Del. facility, 17 more in the Little Rock Completion Center
in Arkansas, and 27 in Teterboro. In addition, 140 contract employees at Little Rock were also laid off, and in May, employees at Teterboro began working a shorter month as a way for the company “to avoid laying people off.” On the positive side of the Dassault ledger, the company continues to invest in R&D, as well as expansion of its service center network.
At Embraer, first-quarter 2009 net sales for the executive jets division were down to $70.2 million from $173.6 million in the first quarter last year. The Brazilian OEM blamed the poor return on “the severe worldwide economic downturn since September 2008.” Embraer also noted cancellations of some of the firm orders for its executive aviation backlog.
In February, the company announced the layoff of approximately 20 percent of its workforce (some 4,000 employees), most in the production and administrative areas. It did not separate out the percent of those who were laid off from its executive jets division.
But as with some other OEMs, there was some good news. After a delay of nearly six months in the cabin completion phase of its first Lineage 1000 by Pats Aircraft Completions in Delaware, Embraer received FAA certification of the aircraft, as well as cabin supplemental type certification. However, as a result of its dissatisfaction with Pats’s performance on the first Lineage 1000 completion, Embraer has cancelled its agreement to have subsequent Lineage 1000s completed by Pats.
Also on a positive note, Embraer received EASA type certification for its new Phenom 100 entry-level jet on April 24.
A Tough Year for Everybody
Bombardier Aerospace released its fiscal year-end 2008 and fourth-quarter 2008 numbers on April 2. While the backlog was valued at $23.5 billion as of Jan. 31, 2009, compared with $22.7 billion at the same time last year, more indicative of the current situation were the quarterly numbers.
The Montreal-based OEM received net orders for six airplanes during the last quarter of its fiscal year, compared with 213 for that period in 2008. According to the statement, the net orders for six aircraft result from orders for 25 commercial aircraft offset by net negative orders for 19 business aircraft. Equally telling are total orders for the fiscal year ending January 31–net orders for 251 business aircraft, compared with 452 for fiscal year 2007.
As of January 31, Bombardier had an inventory of 19 white tails (unsold aircraft), 16 more than on the same date in 2008. The 19 white tails, added to an inventory of 29 pre-owned aircraft, were valued at approximately $448 million.
More recently, international credit ratings agency Fitch Ratings gave Bombardier a BB+ rating and downgraded its outlook from stable to negative, reflecting “concerns about the impact of a sharp decline in demand for business jets on Bombardier’s aerospace business and free cash flow.”
The agency noted that Bombardier plans to reduce business jet deliveries by 25 percent in 2010 compared with 2009 and added, “Fitch calculates that business jet production at Bombardier will decline by a larger amount than deliveries, due to the carryover of business jets completed but not sold in 2009 as a result of cancellations.”
On April 16, Hawker Beechcraft reported $537.6 million in net sales for the first quarter, a decrease of $38.9 million from a year ago. However, net after-tax income increased to $66.9 million, compared with a net after-tax loss of $31.3 million in the first three months of 2008. Nevertheless, the Wichita OEM saw an operating loss of $41.2 million in the quarter, compared with a loss of $1.5 million for that period a year ago.
Hawker Beechcraft’s financial results were hurt by reduced aircraft deliveries, workforce-reduction charges and sagging valuations for its inventory of used aircraft.
The company delivered 15 business jets (one Hawker 4000, five Hawker 900XPs, one Hawker 850XP, five Hawker 750s and three Premier IAs) and 29 King Air twin turboprops in the first quarter. That is five fewer jets than in the first quarter 2008 and the same number of King Air deliveries.
While the Hawker Beechcraft backlog as of March 29 was $7.3 billion, $500 million more than in 2008, the company anticipates a declining backlog for the reminder of this year.
Two days before release of the quarterly figures, Hawker Beechcraft had notified its employees that further cuts in production and reduction in the work force were likely. The company earlier this year announced the layoff of 2,300 workers.
In a note to employees, new chairman and CEO Bill Boisture wrote that due to the declining demand for new aircraft, services and support, “We must act now to decrease our 2009 and 2010 production levels and, in turn, reduce the size of our work forces. The reductions will extend across all levels of the company, including senior management.” He added that the layoffs would come throughout the year.
At Gulfstream the news was comparatively upbeat, following release of the first- quarter 2009 numbers from parent company General Dynamics. With Gulfstream forecasting in March that it would reduce production of its business jets, GD cut its 2009 forecast by about 10 percent to about $6 to $6.10 a share. But in April, with release of the first-quarter results, General Dynamics CEO Nicolas Chabraja said, “The aerospace group held its own this quarter–a noteworthy accomplishment, I think, in light of business jet market conditions. While conditions are by no means good, I am pleased to report that they have improved materially from what we experienced in February,” he said.
All but one ordered aircraft was delivered in the first quarter, and delivery cancellations for the year were covered by new orders or by moving up buyers holding later delivery slots.
He said Gulfstream’s $20.7 billion backlog had been “eroded somewhat” but had stabilized. He added, “I expect the second quarter at aerospace to be as good as or better than the first.”
Gulfstream delivered 34 completed jets in the quarter, compared with 36 aircraft in the same period last year.
Some Positive Signs
On a positive note, Chabraja said there has been a recent rise in Gulfstream flying hours, a “thawing” in the pre-owned market and increased customer interest. Meanwhile, he said, development of the G650 remains on track, with the big business jet scheduled to fly by the end of the year. But Chabraja’s optimism appears to be in the minority.
Citing global aerospace industry challenges, Honda Aircraft announced early last month setbacks in its HondaJet program, as a result of “worldwide economic instability.” The projected first flight of a production-conforming airplane has been rescheduled for January next year, a delay of nearly a year from its previous schedule. (A prototype made the model’s first flight on Dec. 3, 2003.)
According to the company, difficulties in receiving critical components for conforming aircraft production will also delay first deliveries, now planned for the fourth quarter of 2011. A Honda Aircraft spokesman told AIN the company expects FAA certification 15 to 18 months after that first production-conforming aircraft flies.
“We have been working closely with our suppliers over the past year in an effort to minimize the effect of the ongoing worldwide economic instability on HondaJet development,” said Honda Aircraft president and CEO Michimasa Fujino.
If the OEMs are taking a hit from the recession and credit crisis, so are other companies in which the primary source of income is tied to the success of the manufacturers– FBOs, charter and fractional ownership operators, completion and refurbishment centers and thousands of smaller vendors.
Nordam, which is a major supplier of aircraft components–cabinetry, airframe parts, composite cabin shells–is laying off 140 workers, about 66 percent of the workforce at its Wichita cabinetry shop. In the last eight months, Nordam has laid off 411 people in Tulsa and Wichita, about 23 percent of its total U.S. workforce.
There seems to be general consensus on predicting the bottom of the recession and the start of a recovery.
At the European Business Aviation Convention & Exhibition last month, Dassault Aviation’s Edelstenne expressed confidence that an economic recovery is under way in the business aviation industry.
“We are starting to see some sign of change,” he said, pointing specifically to a stabilization of pricing and more sales in the pre-owned aircraft market. “It will take some time before the trend reverses, but this is the first positive sign that we have been expecting for months.”
Gulfstream also sees the current slump as near the bottom. Gulfstream Aerospace president and General Dynamics executive v-p Joe Lombardo said that while February was a bad month, with a lot of order defaults, “we’re now seeing some positive signs.” Among them are fewer defaults and growing sales activity.
In Europe, charter operators and brokers are looking at an unpredictable summer, following a 25- to 30-percent drop in bookings as a result of the recession. And it appears things will not improve anytime soon.
Jeremy Palmer, executive aviation director at charter broker Hunt & Palmer, described the question of what happens next as a “dangerous” one. “We must anticipate a quiet summer and we certainly expect business to be less than it was in 2008.”
Embraer is less optimistic. The Brazilian OEM sees orders declining into 2011, reaching a low of about 900 aircraft. The next year, according to Embraer, will see a rally, but the climb out will be slow, not reaching 1,300 aircraft until 2018. The company’s 10-year delivery forecast is for a total of 10,990 business jets valued at about $188 billion.