Bizav industry hopeful in the face of OEM cutbacks

 - June 29, 2009, 10:58 AM

“Up slightly.” That’s the hopeful phrase often on the lips of those in business aviation these days when describing the health of the industry. Up slightly–ever so slightly in some cases–and in too many cases, not at all.

Speaking at the NATA (National Air Transportation Association) Air Charter Summit and FBO Leadership Conference in mid-June, Dassault Falcon president and CEO John Rosanvallon made reference to the swollen inventory of used aircraft, some of which have lost more than half their value. “It may be two years before we absorb that inventory, and this will impact new aircraft sales. The next two years will be difficult,” he concluded.

Rosanvallon’s statements at the conference came just six days after the company announced that it would lay off 111 more workers at its Little Rock Completion Center, and that another 42 workers had taken advantage of an “early out” program. The layoffs were primarily in initial engineering and design. Less affected were main production activities such as constructing interiors, painting and flight test.

In a more recent address at the Paris Air Show, Dassault Aviation chairman Charles Edelstenne said, “Despite a healthy Falcon order book, cancellations and postponements mean that we have to scale down our production rate.” And he added, “For the first quarter alone, we posted a negative balance of minus 27 orders.”

Meanwhile at Cessna, the company on June 5 passed out 60-day layoff notices to 700 salaried employees. According to a company spokeswoman, the move is part of 1,300 cuts announced in April when Cessna also revealed it had suspended development of the Columbus large-cabin business jet. Still more layoffs are planned but Cessna offered no specific numbers. The Wichita-based OEM has announced a total of 6,900 layoffs since November last year.

Cessna sold 470 aircraft in 2008. So far this year, the company is dealing with the cancellation of orders for some 160 aircraft, and sales as of mid-June totaled fewer than 100 airplanes.

Parent company Textron continues to watch as analysts forecast a break-even second quarter and an 85-percent decline in per-share profit for the year. Textron will update its forecast for corporate jet deliveries this month when it reports second-quarter profits.

Bombardier wasn’t exactly breaking out the champagne, despite some expressions of optimism as it announced its first-quarter results, ending April 30. The Canadian company reported a net profit of $158 million for the quarter ending April 30, down from $229 million for the same quarter last year, and stated that overall revenue slipped to $4.5 billion from $4.8 billion.

According to Bombardier CEO Pierre Beaudoin, the drop stems primarily from the economic slump, which has led to cancellations and delivery deferrals and a 25-percent reduction in business jet deliveries in the first quarter versus the same period last year.

While describing its backlog as “relatively robust,” Bombardier counted a total of 25 so-called “white tails” not yet sold, though a spokesman said “there are contracts pending on many of them.”

Bombardier also noted the 25 used aircraft it is attempting to sell “as is.” While anxious to reduce that inventory, the company is nevertheless mindful of pricing. “We’ve moved quite a few aircraft, but we’re not giving them away.”

Order expectations suggest that the production rate, cut by 25 percent overall for this year, is likely to stabilize and remain flat in 2010, according to the company. The Canadian OEM also noted that the production cuts to the lower end of its product spectrum–the Learjet line, to be specific–were “much more significant.” Bombardier has also not ruled out additional production cuts if the economy worsens, marked in part by an increase in white tails.

At the same time, Beaudoin remarked that in his 25 years with the company, Bombardier has survived more than a few economic downturns. He concluded, “I would also like to remind you that Bombardier’s financial situation is far healthier than it was at the time of the last economic downturn [post 9/11].”

Elsewhere the news was not much better. Hawker Beechcraft announced a series of employee furloughs totaling 11 days through the rest of the year. The Wichita-based OEM also expects to relocate engineering, finance and supply-chain employees to the company’s “square mile” complex east of Wichita and shut down two buildings located outside that main site.

A letter sent to employees identified the furlough days as June 29 to July 2, November 23 to 25 and December 21 to 24. Employees with vacation or other paid time off could use it during those times, but otherwise the furloughs will be unpaid. The furloughs, according to the company, are “based on business needs, including product line and plant-specific requirements.”

Battling Public Perception

At the National Air Transportation Association’s Air Charter Summit & FBO Leadership Conference June 11, industry leaders noted that business aviation is bogged in an economic swamp and beset as well by a negative public perception of private jets that has “many people who use our products…running scared.”

In late May, speaking at the Aero Club of Washington, Gulfstream president Joe Lombardo offered a positive spin on the negative public perception of private aviation. “Things have calmed down, [but] that calming down only means the negative press has abated.”

At the same time, he added, the industry must continue to project a positive image.
Lombardo also expressed optimism in the wake of the European Business Aviation Convention & Exhibition in May, describing the show as “extremely successful.” Speaking later at the NATA conference, Lombardo took a somewhat positive look at the future, saying that the downturn in April was a lot less than in March, but cautioning that it was too early to determine whether it signaled the start of a recovery.

Other good news, however slight, came from Honeywell, which announced in early June that retirements and natural attrition have allowed it to reduce the number
of layoffs scheduled for its Deer Valley avionics facility to 260 from 420. The company started layoffs on a rolling basis last fall and expects to continue making cuts through the end of the year.

The news came less than a month after Honeywell revealed that it is developing new avionics capabilities for certain Challenger 601s and Globals. The enhanced flight management system software update will include NextGen features such as Fans (future air navigation system), Waas LPV (wide-area augmentation system localizer performance with vertical guidance) and RNP (required navigation performance.

Also in the category of good news was the announcement by Reed Exhibitions that it has signed a number of key business aviation players to its global Hong Kong-based aviation expo and congress, part of Asian Aerospace ’09 in September. Among them are online charter booker Avinode, OEMs Bombardier and Gulfstream, completion and refurbishment specialist Lufthansa Technik and global aviation services and products provider Jet Aviation.

Analysts See A Long, Slow Road To Recovery

In his opening comments at the Paris Air Show, Edelstenne offered a stark assessment of the near-term future. “There is nothing in the current situation and forecasts to indicate that any significant improvement could be hoped for before the end of the year,” he said, adding, “we anticipate about 80 deliveries in 2009, but the present climate means that any prediction can only be extremely approximate.”

Analysts would appear to agree. Richard Aboulafia, v-p of analysis at the Teal Group, noted that Cessna and Gulfstream were “conspicuous by their absence” at the Paris Air Show, and that both Bombardier and Embraer, though present, were focused on their regional airline offerings.

Aboulafia emphasized that the recovery of business aviation is primarily a function of an overall economic recovery and that some signs of recovery may not be so reliable. “People right now are racing through inventory,” he explained. “There are some fantastic bottom-feeding opportunities, but that’s not the same thing as recovery.”

For real recovery, he said, you need real wealth drivers, not merely stimulus cash, which he described as “a one-off from the government pump.” The significant signs of a recovery, said Aboulafia, are “productivity increases, business expansion and increased corporate profits.”

Brian Foley of Brian Foley Associates is forecasting a long, slow recovery, probably led by charter, fractionals and FBOs. They were the first to feel the impact as the economy began to slump, “and they’re likely to be the first to feel it as the economy begins to recover and business begins to travel again.”

But, he cautioned, “It won’t be a quick, so-called V recovery.” Foley believes it is more likely to take the shape of a “W” as the economy makes an initial attempt
at recovery, then drops back into the trough before starting on a long, slow road to growth.”

“To get into a real recovery,” said Aboulafia, “we need to see a recovery of corporate profits. There’s a good chance we’ll see this in 2010, but even then, there won’t be a new-build recovery before 2012.”

At the same time, there appears to be plenty of fight in the industry and nobody seems inclined to roll over and quit. As Gulfstream president Joe Lombardo put
it at the NATA conference, “This is a resilient industry.”