Industry news remains mostly bleak

 - August 25, 2009, 7:32 AM

In the business aviation industry, signs of a recovery remain mixed at best. There is some good news, but for the most part the industry seems still to be wondering if there is a bottom.

Lewis Campbell, chairman and CEO of Cessna parent company Textron, recently put a positive spin on the economic crisis, saying that the business strategy at Cessna remains “rock solid.” One aspect of that strategy, he explained, is research and development to ensure that the airframer is off and running when the economy improves. Another is to continue selling the Citation Mustang entry-level jet to add to a loyal customer base that will move up in better times.

Certainly, Cessna appears to be successful, at least in its Mustang sales effort. While cancellations continued and revenues dropped 42 percent in the second quarter compared with the same period in 2008, Mustang deliveries jumped from 29 in the first quarter to 38 in the second quarter. And Campbell pointed out that seven out of every 10 Cessna buyers is a repeat customer.

A modicum of good news on the Textron ledger came from its Bell Helicopter property in Fort Worth, where a six-week strike ended in mid-July. Bell also announced that it remains on schedule to meet its 2009 delivery commitments and is on track for 2010.

But that estimate may change as striking workers return and production comes up to speed. Bell is forecasting delivery of 170 to 180 commercial helicopters this year, slightly higher than the 2008 level but still below the original expectation of 240 deliveries.

Duncan Aviation, in a new report, noted that the available industry-wide aircraft inventory has risen 114 percent in the first two quarters of this year, compared with the first two quarters of last year. No better is the aviation services company’s notation that the number of used aircraft sold has dropped 71 percent. The only good news Duncan had to offer was a slight increase in sales transactions in the Falcon 50EX and Hawker 800XP markets.

An Uncertain Market

Hawker Beechcraft staged another round of work-force reductions last month following a company memo from chairman and CEO Bill Boisture. “Buyer confidence is low, financing more difficult, and in the U.S., which is our predominant market, business aircraft have been disparaged by our political leadership. These combined factors have significantly reduced demand for our products and recovery is difficult to forecast with certainty.” The Wichita-based airframer reported a decline in earnings as deliveries decreased from 129 business jets and turboprops in the second quarter of 2008 to 78 in the same period this year. Net sales for the quarter, which ended on June 28, were down more than $200 million to $816.3 million. The company recorded operating income of $39.4 million, compared with $86.4 million in the second quarter last year, mainly from the nearly 40-percent drop in aircraft deliveries. Despite the decreased operating income, the airframer still avoided posting a loss, reporting net after-tax second-quarter income of $172 million compared with just $24.9 million in the same period last year due to a one-time reduced-price repurchase of its debt securities.

At Gulfstream, too, shipments were down in the second quarter, with the Savannah, Ga.-based OEM delivering 26 airplanes, 19 fewer than in the same quarter the previous year. Margins, however, remained constant at 17.9 percent, the result of a combination of a favorable mix of large aircraft deliveries and continuous improvement initiatives.

Good news: Gulfstream continued to reduce its used-aircraft inventory and had only six remaining aircraft at the end of the first half of 2009, and said it had no “white tails” (aircraft built but not sold).

Among other encouraging signs, according to Jay Johnson, president and CEO of parent company General Dynamics, is an increase in flight hours and greater interest in new aircraft. At this point, he said, Gulfstream large-cabin slots are sold out through year-end. Even so, he added, the company is “closely monitoring” the situation and would make additional cuts if necessary.

If there was a more sobering report from any quarter, it came from the General Aviation Manufacturers Association (GAMA), which reported a drop in aircraft shipments in the first half of 2009 of 45.9 percent, from 1,918 in 2008 to 1,037 so far this year. The organization report also noted that billings are down 22.7 percent.

While president and CEO Pete Bunce said GAMA is encouraged by “some signs of improvement,” he also noted that “these are extremely challenging times for all general aviation manufacturers and suppliers.

“Even though it is too early to distinguish these [positive] indications as a trend,” he concluded, “we are hopeful that this momentum will continue through the second half of the year.”

Dassault, despite cancellations, projects 80 aircraft deliveries this year, even though deliveries in the first half totaled only 26 business jets. The French OEM believes deliveries of the new Falcon 2000LX, now ramping up, will allow it to meet that goal.
Like other OEMs, Dassault has had to deal with order cancellations in the first half of this year that had a dramatic and negative effect on revenue numbers. The company reported revenue down to $1.9 billion from $2.1 billion at the mid-year mark in 2008.

But Dassault, like its competitors, is seeing renewed interest in the used-aircraft inventory as a positive sign that the market is stabilizing.

Having laid off some 4,000 workers in the last year, Embraer continues to push ahead on its Phenom 300 certification program, as well as its Legacy 450 and Legacy 500 programs. The Brazilian OEM remains optimistic that it will meet its forecast of 110 Phenom 100 and Phenom 300 deliveries this year.

As of mid-year, Embraer had delivered only 21 aircraft. Embraer Executive Aviation executive v-p Luis Carlos Affonso said the third quarter will be the key in meeting the year-end target, adding that the company can meet its goal if it produces 55 to 60 Phenoms before the end of this month.

“Only in 2012 will [business jet] deliveries start growing again,” predicted Affonso.
It appears at least some analysts are in agreement. According to the Teal Group forecast, “When the market resumes its growth, it will start from a much lower base.” Analyst Richard Aboulafia said the Teal Group sees 2011 as the low point, with business jet deliveries reduced by 40 percent compared with 2008. This will be followed by a five-year recovery with 10-percent growth per year, starting in 2012.

Brian Foley Associates sees 2009 shaping up to be one of the most challenging years on record for new business jet orders. “We could easily end the year with the industry as a whole having more order cancellations than new [orders],” said president Brian Foley.

Some buyers, he explained, had the financial wherewithal to pay for their jets when they ordered them. But now they’re scrambling to find financing to make their next progress payment. “They’ll find credit markets stubbornly tight and more restrictive, with a bias toward only the best credit risks and aircraft.

The easy credit culture is gone,” he added, “and with fifty percent of all business jet purchases involving some form of funding, that really impacts the industry.”

Foley accused some manufacturers of playing “backlog roulette” by being “overly accommodating and giving weak customers the option to defer their order in lieu of canceling.” Textron last month was the target of lawsuits by irate investors asserting that the solidity of Cessna’s order backlogs was overstated.

Some of these buyers were irreparably damaged in the downturn and will likely never take delivery, said Foley. “This creates a weak, artificially high apparent backlog that does a disservice to both investors and suppliers.”