While Cessna Aircraft’s new CEO, Scott Ernest, may not be ready to sit down for wide-ranging interviews with outside media yet, he did indicate what his priorities are during a brief Q&A he gave for its internal newsletter, the Cessnan, just two days after he joined the company on May 31. His plan for the struggling Wichita airframer: cut costs, boost service revenues and defend the brand, a strategy that sounds strikingly similar to the one implemented by Bell Helicopter CEO John Garrison when he took over that company in 2009. Cessna and Bell are both owned by Textron. A Textron spokesman denied that there was a common formula for turning both companies around and called Cessna’s situation “unique.”
Ernest, 52, replaced Jack Pelton, whose “retirement” was abruptly announced on April 29, just days after Cessna posted a $38 million loss for the first quarter and following an annual loss of $29 million in 2010. More significant and perhaps alarming, according to Textron’s 2010 annual report, Cessna’s order backlog collapsed by $2 billion between 2010 and 2011, representing slightly more than a year’s worth of new aircraft production. It was the worst performance of any Textron company, excluding Textron Financial.
That perennial cash drain posted an adjusted loss of $237 million in 2010 on $218 million in revenues and cumulative adjusted losses of $581 million over the last three years. On March 1 Textron Financial announced that it was voluntarily withdrawing its New York Stock Exchange listing and would suspend its Securities and Exchange Commission financial reporting obligations.
The unit continues to be a significant revenue killer on the conglomerate as it sheds its ill-fated, non-captive finance portfolio, a strategy begun in 2008. Overall, Textron posted $86 million (excluding a $6 million tax gain) in net earnings last year on $10.525 billion in revenues and continues to labor with a debt load that, while declining, was $4.7 billion at the end of the first quarter. Until Textron is freed from the revenue drag of its financial unit and its overall performance improves, the company is going to find it difficult to make the large investments its manufacturing units require for truly new civil product development. At Cessna, that restriction meant shelving the $775 million Citation Columbus large-cabin jet development program in 2009 in favor of more economical options —tweaking established products such as the Corvalis piston single and the 15-year-old Citation X (rebranded the “Ten”) and outfitting them with new Garmin glass-panel avionics.
Ernest is a 29-year-veteran of GE, where he was vice president and general manager, supply chain, for GE Aviation, the company’s jet engine manufacturing unit, and had worked for Textron CEO Scott Donnelly. In 2008 Donnelly left GE Aviation for the top spot at Textron. In announcing Ernest’s appointment, Donnelly said, “Accelerating Cessna’s new product and service development, strengthening its manufacturing and sourcing operations and intensifying its global expansion efforts are key to moving Cessna forward. Scott brings an extensive track record of success in these areas.” Ernest holds a bachelor’s of science degree in mechanical engineering from the University of Akron and a master’s degree in engineering from the University of Cincinnati.
Bell Looks to the Future
If Ernest follows Garrison’s path at Bell, expect some dramatic changes, even with Textron’s overall revenue constraints. To date, Garrison has made significant personnel moves on the civil side of the business, recruiting a new and aggressive sales and marketing team and beefing up the company’s communications staff the better to tell the “Bell story.” He also directed various efforts to rationalize product support and new aircraft production. Bell integrated and rebranded several different Bell-owned aftermarket companies to encourage “one-stop shopping.” In addition, the helicopter maker transferred the type certificate and product support responsibility for the Model 47, the piston-powered helicopter that initially made the company a helicopter icon but has been out of production in 1974 and was becoming increasingly expensive to support, to an authorized service center and operator expert in the type that has a lower cost structure, Scott’s of LeSueur, Minn. Production of the company’s low-margin but long-running entry-level turbine single, the Model 206B3 JetRanger, ended late last year. The long-to-market new 429 light twin was debugged, delivered and sent on a global sales tour. Last month, Bell announced its agreement to sell its stake in the BA609 civil tiltrotor program to AgustaWestland. (See related story on page XX.)
Through this year, Bell is pursuing a strategy of upgrading its popular legacy products such as the 407 single and the 412EP medium twin. The 412, via supplemental type certificate, will get a higher-output engine, glass-panel avionics with an improved autopilot, a new tail rotor and the BLR FastFin vertical stabilizer. The 407, also via STC, will receive the new Garmin G1000H glass-panel avionics system and be branded the 407GX. Another new variant, the 407AH, gets rockets and guns. The upgrades allow Bell to increase prices on its legacy products while offering customers increased versatility and performance.
In the longer term, Bell is looking at new civilian products. Earlier this year a company memo leaked to the media describing “Project Magellan,” a development program believed to be focused on fielding a new medium twin to replace the 412, a fuselage that dates back to the Vietnam War. Earlier this year, Garrison told AIN that, despite the revenue constraints at Textron, Bell could finance a new civil helicopter development out of current revenues. “Capital-wise, we have the ability to invest in new platform development. We just have to pick and choose.” Still it is hard to envision how Textron’s $86 million in annual earnings can adequately and simultaneously finance new, clean-sheet-of-paper civil aircraft development programs at both Bell and Cessna. While Textron did spend $702 million last year on research and development, almost half of that was provided by customers or development partners, primarily the U.S. government, in support of military programs at Bell and Textron Systems. Jack Pelton’s comments at last year’s NBAA Convention were particularly telling when he said that Cessna would not have sustained its annual loss were it not for R&D activities.
Despite large efforts to rejuvenate sales of new civil helicopters, revenues from that side of Bell’s business actually fell slightly between 2009 and 2010, from $672 million to $667 million, and Garrison consistently has said he does not expect that to improve significantly until next year. However, Bell’s revenues jumped by $400 million during that period, thanks largely to increased military sales but also in part to a significant increase in its customer-support business, which rang up more than $1 billion in sales last year.
This would seem an area where Cessna could better balance its business model and show immediate financial results. Cessna currently relies on new aircraft sales for 74 percent of its revenue and appears to leave a good chunk of change on the table when it comes to aftermarket sales and support. Worldwide, Cessna has nine company-owned and -operated service centers. Even before Ernest joined the company, plans were in place to expand Cessna’s service footprint, most recently with the announcement of a new $23 million service and support facility in Singapore, in partnership with Bell. Cessna and Bell previously teamed on a service center in Prague.
When he spoke to the Cessnan last month, Ernest emphasized the need to “provide the right aftermarket service” to ensure that customers are comfortable with their Cessna aircraft “throughout its total lifespan.”