When you’re the head of a company facing a multi-billion-dollar order backlog and production capacity challenges, word that the economy is slowing comes almost as welcome news. Such is the case for Cessna president and CEO Jack Pelton, who has presided over a period of record sales of Citation business jets, a frenzied three-year span that has provided the company $16 billion worth of orders yet to fulfill. But clearly it’s a good problem to have, and no one at Cessna is complaining.
Pelton said he doesn’t see any economic trouble spots that would cause him to be overly concerned at this point, and in fact says sales activity this year is still stronger than at any time in the company’s history, discounting the all-time records sales of the last few years. Cessna is introducing new business models like the Citation Columbus and CJ4 to capitalize on the market’s continued strength, but Pelton said he still isn’t convinced that a single-engine very light jet is worth pursuing. NBAA Convention News talked with Pelton on the eve of the show to get his take on the state of the market.
In light of current economic problems and the sudden rise in pre-owned jet inventories, how concerned are you about a slowdown in business aviation affecting Cessna? Do you think your backlog is sufficient to weather any storm?
When you look at the position we’re in today, and topics like the analysts’ concerns about pre-owned inventories, that is part of the normal ebb that goes with any economic cycle in our industry. We’re at about 13 percent of our Citation fleet for sale today, and if you look at the deepest part of the last down cycles that occurred in the 2000 to 2003 time period, the used inventory at that time was up as high as 19 percent.
On average 10 to 12 percent is pretty normal. We’re starting to see some growth in inventory. It’s not surprising, but it certainly adds some difficulty. All that said, if you go back and look at the last cycle, we didn’t have nearly the backlog that we have today. Our $16 billion backlog gives us increased production rates in 2008 over 2007, and 2009 over 2008 and 2010 again, and so we feel like we’re in a very good position to weather any economic storm that we’re seeing today.
Has sales activity started to slow this year?
Sales projections for this year certainly aren’t what they were last year, but they’re well above any of our prior years. It’s the context that you put the slowing in. Yes, there is some slowing in the number of orders but it’s still at a greater rate than we’ve seen in our history. I know everybody’s probing and looking and wondering, and I kind of like to put it in the context of how we look at [gross domestic product] and economic growth. We had phenomenal economic growth in North America over the last couple years. Economic growth is still positive, it’s not negative, and that’s kind of what we’re seeing in our business. We’ve had some phenomenal growth the last three years and we’re still seeing growth; it’s just not at the rates that it has been.
Are sales to buyers outside North America continuing to hold up?
Certainly our backlog reflects a much stronger international market than in
the past. There is some economic strength internationally, but also we’re truly seeing new markets develop internationally that we had not seen in the past. The good news about that is it’s probably going to be very sustainable for the long term.
It’s now getting people into business aviation that weren’t involved before. They’re recognizing the usefulness and productivity and building the infrastructure to support a vibrant general aviation market in countries that are new to us.
So you don’t see anything in the fundamentals of what’s happening that would be a cause for great concern?
No, I don’t. I think it’s kind of the typical movement that you see associated with any economic move up and down. That’s very normal in our business. The last big concern was a softening economy and the effects of 9/11, which put into question what the ATC system and security would be for general aviation. We had a whole different set of circumstances then than just the normal ups and downs of the economy.
You’ve announced a high level of outsourcing for the Citation Columbus. Are you concerned at all about the outsourcing plans perhaps affecting the schedule for certification?
What we did with the Columbus program involved some very strategic partnering and sourcing, which is a little different than outsourcing where you just throw it over the transom. We very carefully looked at our investment in the program–the fact that we would have to ramp up significantly just for the program, and we would then be ramping down after the program was certified.
Our sourcing on it really was two primary large structural pieces: the fuselage and empennage to Spirit [AeroSystems] and the wing to Vought [Aircraft Industries]. If you look at today’s Citation X wing, Vought essentially builds all the pieces of it, and we just do the assembly, so it’s not a drastically different approach. And if you look at the fuselage with Spirit, here’s a company that builds 35 [Boeing] 737 fuselages a month. It’s right in their wheelhouse, and they’re probably the best in the industry at that. And they’re here in [Wichita], so they’re arms-length away.
We were very careful about how much risk we took on as opposed to 787 type of sourcing activity or an A380 integration effort. We still own all the tooling, own the design and we control all of the top-level design and integration work, which will be accomplished here at Cessna. It’s a little bit of a hybrid approach compared to what people have seen on other programs, and all of that was done being very mindful of how much risk we were willing to take and what we have seen and learned from other manufacturers that have taken maybe a little more radical approach than we have.
I’m curious to hear your thoughts on the single-engine VLJ market. Obviously there are a number of airplanes that have been launched, from Piper, Cirrus and others, but how likely is Cessna to target this market?
We continue to look at it really hard. There are an awful lot of people who are trying to field single-engine jets, and we keep asking the question, what are they trying to accomplish with their aircraft and configurations and performance and price points?
Right now our feeling is that there’s nobody that really has what we think would be required to hit a sweet spot to drive large market demand.
A lot of the single-engine jets are still in some very early phases of development. We’ll wait to see what the final performance and other characteristics are. Right now, if any of those start approaching $2 million or more, we really feel the Mustang is a better solution because it provides a lot more capability and a lot more value. It’s a
very economical airplane–even with two engines. Probably our biggest internal debate is whether you look at a single-engine jet or consider a single-engine turboprop.