The change in fortunes of the business aviation industry since the 2008 EBACE show last May truly beggars belief. Since sometime around September last year the financial crisis–caused at least in part by self-destructive behavior of some of the industry’s best customers, the bankers–has been one kick in the teeth after another.
Major business aircraft manufacturers have cut close to 20,000 jobs in the last six months or so. And according to the most recent projections from the Teal Group, business aircraft production between 2009 and 2018 will be around 12,768 units–a 30-percent dip on the company’s own previous projection made just last year.
But cheer up. The atmosphere at this week’s EBACE show has certainly not been desperate. As of last night, visitor attendance had reached 10,738, which would make the 2009 event the third largest since the show was launched in 2001. And if that number edges above 11,000 today, it will actually turn out to be the second largest ever. Plus, there are actually more aircraft here this year–65 out on the static display compared with 60 last year.
Meanwhile, senior executives from business aircraft manufacturers have certainly been earning their salaries by having to make a series of excruciatingly hard decisions about jobs and the future of aircraft programs. Speaking to EBACE Convention News just ahead of this week’s show, industry leaders said that they have made the necessary adjustments to business plans to ensure their companies survive and they all insisted that the market appears to have bottomed out and is now showing some faintly encouraging signs of recovery.
Gulfstream Aerospace president Joe Lombardo was candid about how the financial tsunami felt when it hit the shores of his company’s Savannah, Georgia headquarters. “The decline in our market happened very quickly and more dramatically than anyone had anticipated,” he admitted. “The big difference was the lack of credit because many [aircraft] purchases are backed by credit, and when these dried up, customers found that they couldn’t get money for progress or final payments.
“As diverse as the backlog was–and it was not limited to North America–the backlog was not protective enough [in terms of Gulfstream’s production rates],” Lombardo said. “However, the large backlog was helpful because in some cases we could bring customers forward.”
Gulfstream’s leader acknowledged that the collapse in orders has prompted the company to discuss possible changes to the way backlogs are managed and contracts are structured. “The majority of the defaults happened early this year. We have developed contract protection to some degree and have gone to fair market value
on trade-ins,” Lombardo said. “But we couldn’t ever get full protection on contracts because there has to be balance [between the interests of the manufacturer and customer]. We will look at future contracts with some degree of caution but we can’t make clients pay too high a price. We might look at things like liquidated damages and cover remedies.
“Our objective is always to keep customer orders,” he continued. “We can defer delivery and progress payments and much of that comes down to what expectation of credit they have. Sometimes they just can’t [complete the purchase].”
But, in the final analysis, Lombardo is allowing himself a degree of optimism. “I believe it has bottomed out. February was a very tough month for us. Starting in the second half of March we saw more interest in buying airplanes, but at the same time an expectation that prices would still go down. But we are getting more inquiries and we have actually been selling airplanes and have plugged holes in this year’s backlog.”
Bombardier Aerospace Business Aircraft president Steve Ridolfi took on the job about a year ago, just before things got ugly. “A year ago it was a very heady time [in terms of high rates of sales and production] and the speed of the downturn since then has surprised everyone,” he said. “The impact [of the financial crisis] was felt very rapidly by business aviation and we have all had to scale back growth plans. It has been very difficult since November.”
Nonetheless, despite the surprise over the pace and scale of the financial crisis itself, Ridolfi does not accept that airframers have been caught off guard by the degree to which this has undermined order backlogs that until recently were viewed as unassailable. “We were not surprised by the cancellations and deferrals,” he said. “A backlog is for the long term but it doesn’t mean you can shore up short-term demand by pulling customers forward [in the delivery order]. We can’t view a backlog as an asset. We [had already] protected ourselves with a temporary workforce and variable rates of production.”
He did acknowledge that the choking squeeze on credit is a big part of the problem. “The lack of credit has exaggerated the downtick. Not a lot of lending decisions are being taken and manufacturers are finding that it is creating disruption to get deliveries done,” he said.
Ridolfi concluded that just in the last few weeks, Bombardier has seen some “rebound” in terms of new orders being taken and also due to a partial recovery in world stock markets. He said that for Bombardier, the weakening of demand has been felt more among the smaller end of its diverse aircraft family.
The impact of the downturn has most certainly been felt in Wichita, Kansas, too. “The demand side of the market for new aircraft has eroded very significantly as have the backlogs of major OEMs,” said Hawker Beechcraft’s new president and CEO Bill Boisture. “This is mainly due to the financial stresses that companies and individuals find themselves in.
“The surprise over backlogs hasn’t been limited to business aviation companies,” he continued. “Everyone has been surprised at the rate at which credit markets have imploded and people [customers] say, ‘Until I understand what is going on, I am going to make conservative moves.’ Part of the surprise was in the erosion of demand.”
According to Boisture and his fellow OEM presidents, the situation has been made a lot worse by “the negative atmosphere created by the U.S. government’s attitude toward our products.”
Embraer executive vice president Luís Carlos Affonso said that the Brazilian airframer has certainly not been immune to the crisis. “We always expected some slowdown because it [the market] was growing so fast and an adjustment was expected,” he said. “But the speed and the magnitude did make things interesting because our market assumptions were wrong and the market change has been so dramatic for our customers, and their situations have changed very quickly.”
Affonso highlighted the major change in the pre-owned aircraft market in terms of price instability. “We are now seeing new or almost new aircraft for sale, which was not the case a year ago.” He also pointed to the rising cost of getting credit and the fact that some customers now feel obliged to sell an aircraft before buying another at a very unfavorable time to be a seller.
The Embraer executive said that just very recently, since late April, he has been pleased to see evidence of a turnaround in the industry’s prospects and recovery signals from the wider business community. His company believes that the world economy will pick up in 2010 and that new sales will be back on tap during 2011, followed by recovered production rates in 2012.
Cessna president Jack Pelton said that the chickens really came home to roost at the start of this year. “By January, it was evident that this [the slowdown] was so precipitous that we were going from high-level, double-digit monthly order intakes to single-digit intakes,” he explained. “For me what was very difficult was that the prior classic case of how you model an economic downturn and the things you look at weren’t holding true. Before, you’d get people in the backlog a ways out, they’d stop making deposits and start negotiating deferrals. In this case we had people who were very abruptly near term but couldn’t get financing for their airplanes.”
Pelton freely admitted that the crisis has fundamentally changed the way manufacturers view their situation. “It rocked us on our heels, but caused us to really test our resolve,” he concluded.