Like most other manufacturers in the aviation industry, the business of building, selling and supporting business aircraft continues to be a financially mixed bag for Cessna Aircraft, with some things better, some things worse and some things more or less stagnant.
Meanwhile, in a deliberate move to secure the Wichita, Kan.-based OEM’s future, Scott Ernest, the company’s new CEO since late May, has shaken up the corporate organization. Textron chairman and CEO Scott Donnelly, speaking during Textron’s second-quarter earnings call in July, said Ernest’s actions “should have a meaningful impact on [Cessna’s] growth and performance success going forward.” Cessna is a division of Textron.
“Based on overall customer activity and the availability of depreciation tax treatment for orders placed by the end of the year,” said Donnelly during the earnings call, “we’re still planning for full year jet deliveries to be slightly higher than last year.”
Echoing this just before the NBAA convention opened its doors, Mark Paolucci, Cessna’s senior vice president of sales, told AIN, “Compared with sales in 2009, sales of new aircraft this year are much better.”
However, the number of business jets Cessna has delivered so far this year is slightly lower than the number delivered to date in 2010. “We expect to pick up the pace of deliveries to at least match last year’s,” Paolucci said. The company delivered a total of 178 jets in 2010, 289 in 2009 and 466 in 2008, its peak year.
Frank Conner, Textron CFO and executive vice president, provided details about Cessna’s earnings through the second quarter. “Revenues were up $17 million on a year-over-year basis, primarily due to growth in our aftermarket business [sales of used airplanes],” he said, speaking with Donnelly during the earnings report. “Jet deliveries of 38 units were down from 43 in last year’s second quarter. We posted an operating profit of $5 million, which compared to $3 million last year.” Through the second quarter of this year, Cessna had delivered 62 jets.
Cessna’s order backlog is also down from last year, although Paolucci said it is now stable. Closely related to order backlog are cancellations and “whitetails,” completed aircraft that await customers. Paolucci declined to be specific about either, but did confirm that Cessna has had its share of both. “We have fewer unsold aircraft this year than we had this time last year. In 2009 we were still delivering a lot of airplanes that we had sold earlier, and I’m not sure we had any inventory at the end of 2009,” he said. “We didn’t have much at the end of last year, but we have fewer this year than we did in 2010, year to date.”
Cessna is working hard to “keep production at order rate so we can deliver what we’re building,” Paolucci said. “For me right now, it’s hand to mouth,” meaning, he explained, “I’m right there with production, so that as soon as airplanes are finished we get them delivered. In some cases, we’re selling and delivering airplanes in the same month.”
Confirming what CFO Conner had reported in July, Paolucci said sales of used aircraft have been very good for Cessna this year. “We have a smooth flow of used aircraft taken in trade and resold. For the first time in a long time, we have actually sold an airplane we have not yet taken in trade. That was usually pretty typical before, but we haven’t seen that over the last three years. Now we’re starting to almost feel normal in the used aircraft market.”
From Paolucci’s perspective of his 33 years at Cessna, he said the company is selling aircraft within its typical range of domestic-to-international ratios, which vary between 72 percent domestic, 28 percent international and 55 percent domestic, 45 percent international. For 2011, he expects domestic sales to be about 65 percent and international about 35 percent. (Cessna defines the segments as “domestic is the 50 states in the U.S and international is everything else.”)
But overall, Paolucci described the current business jet market as “brutal.” He said, “I’ve never seen a time when jet sales have been so difficult over such a long period of time, especially in the light, midsize [categories]. Every deal is competitive. It’s always been that way in the aviation industry, but it’s harder. There’s a lot of competition. We work hard for every deal. That being said, I think we’re holding our market share pretty well.”
Emerging Markets Bolster Large Jet Sales
As many others in the industry have noted, sales of larger business aircraft–the Bombardier Challengers and large-cabin Gulfstreams, as Paolucci characterized this segment–have been holding up better than smaller ones, such as the Gulfstream G250s and below, which are Cessna’s bread and butter.
Donnelly mentioned this during the July earnings call. “In terms of aircraft mix,” the Textron CEO said, “what we’ve seen is a bias toward the larger Citation jets, so XLSs and the CJs and Sovereigns–more slanted away from the Mustang, although Mustangs are doing okay. But we expected that, compared to the last couple of years, we would start to see a move toward the larger aircraft. And that is what we are seeing.”
Paolucci pointed to emerging markets, particularly China, as a primary reason that sales of larger business jets have been holding so well. He related a conversation he had the last time he was in China, during which he spoke with several customers and prospects about their reasons for buying aircraft. “They said Chinese customers buy aircraft to display their wealth, rather than strictly as a business tool. In China, they are making a statement by their purchase.”
So Paolucci took a look at the sales brochures Cessna is using in China. “The focus of the brochures is on how sensible and economical Cessna’s airplanes are, with their low purchase prices and operating costs. These were not the things being mentioned by the customers. So our approach in selling was very different from their approach to buying,” he said. Another reason the recession has had little effect on large-cabin airplane sales is the that people who can afford large aircraft can afford them in good times or bad, Paolucci said. “So it really is a matter whether they need the aircraft or not.”
“We now are trying to market differently in China,” he said, “in the sense that we are presenting the aircraft differently than before and focusing on our Sovereigns, Tens, XLS Pluses–our larger cabin airplanes, to make sure we’re getting as much play out of them, especially internationally.”
Elsewhere outside the U.S., South America is very strong for Cessna, he said, primarily Brazil. “It’s always been a strong Citation territory.”
CFO Conner said in July that international demand had been “reasonably strong” during the first half of this year. He mentioned Southeast Asia and Indonesia as areas that have been good for Cessna “on both the Citation jets as well as the Caravan [turboprop]. The eastern European and Latin American markets are still strong. So it’s been fairly balanced.”
Cessna’s New Matrix Organization
As he finished his opening statement during the earnings call, Textron CEO Donnelly told listeners, “At Cessna, I believe we’re taking the right actions to position the business for the future.” As he had explained a few minutes before, these actions, which had already been implemented by Ernest, include “a regular integrated operations review cadence focused on improving the accountability and cross-functional coordination in the business.”
AINasked Paolucci what these changes meant to him and his sales organization.
“What Scott [Ernest] has done to drive accountability for the profit and loss of particular products is put a matrix organization in place where there are people responsible for jet products, propeller products, after-sales and service of the aircraft, defense products and CitationAir. These people also report to the president.” So now the leadership team includes not only the functional heads, such as Paolucci for sales and marketing, but also the people responsible for specific product lines. The sales force is now tasked with providing sales service to all the commercial products. “This causes us to communicate cross-functionally much more and as a consequence we are a lot more coordinated,” Paolucci said. “Our manufacturing is better coordinated with sales, which is better coordinated with engineering. Like the head of an IT department, I, as Cessna’s sales leader, am responsible for providing sales expertise to the business leaders that need it. So, if the business leader of jets develops a new product, I’m responsible to sell that product.”
The company has also made two significant decisions regarding sales and marketing, Paolucci explained. First, it has combined the sales teams of Cessna and CitationAir–the fractional share, charter and management division–and second, it has decided to double the size of its sales force within the next 12 months, to make sure that not only Cessna gets its fair share of sales, but to also make an attempt to increase the size of the market.
“We now go to market as one Cessna,” Paolucci said. “Being a full aircraft-solutions provider, I can sell customers 50 hours on a jet card for use on a CitationAir airplane, or a Cessna 162 Skycatcher with flight training, or all the way up to a Citation Ten.”
In the U.S., Cessna has hired people to look for “concept customers,” those high-net-worth people who have never used or owned an aircraft before but have a need for private air transportation. “Outside the U.S., we are adding people in the four corners of the world to capture more of the international market,” said Paolucci.
So, is the “Help Wanted” sign already hanging on Cessna’s door?
“We are actively recruiting and hiring sales people today,” Paolucci answered.