Savannah airframer cautiously optimistic
Large-cabin business jets continue to lead Gulfstream’s order and delivery figures, while sales outside the U.S. continue to surpass domestic sales. Both elements are helping to keep the bottom lines of Gulfstream and parent company General Dynamics relatively stable, while they provide a glimmer of end-of-the-tunnel light for the second half of this year and perhaps even some optimism for higher revenue next year.
Gulfstream’s order backlog has decreased from $19.3 billion earlier this year to $17.8 billion now, of which about $12 billion is for the nearly 200 G650s in the company’s order book. (List price of the G650 is $64.5 million.) The other $6 billion in backlog is for in-production aircraft, mostly large cabin. “That’s a very robust backlog,” Jay Johnson, General Dynamics chairman and CEO, claimed during General Dynamics’ second-quarter earnings call in late July.
Orders spanned the entirety of Gulfstream’s portfolio, he said, with roughly two thirds for the large-cabin aircraft and one third for mid-size aircraft. Gulfstream’s in-production fleet comprises the mid-size cabin G150 and G200 and the large-cabin G350, G450, G500 and G550. In development are the mid-size G250, which will replace the G200, and the large-cabin G650, a clean-sheet-design. Both new jets are on track for certification next year.
“I look at [the order book] in terms of who is in there and how long it will take you to get an entry in service of the airplane you want to buy,” Johnson explained. For the G450 that’s 18 months and for the G550 it’s 24 months. “In my thinking,” he continued, “that’s kind of a sweet spot. Given the production rates we have, if the backlog carries an 18- to 24-month delivery time with it, [then the backlog] is appropriately sized. If it gets less than that, then we’ve got some sales work to do. If it is more than that, then the customers wait too long for their airplanes.”
Johnson said the order book at Gulfstream is “essentially where we thought it should be” going into 2010. He admitted a “slowdown in order intake in the second half of the [second] quarter.” However, second quarter “orders outpaced the fall [of 2009] by three to one, while defaults were at their lowest level of the downturn.” He said Gulfstream is taking orders in the third quarter and that he sees “the order book pretty stable as we progress throughout the year.” Default activity, he said, will remain stable for the rest of the year, based on what he was seeing in late July. The company has no unsold recently built aircraft (“whitetails”) waiting for customers.
In 2009, Gulfstream reduced its production rates in response to the market, and delivered 75 large-cabin jets and 19 mid-size jets, compared with 87 large-cabin jets and 69 mid-size in 2008. The company also reduced employment by about 1,200 to a total of 10,600 and cut travel, marketing and other expenses. This year has seen no layoffs, according to a Gulfstream spokesman, and in fact the company has begun “selectively hiring.” This summer Gulfstream furloughed its production employees for two weeks in July, as it did last year, which is reflected in reduced production numbers in the third quarter.
The Gulfstream production rate this year is stable at a level that is close to 2009’s 94 deliveries, said Johnson, though it is some 50 percent below 2008’s 156 units. For this year, Johnson said he expected Gulfstream to deliver 76 large-cabin aircraft and 21 mid-size jets, for a total of 97. The large-cabin number is as was expected, he said, but “the mid-cabin business continued to show improvement in the second quarter and now exceeds my original expectation for 14 deliveries this year.” Two months after the second-quarter earnings call, the Gulfstream spokesman said the company is now expecting to deliver 18 mid-size jets, which would make total 2010 deliveries 94 units, exactly the same as last year.
That anticipated increase in mid-cabin deliveries above Johnson’s expectations earlier this year (though now below last year’s 19) could be a manifestation of the decrease in inventory of used G200s this year, which went from a peak of 38 aircraft in 2009 to 24 in September. This is the same level that used G200s held in October 2008, when Gulfstream announced the G250 as the 200’s successor. About half of the G200s sold on the used market over the last 12 months went for less than $10 million, while two years ago they were going for $15- to $20 million. Base price of the G250 is $24.5 million.
Larry Flynn, Gulfstream, senior vice president, marketing and sales, told AIN that the business aircraft market is clearly segregated. “The top end is very good and the bottom end not so good,” he said. “The higher the price of the airplane, the better it is selling.” This gives Gulfstream a leg up over other OEMs, because most of its sales are of its large-cabin airplanes. “Here in the U.S.,” Flynn said, “the recession has hurt a lot of smaller businesses, which are major customers for smaller airplanes.” Therefore, manufacturers with more models on the lower end, such as Cessna and Hawker Beechcraft, are being more negatively affected by the general economic downturn.
In addition, Gulfstream is selling more than half of its jets to customers outside the U.S. market, and most of these are large-cabin. Flynn characterized the non-U.S. market as mostly private companies and high-net-worth individuals who have not been substantially affected by the downturn. Most of this international business is coming from the now familiar BRIC countries–Brazil, Russia, India and China–plus the Middle East. Not surprisingly, these are the same markets that were boosting business aviation sales before the stock market plunged off a cliff in late 2008, quickly dragging business aviation with it. This happened soon after Lehman Brothers declared bankruptcy on September 15, coincidentally just three weeks before the NBAA convention of that year.
While the glass-half-empty crowd could point to Gulfstream’s level delivery numbers this year as further evidence of more grey skies to come, Johnson did see a sliver lining during the first half. “Second quarter orders also reflected renewed interest in our North American markets, which were essentially dormant following last year’s financial crisis and ensuing anti-business jet rhetoric,” he said.