Wichita aviation waits on rebound

Oct. 14, 2010


Oct. 14--The market for business jets was supposed to be a lot better by now.

Previous downturns, while painful, have been "two-year affairs," Teal Group analyst Richard Aboulafia said.

But analysts now don't expect deliveries to improve until 2012, about four years after the recession started taking its toll on the market.

And Aboulafia predicts it will be 2015 or 2016 before the market returns to previous highs.

"We were all hoping the recovery would come in (the second half of this year), but it's continuing to linger," said Bombardier Learjet vice president and general manager David Coleal. "It continues to be very difficult in this segment of the market."

Their comments came ahead of the National Business Aviation Association's annual convention, which runs Tuesday through Oct. 21 in Atlanta. It's the world's largest show dedicated to business aircraft and the nation's fourth-largest trade show.

Cessna Aircraft is planning a major announcement at NBAA, and Hawker Beechcraft will announce some product advancements and some new additions, while Bombardier will provide information about its new Global family of aircraft and give updates on the new Learjet 85.

But Hawker Beechcraft CEO Bill Boisture said the market has stagnated.

Today, the market for business jets is 40 to 50 percent down from 2007 and 2008.

A year ago, Boisture expected the market to be flat by now. But "I didn't realize it would be flat as low as it is."

Wichita has borne the biggest brunt of downturn in the business jet market.

"Wichita really is the center of the problem," Aboulafia said. "The bottom half of the market is just getting crushed, and the top half is doing really well.

"It's one thing for the entire industry to feel a certain pain, but for all of the pain to be suddenly dumped on Wichita-based companies -- that's an extremely unusual event."

Companies that offer larger business jets -- Gulfstream, Dassault and Bombardier's larger jet segment of the market -- are doing fine, he said.

But builders of small to midsize jets -- Cessna Aircraft, Hawker Beechcraft and Bombardier's Learjet plant in Wichita -- have felt the most distress.

"It's a lot worse than anyone expected," Aboulafia said.

Wichita planemakers have cut production and about 13,000 jobs since late 2008.

Buyers of large business jets tend to be less susceptible to market fluctuations than smaller jet buyers.

Buyers of small and midsize jets also tend to rely on financing for jet purchases, and financing remains difficult.

And many orders for Wichita jets came from the fractional ownership market, which "basically imploded from the standpoint of taking (delivery of) new jets," Aboulafia said.

Sales of new aircraft also have been hurt by a glut of quality used aircraft on the market at low prices.

The numbers remain elevated, although they are coming down.

Wichita planemakers also are grappling with how to compete with a relative newcomer to the market -- Brazil-based Embraer.

The planemaker is capturing market share.

Embraer is "aiming its attention directly at Wichita," Aboulafia said.

Backlog pain

The distress in Wichita's business jet industry is evident in its eroding order backlogs.

Cessna's backlog reached a record high of $16 billion at the end of the June 2008. At the end of 2009, it had dropped to $4.9 billion. And by the end of June, its backlog was $3.7 billion, down 77 percent from the 2008 high.

Hawker Beechcraft, meanwhile, reached a record $7.6 billion backlog at the end of 2008. But by the end of June 2010, it dropped to $2.4 billion, down 68 percent.

Bombardier posted a $23.5 billion backlog in its aerospace business at the end of January 2009, the end of its fiscal year. That's declined to $16.7 billion at the end of January this year, a drop of 29 percent.

The drops in backlog aren't good news, Aboulafia said. But no one can take comfort from business jet backlogs even in the good times, he said.

"Studying the backlogs is like mapping sand dunes," he said.

The backlogs aren't transparent.

"At their peak, I wouldn't have taken them seriously," Aboulafia said.

Will jobs return?

Eventually, the market for sleek business jets will rebound, Aboulafia said.

"I think in terms of reaching the peaks it's reached, absolutely," he said. "I have no doubt in my mind that we'll get there."

Every up cycle following a downturn has come back stronger.

He doubts, however, that the business aircraft market will experience the same strong growth of the 2003 to 2008 timeframe.

In that five-year period, the market grew more than 17 percent annually.

Deliveries, however, should return to their previous peak levels by 2016, he said.

However, Embraer, a relatively new player in the market, is changing the landscape.

With Embraer's entrance, cost competition has risen intensely. And that's putting pressure on manufacturers to outsource as they aggressively cut costs, Aboulafia said.

"So I suspect the answer is 'no,' " he said, on whether all the jobs will return.

He expects work to continue to be shipped to Mexico and some to other outside suppliers.

Hawker Beechcraft, for example, plans to send work outside the company that would eliminate 821 hourly jobs under a contract proposal to the union. It would retain about 1,718 hourly jobs.

As long as work remains in Wichita, the jobs can grow once the market rebounds, the union and company note.

International market

The international market is important to Wichita.

More of Hawker Beechcraft's products will be sold outside North America than inside the continent this year, Boisture said.

The company has set up regions to focus its efforts, divided by Europe, the Middle East and Africa; Asia-Pacific and the Americas.

"We're working hard over there to find new business," Boisture said.

That doesn't mean that the international market is strong, however.

"It's not any easier, really, in those markets," Boisture said. "But there are pockets of demand."

The global economy of the world is apparent in this downturn, he said.

"Something that happens in one part of the world does affect what's happening in other parts of the world."

Boisture expects Hawker Beechcraft to sell about 65 to 70 percent of its products internationally this year.

On the financing front, several institutions are coming back into the aircraft financing market, said Hawker Beechcraft executive vice president for marketing and sales Shawn Vick. But the terms of conditions -- such as the amount of down payment -- are significantly higher than when the market was thriving.

"It's not as attractive a proposition as it was," Vick said, and it's keeping some buyers on the sidelines.

"For most buyers, they're not interested in taking advantage of those terms and conditions."

One piece of good news is that corporate profits have made an extremely strong comeback, Aboulafia said.

"That's a long-term indicator," he said. "One of these days, businesses are going to start feeling good about prospects for the economy and they're going to start spending again."

In the meantime, Wichita general aviation planemakers must do what they're doing -- downsize and cut costs.

"There's not much you can do but hang on, cut costs and try to keep new product development alive and hope for better times," Aboulafia said.

Reach Molly McMillin at 316-269-6708 or [email protected].