Moody's: Hawker must cut costs

Oct. 1, 2010


Sept. 30--With debt coming due in 2014, Hawker Beechcraft has no option but to lower its costs, a report by Moody's Investors Service said.

"Cutting costs is key to its survival," Moody's Investors Service vice president and senior analyst Edwin Wiest said in the report.

Hawker Beechcraft is highly leveraged with $2.135 billion in debt, Wiest wrote. Meanwhile, its order book has fallen by 70 percent from its peak of $7.6 billion at the end of 2008 to $2.4 billion at the end of June.

Sometime in 2013, the company must be on healthy footing so it can successfully refinance $1.4 billion that's due the next year, Wiest wrote. Contributions to its underfunded pension plans are also expected to increase before then.

"Hawker Beechcraft needs to take crucial steps to address its cost structure and thwart potential perception issues by customers and suppliers who may become worried about the company's long-term viability," he wrote.

As the "weakest player" in the sector, Hawker Beechcraft is the first to confront difficulties faced by the broader industry, which is still reeling from the economic downturn, he wrote.

Analysts don't expect general aviation production demand to increase until 2012.

Moody's ranks Hawker Beechcraft's probability of defaulting on its obligations as Caa2, eight levels below investment grade. A rating of Caa is judged to be of "poor standing" and subject to "very high credit risk."

Hawker Beechcraft is on a quest to lower costs and is evaluating options to put work out of state and across the border.

It's had offers from Louisiana and Mississippi. Louisiana recently tripled its offer, a Machinists union official said recently.

Decisions will be made in the next few months, company officials have said.

Last week the company said it will lay off 350 salaried workers. It also opened contract talks with the Machinists a year early in hopes of lowering costs. Union members vote Oct. 9.

"A new, more favorable union contract may give the company an incentive to keep the bulk of its operations in Wichita," Wiest wrote.

Hawker Beechcraft spokeswoman Nicole Alexander said the company is evaluating several options to reshape itself to remain cost competitive.

"We will not make any additional footprint decisions until our discussions with the union are finalized," Alexander said Wednesday in an e-mail. "The outcome of these discussions is a critical element to our company's future success."

With a new contract, Hawker Beechcraft may still opt to move some operations elsewhere, Wiest wrote.

Wiest said in an interview with The Eagle that Hawker Beechcraft must consider factors such as net savings, logistical challenges and quality of the work when contemplating moving work outside Wichita.

"Clearly, the company has to evaluate the costs as well as some of the risks in looking at these alternate locations," he said.

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