If Hawker Beechcraft emerges from bankruptcy with its debt load gone, does that solve its problems?
The answer, say several experts, is no.
The company filed Chapter 11 bankruptcy Thursday, seeking a prearranged restructuring agreement that would allow it to continue its operations and restructure its finances.
The bankruptcy filing saves the company $125 million now going to debt payments, but Hawker Beechcraft still faces big challenges. In the short term, demand for aircraft remains weak. Longer term, the companys jet line has competitiveness issues, its military trainer program may be winding down, and new challengers and new models are coming into its markets.
They solve their cost-side issues, said George Tsopeis, vice president of operations for Zenith Jet, but on the sales side, they face very formidable obstacles in the segments where they operate, from new offerings from Embraer, Gulfstream, Cessna and Bombardier that they still need to contend with if they were going to seriously contend.
Still, theres reason for optimism, some say.
Jim Schuster, the companys CEO from 2001 to 2009, said the company is in no worse shape now than it was when he took over. The big difference is that it was owned by Raytheon, which was willing to absorb the losses.
Now its a stand-alone, and its a shame that so many people are expecting the worst here, he said. It wont be the easiest process, but I think it has a happy ending.
The recession hit Hawker hard: In 2011, it shipped a third as many corporate jets and half as many piston planes as it did in 2008.
The company also appeared to suffer a major setback late last year when the Air Force disqualified it from a potential $1 billion contract to build its AT-6 light support plane for the Afghan government in favor of an Embraer product. Following an outcry and an investigation by the Air Force, that contract is being reworked and is now expected to be awarded in early 2013.
A strong market rebound for civilian aircraft would lift the whole industry and solve a lot of Hawker Beechcrafts problems, say analysts, but that doesnt appear likely.
Richard Aboulafia of the Teal Group said the dollar value of the corporate jet market grew 17 percent a year for five straight years in the past decade. It grew 14 percent annually in the 1990s.
You could make everything better with that kind of recovery, but were not seeing that, he said. Now, Aboulafia said, forecasters are projecting a market rebound of 10 to 12 percent annually once it finally takes hold, perhaps this year.
This is going to be a long slog rather than a race for the economy, and that will impact the ability of the market in general to respond, said Wayne Plucker, an aerospace analyst for Frost & Sullivan.
So if the market for aircraft isnt going to expand fast enough to make everybody a winner, Hawker Beechcraft must keep or gain a larger piece of the market.
Hawker has several different businesses, some stronger and some weaker. Some, such as the King Air turboprop, its aftermarket service business, its military and trainer business, are relatively strong, analysts say. The market for piston planes is weak, but the companys product is well respected.
The biggest issue lies with some of its corporate jets, analysts say. The company currently has three models: the Premier IA in the very light jet segment, the Hawker 900XP in the midsize jet segment, and the Hawker 4000 in the super midsize segment. The company was working on an upgrade of the Premier IA, the Hawker 200, but in December said it would slow the work, citing weak demand.
The Hawker 900XP, a derivative of the earlier 800 platform, is an older jet but remains the companys most popular, and best of all its development is largely paid for.
The problem lies mainly in the Hawker 4000, which was certified in 2006 following a decade of delays that meant it virtually missed the sales boom of the 2000s and lost the technological edge it would have had. It was plagued by software glitches until recently. The company has made many upgrades to the plane, and it has gotten good reviews lately.
But the company sells the Hawker 4000 at a loss. Tsopeis said the bankruptcy will allow the company to regain a healthy profit margin on the plane, but it remains in the most competitive category for jets, the super midsize.
The Hawker 4000 is the plane they essentially envisioned, but at that time, in the late 1990s, it was supposed to have a real technology proposition, Tsopeis said.
And the competition for the 900XP and the Hawker 4000 is ready to ratchet up as Brazils aggressive Embraer is set to join the fray with its Legacy 450 and 500 models.
The good news, Tsopeis said, is that Hawker now has the technology issues behind it and can focus on less-expensive upgrades and variants.
Plucker described the Hawker 4000 as a nice airplane, but unremarkable.
Theres not enough differentiation from its competitors to carry the company, he said.
But, he added, the bankruptcy will allow the company to price the plane aggressively going forward, and that should help sales greatly.
Hawker Beechcraft Inc. CEO Steve Miller is a turnaround specialist who discovered his speciality during one of the most famous corporate turnarounds of all: Chryslers recovery in the 1980s led by Lee Iacocca.
In 1980 Chrysler faced both the general collapse in demand caused by the 1979 oil price spike and an unappealing product line. As detailed in Millers 2008 memoir, The Turnaround Kid, things were touch-and-go for the company. Chrysler got a federal loan guarantee and then Miller had to persuade bankers to renegotiate their loans. Things got so tight during that period that the company couldnt order in sandwiches during long meetings with creditors without paying upfront.
Within a few years, the economy snapped back strongly. Just as importantly, Miller wrote, Chrysler had some design coups in development throughout the crisis. It unveiled its new K-Cars the Plymouth Reliant and Dodge Aries in 1982 and sold 300,000 the first year. It unveiled the first minivan a year later, selling 210,000.
In 1992 Miller left Chrysler. His parting advice to the new Chrysler CEO:
I warned him that every five or ten years Chrysler runs out of money, Miller wrote. They get into a financial crisis and then sacrifice long-term product development to cut costs. I suggested he use the times ahead to beef up the balance sheet so he would not have to cancel work on the next generation of vehicles just to meet payroll.
Its possible that Hawker Beechcraft is the new Chrysler, ready to blossom if it can just get through a temporary market downturn.
Or, it could be American Motors, the firm Chrysler bought in 1986 to get its Jeep line.
AMC was perpetually starved for capital in an industry with a high demand for capital; as a consequence, it stumbled from recession to recession, occasionally bringing out quirky models such as the Pacer and Gremlin.
Success in manufacturing requires new capital investment and research and development, said Jim Wolff, a professor at Wichita State University. Its hard to outspend larger rivals or come up with the kind of home-run type product that shakes up a mature industry. Its the main reason that Chrysler and Ford rarely, if ever, surpassed General Motors despite 80 years of trying.
And thats why some analysts wonder about Hawkers long-term prospects in such a competitive industry.
Product line, the market, Embraer, their debt, Aboulafia said, ticking off the challenges.
Those who say Hawker has basic long-term competitive problems, as opposed to just a weak market, suggest that Hawker needs a massive infusion of money to refresh and broaden its jet product line or restructure the company.
Tsopeis said Hawker Beechcraft needs to spend heavily to compete or get out of the jet building business. Other parts of Hawker Beechcrafts business are doing better or have stronger competitive positions, he said.
The company could sell off the jet business and build its business around its sparkling King Air turboprop, he said.
The footprint would be considerably smaller, but they would be profitable, he said.
Wolff, the WSU professor, agreed that even with the improved cash flow, the company probably needs something more.
The margin for error is diminished, Wolff said. You have to be exceedingly good. You have to have a very good plan, and it has to be well communicated throughout and everybody has to be on board. And it will take some money. They are not going to survive on cash flow from operations.
If the company were to shed its jet-building operation, Wolff said, it would have a serious impact on employment and on the community.
Schuster, on the other hand, rejects the contention that the jet business has serious long-term competitive problems.
Investing heavily in new development would be a big mistake, he said. The company was hobbled for years by the money it spent on the clean sheet development of the Hawker 4000 and the Premier I. Now that the planes are on the market, the company just needs to sell them.
The situation today looks familiar to Schuster. When he took over in 2001, the company was losing $1 million a day. The company got through that and performed fine in the upswing that followed, despite long-term concerns by his bosses at Raytheon Aircraft.
I was on conference calls with Raytheon for years talking about their concerns over the products, he said. Sure, there are competitive products coming into the market. The jet line may not be the strongest, but its not the weakest.
At heart, Schuster said, Hawker Beechcrafts problems are its finances the $2.5 billion in debt on its books not its products.
I dont share the pessimism, he said. The problem isnt mismanagement by Goldman Sachs or Onex. The problem is the market has gone into deep depression, and it will take some time to recover.