October 15, 2009

The state of Kansas' business aviation industry

Nobody saw this coming. Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program. The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall. A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow.

Nobody saw this coming.

Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program.

The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall.

A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow.

"We're going to win, but it's going to be a long fight," said Hawker Beechcraft CEO Bill Boisture.

Deliveries are expected to drop further next year from already depressed 2009 levels. An upturn in deliveries is expected in 2011 or 2012.

But it may be several years before demand for business jets returns to record highs.

"We're in the bottom... of a long cycle," Cessna Aircraft chairman, president and CEO Jack Pelton said in an interview ahead of this year's National Business Aviation Association show. The show opens Tuesday in Orlando, Fla.

As demand for jets eventually increases — and it will, aviation experts say — Wichita jobs will return.

But whether aviation employment returns to previous levels is uncertain. Some say it's unlikely.

Wichita business jetmakers are under pressure to lower costs as they deal with the new reality of lower demand.

They're also grappling with increased competition, particularly from business jet manufacturer Embraer in Brazil.

"They're going to continue to be a real thorn in our side," Pelton said.

Before the fall

This past year couldn't have been more different from the previous one.

Before the downturn, Wichita planemakers were in their third year of record deliveries.

Cessna, Hawker Beechcraft and Bombardier Learjet were boosting production and hiring as order books bulged.

Cessna was about to break ground on a new production plant for its largest business jet, the Citation Columbus. The Columbus program has since been canceled.

Cessna had planned deliveries of 535 jets this year. That's been cut nearly in half.

Any downturn, economists once thought, would be cushioned by a strong international market and big backlogs. A year ago, the U.S. stock market was piling on losses and the financial crisis spread around the world.

The industry has never before faced a downturn this severe, said Teal Group analyst Richard Aboulafia.

Cessna, Hawker Beechcraft and Bombardier Learjet have shed almost 13,000 jobs in the past year. That doesn't include lost jobs from local suppliers and others who support the industry.

The industry has taken a tough blow, Aerospace Industries Association president and CEO Marion Blakey said during a visit to Wichita this week. But the fundamentals are in place to weather it, she said.

"It's an industry with great bones," Blakey said. "We are in a strong position."


As the market changes, companies are taking time to assess their business.

"The market has given us a respite here," Boisture said.

Hawker Beechcraft is working to improve its business so it will be ready to compete when the market improves, he said.

Ultimately, the company's footprint likely will be smaller.

It's assessing outsourcing "non-core tasks," Boisture said. Where it's practical, it's seeking "lower labor-cost markets," he added.

At the same time, it's considering closing and consolidating facilities to cut overhead. Specifically, it likely will close its Salina plant and move work to Wichita.

"We are intending to do more work with fewer people," Boisture said. "Our early assessments of our processes tell me we can get a lot leaner than we are."

Bombardier Learjet is concentrating on efficient operations, customer satisfaction and its product lineup, Bombardier Learjet vice president and general manager David Coleal said. It also is developing a new business jet, the Learjet 85.

That, and an eventual improvement in the market, will create a need for more jobs at some point, Coleal said.

At Cessna, Pelton said there's no fundamental changes in the works.

"We have a lot of capacity that is still underutilized," he said.

The downturn forced Cessna to close its Bend, Ore., plant and move work on its Corvalis models to Independence and to Chihuahua, Mexico.

In all, Cessna is consolidating 10 facilities with about 540,000 square feet of space to meet lower production needs, its parent company, Textron, said last month.

Cessna must improve its margins and increase profitability, officials said. It's striving to lower the cost of fabrications, production and engineering and to improve productivity, they said.

Pelton said it's difficult to tell what will happen with jobs in the future.

"It's all based on when demand comes back and what kind of production rates you might see," he said.

While not all the city's aviation jobs came back after the downturn following Sept. 11, 2001, Cessna's employment before this downturn exceeded its previous levels.

A 'nasty cycle'

Business jet demand depends on an economic recovery, the return of corporate profits and how quickly customers feel confident about buying.

While the numbers are improving, the quantity of used jets on the market remains high, prices remain down and usage continues to be lower. The lack of financing available for aircraft purchases also is still a problem.

"It's a pretty nasty cycle," said Cowen and Co. managing director and senior research analyst Cai von Rumohr. "The comeback usually takes a while to generate momentum."

Teal Group's Aboulafia said he expects recovery to begin in 2012.

Cessna isn't projecting when 2008 levels might return, Pelton said.

"It's fair to say it's going to be a ways down the road," he said. "We're not planning for it in the next five years."

Order cancellations have slowed to more manageable levels but haven't stopped entirely, Pelton said. Cessna is taking new orders but not at the rate of previous years.

"The good news is we're starting to see the economy starting to recover," he said.

Worldwide, planemakers delivered 1,315 business jets in 2008. It may take six to eight years for those levels to return, Aboulafia said.

Regardless, the long-term fundamental global need for travel using corporate aircraft will be there when the economy recovers, experts say. Emerging international markets also will evolve and stimulate demand.

"Time is important, and safety and security and the ability to do business are important," Boisture said.

Wichita planemakers are still developing new products to be ready to compete when the market improves.

One must take a long-term view, Coleal said.

"New products will improve safety, reliability and be more sensitive to the environment," he said. "All these things will be good for aviation."

New competition

When the market returns, the competition for business jets will have intensified for Wichita planemakers.

Gulfstream, for example, is developing the new super-midsize G250. The first plane rolled out of the factory earlier this month.

An even larger threat is Embraer, which is developing three business jets to add to the three jets it already has in the market.

" (Embraer is) gunning for the Wichita part of the business," Aboulafia said. "They're going for the lower end of the business jet market, and that's where the Wichita companies play."

The company builds good products and is aggressive on price, he said.

"If you look at each Embraer product, they're going after the Cessna or Hawker or Learjet product for a couple of hundred thousand dollars less," Aboulafia said.

The advantage for a company like Cessna, however, is customer loyalty and superb service, he said.

Because Embraer has built airliners for so long, it brings an eye toward ruggedness and reliability to the market, Hawker Beechcraft's Boisture said.

"I'm very concerned about them," he said. "They're a good engineering company."

"They have a product development plan that is, in my view, well-developed to enter the market where we and Cessna have been for many, many years," he said.

Eyes turn to Mexico

As they look to lower costs, Cessna, Hawker Beechcraft and Bombardier Learjet have turned to Mexico as a lower-cost area to place work.

"The pressures to do that are going to increase," von Rumohr said.

About 190 aviation companies do business in Mexico and employ about 27,000 people.

For the first time last year, Mexico was the fastest-growing aerospace supplier in the world, outpacing China by a wide margin, Aboulafia said.

"Mexico represents a compelling value proposition for a lot of companies that want to outsource, whether that's partnering or building (their own) factories," Aboulafia said.

Hawker Beechcraft employs about 280 people there, up from 180 a year ago.

Hawker Beechcraft is evaluating what work its Mexico facility will perform in the future, Boisture said.

The hourly labor costs there are attractive. They total about $4 an hour, including wages and benefits, sources say. The Mexican government also encourages U.S. companies to place work there.

The decision to move work, however, isn't as simple as wage rates. There are a number of issues and risks to consider, including quality and political uncertainties, experts say.

"The long-term economic stability of the country is something to worry about," said Malcolm Harris, a finance professor at Friends University and former chief economist for the U.S. Postal Service.

Pelton said Cessna has no plans to expand beyond what it's currently doing in Mexico.

A Cessna-owned facility in Chihuahua builds the composite fuselage for the company's Corvalis aircraft. It also does some sheet metal work and wire harness assembly work.

Labor officials are concerned about the work being shipped to other countries.

Machinists union District 70 president Steve Rooney said Mexico is a threat to U.S. jobs. He said the government must rethink the North American Free Trade Agreement.

"It's a race to the bottom," he said.

Still, Rooney is optimistic about the future of jobs in Wichita. The key will be training, he said.

Because of the age of the current work force, many workers will retire over the next five to eight years, Rooney said.

"As long as we have people trained, most of those jobs will come back," he said. "I believe people want planes built by highly skilled people right here."

Wichita's aviation industry might look a little different in the coming years.

"I think there's a synergy here that no other region has," Bombardier Learjet's Coleal said.

"That's hard to replicate."

Other parts of the world are trying to be the next Air Capital with its concentration of manufacturers and great work force, Coleal said. Wichita must understand the competition and be prepared.

"As long as we're aware and able to execute... I think we have a strong future," Coleal said.

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