Cessna faces obstacles beyond CEO's departure

05/09/2011 10:42 AM

08/08/2014 10:03 AM

Jack Pelton's departure as Cessna Aircraft's chairman, CEO and president comes during one of the most challenging times in the company's history.

Economic turmoil has led to a sustained weak market for its products. Increased competition from Brazil-based Embraer has cut into the market that remains. The company has shed about half of its employees since 2008.

Financial losses are mounting.

Once the shining star for its parent company —"It was the salvation of Textron" at times — Cessna now is one of Textron's biggest problems, said Frost & Sullivan senior aerospace analyst Wayne Plucker.

Pelton's retirement was announced Monday. While his official retirement date is June 1, he is no longer managing Cessna's daily operations.

It was a sudden departure for the man who joined the company in 2000 as senior vice president for product engineering and was promoted to CEO seven years ago.

Textron chairman and CEO Scott Donnelly, who will run Cessna until Pelton's replacement is found, said in a statement last week that Cessna made many significant program and product milestones and strengthened its position as a leader during Pelton's tenure.

Weeks earlier, in a conference call after Textron reported first-quarter results, Donnelly called Cessna's underlying operational performance disappointing.

Pelton didn't return calls for this story, and Donnelly declined to be interviewed. A Textron spokesman said last week that the company's performance was not the cause for Pelton's departure.

"This is a straightforward retirement," Textron spokesman Dave Sylvestre said. JP Morgan analyst Steve Tusa said Pelton's retirement wasn't a shock given the new senior leadership team in place at Textron. In recent years, the team has changed nearly all of the top leaders running Textron companies. Donnelly took over as Textron CEO in 2009.

"Cessna was the only one that had a consistent management team," he said.

It also was hardest hit.

"I think to some degree there was writing on the wall — then things progressed," Tusa said.

Plucker, however, was surprised by Pelton's departure.

"If you look around the industry, it's not just him who's sitting in an uncomfortable position because the boards of directors are saying 'Hey, I'm losing money. What are you doing to do about this?' " Plucker said.

It's difficult to view Pelton's departure as positive for Cessna, said Teal Group aviation and defense analyst Richard Aboulafia.

"He had a good name in the industry," Aboulafia said. "I find it difficult to believe anyone could have done better in very bad circumstances."

Pelton will be missed in the industry, General Aviation Manufacturers Association president Pete Bunce said in a statement.

"Jack has been a tireless industry leader, and we owe him a huge debt of gratitude," he said. "He has been one of our most effective spokesmen for general aviation, always willing to travel and speak to policy makers and regulators on issues."

The down cycle

Cessna is a good company that does a lot of smart things, Plucker said.

"They're seldom on the bleeding edge, if you will," he said. "They tend to make those things work and work well, but some of the high level decisions I don't think bore fruit for them."

Demand for Cessna's portion of the business jet market — the light to medium-size aircraft — fell 57 percent in the downturn.

As the world's largest business jet maker, Cessna bore the heaviest brunt of the downturn, analysts say.

Cessna made good money and turned in some "sparkling results" in the last up cycle, Tusa said. "Clearly, they're making no money at the bottom."

Cessna lost more money than Plucker expected during this year's first quarter, losses that appeared to be operating losses rather than one-time charges. Cessna lost $38 million in the first quarter compared with $24 million for the same time a year ago.

"That's a little disconcerting, as much cost cutting as they've gone through," Plucker said.

The company took a $29 million loss in 2010, compared with a $198 million profit for 2009.

Analysts think the down cycle in the market has hit bottom and will begin to improve next year.

Fending off competition brought on by newcomer Embraer is Cessna's biggest challenge, Tusa said.

"Every jet order that Embraer takes potentially subtracts from one of the three other midsize guys (Cessna, Hawker Beechcraft and Bombardier Learjet)," Tusa said.

With Cessna the largest manufacturer, business jet orders to Embraer come largely out of Cessna's pocket, he said.

"It's almost a guarantee that Cessna is going to lose share," he said. "It's a question of how much."

Cessna currently has 50 percent of the small and midsize market. That could drop to around 40 percent, he said.

To compete, Cessna must have its "manufacturing house" in order and lower costs in place, Tusa said.

Long-term strategy

Cessna officials must retrench and decide what they want for the future and what they think it holds, Plucker said.

"You don't often hear that from them," he said.

He said Cessna has lacked a long-term strategy the past few years.

"The new guy needs to come in and map out a good strategy," Plucker said. "They've kind of been following for the last number of years rather than leading."

Cessna has been in a cash conservation mode and must increase research and development and refresh its product line, the analysts said.

"I think they need to be pretty aggressive," Tusa said.

Cessna has been "leveraging the same platforms over and over," Plucker said. "There's nothing wrong with what they've done... but they're probably reaching the edge of that."

In early 2008, Cessna officially launched a program to build what would have been its largest plane, a large-cabin intercontinental business jet called the Citation Columbus. However, Textron canceled the program a little over a year later in the midst of the downturn.

Its latest plane to come to market was the Citation CJ4 business jet, introduced in 2006. Deliveries began last year.

Pelton previously said Cessna has new products in the works that will be announced when market conditions improve.

"I think you'll see a steady line of new products over the next several years," Tusa said.

Cessna must look at the market and think about what's next.

"That's going to require some decision making and some patience on the part of the board," Plucker said.

In the last down cycle, Cessna kept investing and was the only company to come out with a slate of new products even before things started to turn back up, Tusa said.

Aboulafia questions whether Textron will give Cessna the product development resources it needs.

"It's important to protect the company's presence in the market with new product development," Aboulafia said. "My fear is the requirements of making the short-term or mid-term (financial) numbers are such those developments might have to be put off."

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