Wichita’s aviation industry can rebound, analysts say, by expanding its focus

06/23/2013 2:45 PM

08/08/2014 10:17 AM

For many decades, Wichita has been known as the Air Capital of the World as Boeing churned out bombers during World War II and Clyde Cessna, Walter Beech and Bill Lear opened factories.

Suppliers, training and research to support the industry followed.

Through the years, the city has ridden waves, with highs and lows in employment and output.

Still, Wichita remains one of the world’s five important aviation clusters.

Yet its place in the competitive general aviation market has eroded, and local planemakers have had to work harder to try to maintain their place in the rankings.

At their peak less than a decade ago, Wichita’s three business jetmakers built more than 70 percent of all corporate jets delivered. That has now dwindled to 38 percent.

The percentage of turboprops and piston planes shipped from Wichita also is down.

The business aviation industry as a segment has evolved and become a global phenomenon competing with more global players, said Shawn Vick, Beechcraft Corp. executive vice president of sales and marketing.

“It’s a result of a more interconnected planet and a global supply chain,” Vick said.

The recession also took a deep toll on demand for Wichita-built airplanes.

“It was a bad nightmare for us,” said Wichita Mayor Carl Brewer. “We were hit hard.”

It’s coming back, but slowly, Brewer said.

But it’s possible that the city’s place in the global market has changed permanently.

Beechcraft Corp. exited the corporate jet-building business as it emerged from Chapter 11 bankruptcy in February; it will concentrate on its piston and turboprop products.

And Boeing continues its plans to close its Wichita facility in 2014 and move military work elsewhere.

So is the city’s prominence as the Air Capital of the World at risk? No other area in the world is in competition for the title, experts say.

“We still have more expertise than pretty much any other single place in the world,” said Malcolm Harris, professor of finance at Friends University.

Gov. Sam Brownback agrees.

“The entire (support) structure is here,” Brownback said this week. “There is no place else in the world that has that.”

In contrast to some of the city’s losses, there also have been gains. Spirit AeroSystems builds part of all Boeing commercial planes in Wichita at a time of unprecedented demand.

“We’ve hitched ourselves very much to the most important star, which is the commercial aviation side,” Harris said.

A change in market conditions doesn’t mean there’s been a collapse of competitiveness – Wichita’s ability to get future business – said Teal Group aerospace and aviation analyst Richard Aboulafia.

The numbers on delivered planes don’t tell the story of the area’s role in parts and services and of the infrastructure that’s in place to support manufacturing, including its skilled labor force, experts say.

Still, it’s important to look at where Wichita is going and how it plans to get there.

While Wichita’s aviation cluster will remain in place, it may look different in the coming years, in part because aviation manufacturing is becoming much more global.

“I don’t think any one place is going to be as dominant as we once were,” Harris said.

It’s not that another company is edging us out, he said.

Instead, it means that “there are more and more places that are contributing ... to the industry,” Harris said.

Aboulafia said it’s time for Wichita and the state to work to diversify the industry from a concentration on building fuselages and to add other expertise, such as in avionics and engines.

“We’re at a very interesting time,” said Jack Pelton, the former head of Cessna Aircraft who remains active in the aviation industry. “The economy can only get better. Are we going to win … when the economy gets better or are we going to get left behind? There are a lot of pieces in place that we have every chance to win.”

In the future, Wichita may not be so “OEM (original equipment manufacturer) aircraft delivery centric,” Pelton said.

“There’s a long history of skills that have been developed in this area,” he said. “It’s still a very attractive place for people to put their businesses or want to do business with the companies that are already here.”

Brownback said it’s time for Kansas to aggressively promote the industry to the world to gain new business.

“We have to go sell that,” Brownback said.

Wichita has a schizophrenic opinion about its aviation industry, said Harris of Friends University.

“On one hand, we think we should be more diversified,” Harris said. “On the other hand, any time we see (the aviation industry) shrinking, we get upset.”

Shrinking share

Wichita was hit with a one-two punch by a downturn that affected its small and midsized business jet segments and the rise of Brazil-based Embraer as a healthy business jet competitor.

Add to that Beechcraft’s exit from business jet manufacturing when it emerged from bankruptcy this year.

The upper end of the business jet market fared better during the downturn than did the bottom half. Nobody saw that kind of bifurcation in the market coming.

“The bottom half of the market is Wichita,” Aboulafia said. “And Wichita is the bottom half of the market.”

While the entire business jet market fell by 29 percent from 2008 to 2011, the bottom half of the market collapsed by nearly 60 percent.

Those are “just truly disastrous numbers,” Aboulafia said. “You’re talking about the most unusual four-year period in aviation history.”

Wichita was at the epicenter of that pain.

“Hopefully that’s not going to be repeated again, and hopefully the rift will repair itself,” Aboulafia said.

Embraer, which entered the business aviation market to diversify its product line, also wasn’t insulated from the recession.

“Has business jets done much for them?” Aboulafia said. “Not a heck of a lot.”

In the future, Embraer will remain a competitor, but it won’t massively increase its market share, Aboulafia said.

Pilatus and Socata also compete with Wichita on turboprops and Cirrus in the piston aircraft.

The recovery, however, is taking longer than anyone expected, Aboulafia said. The momentum in the market is lacking.

But once the economy gains some speed, the aviation recovery could happen faster than expected, he said.

The delay in the recovery most recently forced Cessna to offer voluntary retirements and to lay off some of its staff.

There are other uncertainties.

Cessna fired a lot of talent in the downturn, Aboulafia said.

It also has several new products in the works, including the Citation Longitude and Latitude and the M2, although the Latitude had some early stumbles, Aboulafia said.

Its specifications have been done twice.

“That speaks to a shortage of talent that’s able to translate market needs into product performance,” Aboulafia said. “It’s quite possible they make a strong comeback with the Longitude and Latitude. I’m just concerned about the loss of talent.”

Pelton said that a key to Wichita’s general aviation industry going forward is how well Cessna, Bombardier Learjet and Beechcraft do with new product offerings.

Cessna is betting a lot on the Latitude and Longitude, which Pelton calls “very, very strong offerings. And Learjet is betting on the Learjet 85.”

Beechcraft is deciding what its next step will be. The restructured company had a good first quarter. Its product support side of the business is doing well.

“We have a very robust investment strategy in our aftermarket business,” said Beechcraft’s Vick.

Going forward, the company will focus on its twin-engine turboprop business and its piston planes.

“We think there’s significant strength in the special mission application for the King Air,” Vick said. “That’s a growth opportunity.”

At the same time, Beechcraft is spending 2013 doing extensive market research on whether to add a single-engine turboprop to its product lineup.

“We know we can build an airplane that will be a very attractive and very competitive airplane,” Vick said. “The question is, is the market ready for it and will it pay for it? If the answer is yes, we’ll make an announcement. If no, we’ll continue to keep our powder dry.”

For suppliers, it’s lucky not all of the work has been in the light business jet market, said Jason Cox with Cox Machine. Commercial work is on the upswing as Boeing raises production rates from record orders.

“There’s enough commercial work right now in Wichita to help balance it out for suppliers,” Cox said.

Before the downturn, about a third of Cox Machine’s work was commercial. Now it’s more than half.

“I think everybody’s busy right now in spite of everything,” Cox said.

There’s also potential to grow in more skilled sectors, such as engineering.

There was a reason Airbus opened an engineering center in Wichita when it needed design engineers, Harris said.

“We have the human capital no other place has,” he said.

There continues to be a negative perception, however, about Wichita’s labor rates.

“That’s the stigma of a union-centric community,” Pelton said.

Labor rates can be overcome by productivity.

If labor rates are cut by half but it takes longer to build a part and the scrap rate goes up, there’s no savings, Pelton said.

In addition, union leaders have shown willingness to do what it takes to save jobs.

“I found Tom Buffenbarger (Machinists international president) willing to say, ‘Let’s start with a clean sheet of paper and do what we need to do to preserve jobs,’ ” Pelton said.

Global vision

Cessna is forging partnerships with China to sell airplanes there.

Components and large pieces of the airplanes will continue to be built in Wichita, Pelton said. But final assembly and delivery will be made in China for the Chinese market.

Brazil, Russia, India and Africa will be growth markets as well.

Wichita can rebound, but it must work hard to bring in new business, experts say.

“I think converting Wichita into a global aerospace supplier rather than a light and medium jet manufacturer is a major ongoing challenge,” Aboulafia said.

The city has been focused on building air frames. That focus must also shift to include subsystems and their components, Aboulafia said.

“There’s a bigger universe of aerospace companies and entities to attract: engines, avionics, test equipment and (other) equipment,” he said. “North Carolina hit the jackpot and got a big GE plant. Why not Wichita? Good questions.”

The aviation market has changed, he said.

Wichita needs to look outside to expand its customer base.

“There’s no shame in supporting a cluster with shares of other people’s planes,” Aboulafia said.

Britain doesn’t sell airplanes anymore, he noted, but it’s still an aerospace powerhouse.

“Something changed,” he said. Ditto for Japan.

It’s important for Wichita to spend political resources on the global marketing of its capabilities and do it in a more aggressive fashion, Aboulafia said.

“All of a sudden it’s a different mindset,” he said. “You go from one where Embraer is your mortal enemy to the other where Embraer is potentially a good opportunity to sell them things.”

Wichita is an attractive place for people to open businesses or do business with the companies that are here, Pelton said. But the city hasn’t been all that successful in recruiting business to the area, said Pelton, who has been involved in a consulting project.

Places such as San Antonio and the Carolinas are creating favorable economic zones to help recruit aviation-related companies.

“We really have got to put the pie together and figure that out and go to market and sell Wichita’s competitive advantages,” Pelton said. “I hope we’re not living on past entitlements. ... You’ve got to freshen up your approach and get out there.”

It’s hard to ignore Wichita’s skilled workforce, which would allow a company to start up in Wichita without a learning curve, Pelton said.

Pelton said he’s always amazed at the number of companies involved in aerospace in Wichita that go unrecognized.

“If we catalogued them all and put out what the capabilities of Wichita are, it’s staggering,” he said.

Brewer, Wichita’s mayor, said he agrees the city and state must do more recruiting.

“We finally have woken up and realized the rest of the world is wanting what we have,” Brewer said. “We as a community have to continue to support them and work with them to figure out how to improve their market. This is a team effort for our entire community.”

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