Interview: Jack J Pelton

How do you see market conditions for both the piston and jet product lines at the moment, considering factors like the weakness of the US dollar and the weakening global economy, but with countries like China and India performing really strongly? The dynamics have changed from where our industry had been so North American centric.

If you look historically 70 per cent of the sales that had taken place were in the domestic North American market. And that has changed radically over the last three years to being pretty evenly balanced, 50 per cent international, 50 per cent domestically, with the current emphasis on the international sales still being very western and eastern Europe focused.

But we are seeing great inroads into India and China, specifically with our Citation products, and I think that’s going to be a trend that is going to continue. The numbers aren’t nearly to the magnitude that we see in the rest of the world, but the direction is going in the right way, and that as they continue to develop the infrastructure for business aviation, they have recognised the importance of it, they just need to catch up with the rest of the world.

China no doubt represents a huge potential market longer term, but there are restrictions on private flying there at the moment.

Given China’s system of government you can’t really lobby the government to open uptheir airways and aviation infrastructure, so how do you promote the growth of private aviation there? We’ve done a lot as an industry to help work with the government on understanding some of the fundamental principles on how you develop general aviation. They were focused a few years ago on ‘we really need maintenance, we really need to have certain attributes in general aviation’ and we said no, no, let’s start with how the order needs to take place – the first need is you have to have the ground based infrastructure, second is you have to have the airways infrastructure and the air traffic control system, and they listened which was very encouraging.

They sent a large delegation to the United States last year and instead of coming to the manufacturers to visit and see aeroplanes and see our maintenance facilities, they really wanted to meet with all the providers of the air traffic control system, so we thought ‘ahh we’re making some head way in that they’re starting to understand how you build layers of this puzzle’ so that you can then eventually introduce the product and have it be product in the country. So I feel very encouraged.

At the moment where are your higher growth markets? Our highest growth currently continues to be in western and eastern Europe. With the airplanes sold in eastern Europe many of them are being registered in western Europe but for Russian owners. That’s a very high growth region.

Would you say you’ve been more effective than your competitors in terms of getting into some of those developing markets? I would say if you look at just sheer data on leadership and the market segments that we compete in today we can rightfully claim our role as the leader in all of those markets. We have data that shows by different countries and different regions that we’re still holding the lead and that can be attributed to the aeroplane types that we deliver.

“Some people are just delaying acquisition decisions and they are delaying their use of aeroplanes at the lower end. ”

What about the home market, how is the US performing at the moment, what concerns do you have, are you seeing some softness on the piston side especially? For piston airplanes we’re clearly seeing softness and there are two contributing factors to it. There is the high fuel prices that the piston market is seeing for the first time in a long time, and then that also brings forth people’s concerns with where the economy is going and some people are just delaying acquisition decisions and they are delaying their use of aeroplanes at the lower end.

The business jet side, while we are seeing some softening, that is not driven by fuel prices, it’s more being driven by economic conditions. The way the airlines are continuing to underperform the need is there, so while people might want to slow down their flying to save money they really can’t because the only way they can get to a lot of destinations is through business aviation. The airlines have announced cutbacks to mid markets such as Kansas City, Oklahoma City for example, these are destinations that are not tourism centres, they are truly just economic regions that airlines have said they are going to cut services to by 30-40 per cent, so businesses that have small 300-400 person operations to get into those facilities, they’re going to have to use business aviation.

So airline cutbacks in worsening economic conditions in fact help soften the blow for business aircraft manufacturers? That’s helping to stem the decline, it’s kind of keeping it above the water level which has been good. Now all that said if you look at Cessna we have the largest backlog that we’ve had in quite some time where we delivered 387 airplanes last year. But this year we are delivering 470, so we have grown, we’ve sold out this year in business jets and next year we intend to increase production rates and we are continuing to being close to sold out.

So you look at that and you look at the conditions we are in we think we can really navigate through it quite well and not have any severe impact on our overall business.

The real question will be what does the future look like beyond 2010? I’m optimistic that some of this will be sorted out by then.

It’s worrisome where we are now but historically we always have these economic troughs and valleys, but there is a bottom to it, it does come back, and I think we are starting to get close to seeing the bottom.

Cessna’s business jet line has almost every conceivable market niche covered, from the Mustang to the Columbus, and you have successfully developed multiple derivatives off original baseline designs such as the CJ series. It is obviously a key strategy to develop derivative aircraft and fill market niches?

When we look at any market segment that we’re going to enter we try to look at it with a product that has the ability of expanding and contracting. The Columbus is a great example, it is a new segment that we went into knowing that there will probably be derivatives off of the Columbus. So when we begin a design with a clean sheet of paper and we say well, what if I want to make a derivative that is faster, what if I want to make one with less range, for example? We did that with the Columbus and so our full intent is we’ve launched it, we are going to get it certified and bring it to market, and then we will be on the heels of that with possible other family members with different performance parameters.

One of the competitors to the Columbus is the Challenger 605. Does what Bombardier has done with that basic design, in providing the basis for the Global Express series and even the CRJ regional jet family, give an indication of the types of ways the Columbus could be developed? It does. The Columbus gives us a great platform, a fuselage tube and a lot of aerodynamics off the wing that can be used for other aircraft.

Can the Columbus’s engine be scaled up in thrust as well? It can. We are using about 8600lb of thrust on the Columbus and the core for our 800 series can produce up to 10,000lb of thrust, and

“We do have advanced design concepts for single-engine turboprops and singleengine jets, and we are still trying to figure out what is the real customer requirement. ”

then that family of Pure Power engines that Pratt & Whitney has just introduced goes all the way up to 20,000lb+ pounds of thrust. We look at that very carefully when we make our engine selections as to where can it go and then look at the fuselage and where can it go.

At the other end of the jet family the Mustang is doing tremendously well, but then below that there are the smaller VLJs – very light jets – and below those are a growing number of single-engine personal jets like Cirrus’s new The Jet. Is Cessna considering developing jets smaller than the current Mustang? The success of the Mustang has been absolutely phenomenal and I think it’s going to be most successful single product that Cessna has ever bought to the market – for now. We’ll find a way to beat that over time! So you look at the Mustang and then you say what below that makes sense.

We do have advanced design concepts for single-engine turboprops and single-engine jets, and we are still trying to figure out what is the real customer requirement in that marketplace. It is yet to be seen whether the single-engine jet can meet the more robust requirements that I think are necessary in that segment.

Today’s single-engine jets really are personal jets when you look at them, they are two-passenger, three-passenger jets with so-so performance, and I’m not sure that that’s the real market.

I think the real market is probably still delivering four or five people with jet-like performance and so does a single-engine turboprop better satisfy that? We are investigating, we’re trying to figure out where do we go next, but we have a gap there that we intend to address.

So you think that a jet is not really applicable as a high-end personal aircraft? I’m not saying it’s not, I just don’t know what the size of the market is, and is it one that makes sense for us to get into. We hold ourselves, as you can see in our financial performance, to being profitable in any segment that we are in, we don’t hobby around, because we are a publicly traded company we have to get it right, and I’m just not sure yet.

But believe me with our ability to bring product to market, if tomorrow we came to the conclusion that a single-engine jet market is where we could be, we could get there very quickly, faster than any of our competitors, in terms of our fundamental capabilities as a company.

Does that mean some conceptual designs for that segment are close to maturity? I wouldn’t say they are close to maturity, they’re still in the evaluation of what are the performance characteristics that you can ultimately achieve out of a single-engine jet. There are a lot of tradeoffs – what is the real field performance going to look like? If it starts to be a 4-5000 foot field on a single-engine jet that’s not the performance Cessna would feel an owner-operator would be comfortable with because that limits you to a lot of locations.

How is the newly acquired Columbia facility in Oregon performing? Columbia is doing very well from an acquisition and then integration standpoint.

Most companies really struggle with the integration piece, and I feel really good about how we have integrated Columbia into Cessna. We couldn’t be more pleased with believing it is the right product to add to a great product family, feedback we’ve gotten on aircraft performance, customer satisfaction, the high quality is great. And we’re going to learn a lot. While it’s a great aircraft to have, we now have bought our way into advancing ourselves on the learning curve with composites, which is exciting.

You would have been asked this before, but where does the introduction of the high performance Columbia piston singles to the Cessna product line as the Cessna 350 and 400 leave development of Cessna’s own NGP – Next Generation Piston – concept, and how do both those factors relate to the high performance single-engine turboprop and jet concepts you spoke about? The NGP got left behind or ignored while we were going though the Columbia acquisition process because all of a sudden we were tying up all of our time and resources on trying to figure out are we going to do this and then how does this fit into our single-engine product line. We are getting the company up and running and we’re stepping back, a lot of it due to the economy, the slower single-engine piston sales.

The shift that we see on the horizon is what’s the technology requirement going to be with potentially new engine requirements if 100 octane low lead fuel goes away or turbine or diesel engines come about. We were even looking at an NGP with a Thielert four litre engine on it which now isn’t going to happen (with Thielert’s recent bankruptcy).

So we have to step back and say let’s slow this down and look at where is the technology going to take us, where is the new market that comes out of this slower economy going to take us, and re-evaluate what is the right product strategy across our single-engine product line.

Was the Columbia acquisition an acquisition of opportunity, or does it represent a change of strategy where you will potentially look at other acquisitions as well to further augment Cessna?We want to grow and we’ve had a very good track record of being able to grow organically, and also within our ‘knitting’ we can continue to develop products.

But to keep that growth going we have gaps in our business, and those gaps can be in market segments that we currently aren’t in, or they can be in services and capabilities that we don’t have today. So I encourage my team to make sure we are looking at the entire playing field and if we can get an advantage through an acquisition then we should be considering that. I wouldn’t want to think Columbia was a short term opportunity because I was engaged with Columbia for the last three years, trying to acquire it, seeing that strategically it was the right addition to our product line.

Other new business practices for Cessna include outsourcing Skycatcher production to China, and at the other end of the production line a greater use of partners on Columbus production and development.

We are trying to change our business model, and what we’re trying to say is ok, the business model we have for our core businesses that has made it successful today works and it continues to work, but it may not be applicable when you get into adjacencies. The Skycatcher’s market really requires a price point that we couldn’t do with our existing business model. Our distribution model along with our investment costs were going to be too high to hit that US$110,000 price mark. So we stepped out of our business model and said what is the model that works, and we needed to find somebody who had the capital investment already made in facilities, infrastructure and people that we would not have to make to make that work, and that’s why we used that model on the Skycatcher.

On the Columbus the business model had different constraints to it. The biggest constraint was making sure we didn’t hire 1000 engineers and then have to lay 1000 engineers off, and we wanted to make sure that we spread some of the implementation risk to the best in the industry. For example I think our partner Spirit Aerosystems is the best there is in making fuselages, which it demonstrates with the 737 for Boeing. So we were trying to address another problem which was capacity and capital. If I had said I’m going to do it within my existing business model I would have had to have invested another US$200 million in capital for the Columbus, which would just make the price point then go up and the pay-back go up. We thought the Columbus needed to be US$27 million, and so it was a small tweaking to our existing model to make it work.

We think it’s a manageable risk profile, it’s not like a 787, we don’t have risk sharing partners, we are paying for everything.

We are paying for all the design, all the intellectual property and all the tooling.

So, and I hate to say it because I don’t want to curse ourselves, but if a supplier fails to perform I just bring their work all back, I can do it myself, which is a much different situation to the 787.

So Boeing’s 787 experience then doesn’t really give you pause for the concern? We have paid very close attention, we’ve learned from it. We spent a lot of time with Boeing, we spent a lot of time with Vought, and they all said if we had done what you’re doing with the Columbus we wouldn’t have had the problems that we have had. So that makes you feel pretty good that you’re on the right path.

Regarding outsourcing Skycatcher production to China, would you look to build other products there as well? Yes we could. The Skycatcher, while it is an ASTM (Light Sport Aircraft) certified airplane, I would still like to see it or a variant of it be FAR Part 23 certified and built offshore, primarily because the China market does not know how to accept an ASTM certified airplane, airplanes need to be Part 23 certified to be operated in China. So there is a market there I have to go after and I’ve got to make sure I have the right product for it.

How do you evaluate the utility singleengine market where you have the Caravan and Cessna 206 and there is your Australian competitor in the eightseat Gippsland Airvan? We dominate those markets, but for Gippsland I would never give up on that market because I think they’ll still be successful, there is a niche there, there’s a need. We kept thinking that over time the Caravan would run its course and go out of production, but we’ve introduced the G1000 avionics suite and last year took over 200 orders on it. So we’re actually going to be at the highest Caravan production rates that we have ever been at in the next year or two. It dribbled down to 60 or 40 a year and now we are up to 120 a year. It’s an obvious market that’s there, there is a need, we continue to have a product, and I’m not saying it’s the best product, we haven’t changed it in years, but it comes with Cessna’s brand and support and people have continued to buy it.

With the Skycatcher Cessna now has a product range that stretches from the most basic trainer to high performance jets. No doubt the Skycatcher is part of your strategy to attract people tolearn to fly and then buy other Cessna aircraft, but are you concerned that fewer people want to learn to fly? What can the industry and Cessna do to encourage people to take up flying? We were hoping when we introduced the Skycatcher that we would be addressing that concern and part of it was the price point. For people learning how to fly it is becoming financially prohibitive, and we hope by bringing a product in that can reduce the price point that that will be a stimulant, and then we hoped that it would also be attractive where flight training facilities, whether they be individual FBOs or training colleges or training institutions, will maybe get a new shot of life and some will get started, because we’ve got product that will help them do that.

The other thing that we are doing in that area is working really hard on our computer based curriculum that goes with the flight training syllabus. We sat down with our people talking about how we all learnt to fly at some point in time, wasn’t it painful, wasn’t it terribly inconsistent.

Now we have people that don’t have time or they have been brought up in a learning environment that is significantly different. The ability for people to learn at a faster pace through various mediums, whether it’s simulators or whether it be computers, it is something our industry has to catch up with, so we are developing an all purpose curriculum with the Skycatcher that we hope will get people to start flying using that curriculum. It will be very regimented in helping them see success and knowing where they are and how much longer to the finish line. I think the key, statistically, is getting them to finish. Getting them to start pilot training is not hard, they go up and they take the flight and they enjoy it, but if they don’t have a road map and a sense that they are going to get done they drop out because they feel they are just writing cheque after cheque after cheque, or the instructor would change or they would take a couple of weeks out and to get back into it would take two weeks and they’d say I can’t afford to keep doing this, I’ve got to know that I can get to here. But companies are never going to guarantee a licence because there is so much variability with the student’s ability.

We have a pretty neat program that is going to be launched with the Skycatcher, I’ve piloted it and looked at it and it really gives you a good sense of ‘here’s where I am and here’s where I am going, and I can actually achieve this. ’ So we are working on that. I think the next step will be working on how do you get to a higher level of simulation so that if you fly a couple of lessons then you’re busy for three weeks, during that three weeks how do you stay in the cockpit so that when you do go back you haven’t taken a huge leap back. There is the technology to do that.

When you did the business case for the Skycatcher, was the decision made on a purely financial basis or did you lend consideration to having a cheaper product that would encourage people to learn to fly on a Cessna aircraft to introduce them to the Cessna brand as potential future customers for other Cessna aircraft? We looked at various attributes. One was it at least needed to make money, we are not being greedy but it just needed to have a positive financial result. But more importantly to me personally was that it needed to bring people into Cessna, it needed to bring people into aviation, it needed to create future pilots for our industry, and it needed to provide to our Cessna pilot centres an opportunity for them to stay in business with a proper offering. So when I pitched it to our board of directors a lot of it was around the more strategic implications of what does it really mean, not just the financial.

And will the rest of our industry benefit from it? I hope so because I think we as an industry leader have an obligation to keep the whole industry alive.

Cessna has a quite a well known program of subsidising its employees to learn how to fly. What kind of benefits to you see from that? It’s huge, from being in a company that people choose to work for. As an engineer right out of school you go interview with various companies, the companies are all probably going to pay you within a few dollars of each other, but we hope that we can offer a greater work environment.

In our engineering facility the equipment that each employee has is the best and the facility is the best, and then we hope that we have competitive benefit programs and that we have offerings like our flying club that give them extremely discounted abilities to grow personally so they can get their own licence. But we reap the benefits of that because now they understand the environment they work in and the products they’re producing, the infrastructure of aviation that they need to fight for, so it’s a real plus from a retention standpoint.

It must be very rewarding personally to lead Cessna? It is, there is nothing better than waking up every morning and looking forward to going to work, because my hobbies and passion are aviation. I have four airplanes and am about to get my fifth and so when I leave work to relax, to get away from the stress of work, I go to the hangar and work on my airplanes.  BIO OF A CEO – Jack Pelton is an aviation industry veteran who worked on various engineering programs at Douglas Aircraft for 20 years before its merger into Boeing.

He then moved to Fairchild Dornier in Germany where as head of engineering and programs he led development of the ill-fated 728JET.

Pelton joined Cessna in 2000 as senior vice president product engineering, became president and CEO in 2003 and chairman in 2005.

Pelton holds a CPL, is type rated on a number of Citation jets including the X, and owns his own Ryan PT‑22, Citabria, Cessna 195 and Cessna T206, while his wife Rose has ordered a Skycatcher for delivery in late 2009.