Out the other side

For all the difficulties experienced by the aviation industry in Australia in the past year, few companies have faced the severity of downturn encountered by Cessna.

“We have seen nothing like it. The speed and severity of this economic downturn caught us all off guard.”

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Since the global financial crisis hit in September last year, the world’s biggest general aviation aircraft manufacturer has faced a huge slump in sales, leading it to retrench half its workforce and dramatically cut production rates.

“We have seen nothing like it,” Cessna chairman, president and CEO Jack Pelton said in his keynote address to the Regional Aviation Association of Australia (RAAA)’s 10th annual convention on October 1 of the effects of the global financial crisis. “The speed and severity of this economic downturn caught us all off guard. Fortunes vanished, fear gripped the financial markets, securities plummeted, and financing capital absolutely disappeared,” Pelton related.

“Now at Cessna we went from record orders and preparing for 2009 which was going to see our highest production rates in the history of our company to witnessing cancellations and delivery deferrals like we have never seen before.

“Our early reaction was that we had a healthy backlog of firm orders where people had placed non-refundable deposits on aircraft, and we thought that would hold us through a downturn of several years, but what became most surprising was that these people began to just simply walk away, leaving large deposits behind. ” As that trend emerged Cessna began planning “drastic” reductions in production rates. In early 2008 its production plan for Citation business jets for 2009 would have seen 535 aircraft built. Instead in 2009 Cessna will deliver 275 Citations, with even fewer deliveries planned for 2010.

“So we resized the business, we reduced our workforce, the cancellations and deferrals snowballed, and the new orders never appeared. It soon became clear that we would need to not only cut production and our workforce, but also completely change how we would do business in the future. ” This saw Cessna cut its workforce from over 16,000 to just 8000 employees, cancel development of the large size Columbus business jet – demand for which “essentially evaporated” Pelton said – and shut its Oregon production plant.

So having endured all that, and with Cessna starting to see some signs of stabilisation, it’s perhaps understandable that Pelton took a week out of his schedule for his first visit to Australia as Cessna CEO on a working holiday to speak at the RAAA convention, talk to Australian Cessna distributors Aeromil and Airflite, and meet local Cessna customers and pilots. It certainly gave him time to reflect upon a tumultuous 12 or so months.

“It’s hard to imagine that a single banking institution’s demise (the investment bank Lehman Brothers’s collapse) could have such a chilling, rippling effect,” Pelton told Australian Aviation in a follow-up interview to his RAAA address. “As we were watching it, I think the first three or four months it called into question, ‘is there potentially going to be a depression and what does that truly mean for the rest of the world?’” Fortunately it did not quite come to that, and “we’ve worked our way through it and we’re starting to see some of the fundamentals improve. We’re starting to believe that whatever the disaster that potentially could have been has been averted. ” Pelton recalled that Lehman Brothers collapsed during the NBAA (National Business Aviation Association) convention in the US, the major trade show for US bizjet and GA manufacturers where typically new aircraft programs are announced and big orders taken. “I had a meeting with a group of 50 or more Wall St type analysts on the state of the industry and the state of Cessna on the second day of the show, and Lehman Brothers collapsed that day,” he said.

“We still have some cancellations, but we’re getting some new order intake and we’re seeing people finding ways to work through the financing issue.”

“That year we were taking orders faster than anyone could imagine and not receiving any cancellations, so we were planning our whole business around that and people would ask, ‘well didn’t you see that coming?’ or ‘should you have slowed down?’. The dilemma I had with the outside world was they kept saying ‘why can’t you build them faster because the market is doing so well, why aren’t you taking advantage of this,why aren’t you capitalising on this?’ And sure enough all of a sudden the order intake literally stopped and then the backlog began to shrink.

“What we had always seen in prior recessions was people would defer future orders or there might be cancellations on orders that were not at risk of losing their deposit.

But now we had a situation where we had airplanes ready for delivery in January and those people couldn’t get financing for their airplanes, their own personal wealth had been destroyed to a certain level that made it uneconomical, or they had a used airplane and quite often our customers trade in or sell their used airplane to move into their new airplane, but the used aircraft pricing had deteriorated to where they were saying ‘I’m now $3 million down on the airplane that I own and operate which is doing me fine, my deposit with you is $1. 5 million, I’m going to walk from my deposit’.

“We’ve never had that. I literally had customers coming to Wichita to see the airplane that they weren’t going to take delivery of. I’m mean it just blows your mind to think that that could happen. So that scenario continued to play out through the whole first half of 2009, and now we’re seeing what I’ll say is some stabilisation.

We still have some cancellations, but we’re getting some new order intake and we’re seeing people finding ways to work through the financing issue. ” With aircraft values falling and the banking sector in crisis, financing became a critical issue. Pelton said in the US the number of lending institutions prepared to finance aircraft sales fell from 37 to just nine. In one recent example Pelton cited, a financing deal for a Citation Sovereign, “the bank said ‘we understand the retail price of this airplane and the customer has put the adequate deposit based on that retail price to keep the financing in balance’, but they wanted to make their own assessment of the airplane price. They said they thought it was $1 million less than what he paid for it, so now the customer has to put more money down, at terms that are more difficult. ” So with financing for new aircraft very difficult to source and values for second hand aircraft slumping, the last thing business aircraft manufacturers needed was the public relations disaster created by the images of the CEOs of GM, Chrysler and Ford flying to Washington DC in their corporate jets to ask for government bailouts.

This saw public opinion, particularly in the US, turn savagely against business jets, which were increasingly seen as a sign of corporate excess.

“After the auto manufacturer CEOs went and asked for their bailouts and the negative response about their airplanes, it immediately caused corporations to hide their airplanes, deny that they owned airplanes, or tried not to fly them, because they saw this very publicly played out on TV. And it was played over and over, there was an immediate movement of airplanes out of companies into managed operations, it was fascinating to watch,” Pelton said.

Symptomatic of this crisis in confidence in business aviation use was a move by the chairman of the House financial services committee, Democratic congressman Barney Frank of Massachusetts, to incorporate a provision into bailout legislation which would have required companies that received TARP (Troubled Asset Relief Program) funds to sell off their corporate aircraft.

Said Pelton, “My reaction to that was let me just go look at the number of Citation operators who are recipients of what wasreferred to as the TARP money – I believe it was well over 60 per cent of companies who received the money had business jets and that scared me to death. ” But manufacturers like Cessna had their own advocates in Congress and their own powerful message to sell – jobs.

“My neighbour in Wichita, Kansas, is a doctor, he lives a good life and he makes a nice living, but he is never going to ride in, be involved with or have any sympathy towards people in business aviation,” said Pelton. “So I can’t convince him that a Citation X is something he ought to be out there supporting, but when I talk to him about the economic impact and the fact that people in our neighbourhood work at Cessna and if they lose their jobs their house values go down and his house value goes down – now he becomes engaged and aware that this is something that I need to support. ” So Cessna and its Kansas neighbour Hawker Beechcraft were able to rely upon their own congressional allies, who were able to advocate for the 40,000+ people directly employed by GA in that state, and the Frank business aviation ban was soon dropped before it could become law.

“There is a lot of misrepresentation of the fact that 85 per cent of business jet use is done by mid level managers,” Pelton said. “These airplanes are full, they are not the corporate barge with just the CEO on board going places, and we got caught not having people properly advised. ” “The private aircraft industry is an important industry in America, and it plays a necessary role with businesses in certain areas of the country,” Frank told CNN in a statement after his provision was dropped.

But it was a torrid time for business aviation, with its reputation potentially irreparably cruelled. “When you’re scrambling to try and turn around a perception, sometimes it can’t be done,” Pelton said.

That PR disaster and deepening recession meant Cessna endured a bad January and February, which Pelton nominates as the depths of the crisis for his company, with its full impact felt by the Cessna workforce.

In several rounds of job cuts beginning late last year Cessna has had to shed 50 per cent of its staff.

“The message to the employees and the message to the people in the community is the business has dramatically changed. We explored every other alternative, could we use other methods to maintain our employment.

But when your production volume is down that low, I have to size the company around the production line. I can’t just have additional people with no work, it just doesn’t work.

“So from a business leader perspective you have to say, ‘am I doing what’s best for those remaining to make sure they have a viable company to be part of that will make it through this?’. And you look at some of our competitors . . . a lot of people might bring into question about whether they will survive and we feel very good about our position and we will survive and we will be as strong as we have always been, we’re doing all the right things for that,” Pelton said, noting that Cessna has remained profitable through the crisis.

“But when you live and work and play in the same areas it’s tough to know you’re seeing friends at the hardware store or the supermarket who are no longer employed and it’s no fault of theirs, they’ve done a great job for Cessna. ” Continued Pelton, “under the circumstances they’re all so mad at the government, the President, the auto manufacturers about what they have done in this mess.

And we do have our own union, it’s not that we don’t, but they’re not saying the company did me wrong, they are saying this industry is being absolutely crucified, and unfairly. ” The great irony in that situation was that the US government was able to bailout GM to substantially protect the car manufacturer’s workforce, but Cessna received no (nor asked for) government assistance and yet the Obama administration’s negative attitude to business aviation use had a big impact on the fortunes of Cessna and other bizjet manufacturers.

Cessna’s piston light aircraft business has also suffered as a result of global recession, but that sector was already hurting with the fuel price spikes earlier in 2008, even before the global financial crisis hit last year.

“It’s been similar but it’s also been different,” Pelton said of the piston market.

“It actually started in early in 2008, we started seeing it before the jet orders with fuel prices going through the roof, which became very problematic for owners. ” Pelton said the market for training aircraft is holding up, but for private aircraft purchasers, “it’s really discretionary income,. . . if you’re at home deciding if I’m going to have a little airplane toy to fly around in or protect my savings (people make the obvious decision). So people are not buying right now. ” For companies buying business jets “their finances are important as well, but they have a business where they can project where things are going, but for a lot of single engine buyers it is discretionary income, so it’s the powerboat versus the airplane or the country club membership, so it’s that kind of money where people are saying it is better to keep it in the bank. ” One key decision Cessna made with its single piston product line was to move production of its Corvalis 350 and 400 high performance singles from Bend, Oregon, to Independence, Kansas, where the rest of the Cessna singles (and the Citation Mustang) are built. Cessna acquired the Bend facility when it took over the financially troubled Columbia Aircraft and its Columbia 350/400 line in late 2007. Originally Cessna planned to expand its new Oregon operation, but after the financial crisis hit in May this year decided to move final assembly of the renamed Corvalis line to Independence, with the Corvalis’s composite fuselage to be built in Mexico.

“My head of marketing would tell me, ‘Jack you could announce today you have a supersonic business jet for $100,000 and nobody would care’.”

Pelton said the big order falls and cancellations, plant consolidation and the staff reductions has fundamentally recast Cessna as a business, and led to big changes in the company’s future plans.

“We do an awful lot of looking out five, 10 or 15 years on building our business and our company, and it has taken a complete recast on what does that future really look like, because we’re not seeing in the five year forecast us being back to the levels we saw in 2008,” Pelton explained. “We think it’s a much longer period of time to get to that growth. And that’s being conservative, based on certain indicators that have been pretty tried and true. There’s financial analysts out there who say, ‘oh no this will recover faster and be more robust’, but I’m not so sure, I think it’s causing people to take pause and rethink their capital allocation strategies and plans. ” This has big implications for Cessna’s new product strategy. With the company’s revenues and earnings down, so too has it had to scale back R&D spending, starting with cancelling the Columbus.

“The amount of money the Columbus was going to cost to develop was close to $1 billion. And what we’ve said is that we’re going to continue to spend on a percentage basis of our revenues equal or more money than we have in the past on development.

We were a $6 billion company in ’08 and now we’re a $3 billion company, so what that leads you to is, ‘do I want to place a single bet on the Columbus and ignore the rest of my product line?’. And we’re the market leader in those other categories and I went back to our board and said I’m really concerned with the new entrants, the Embraers and the Hondajets and others, and I have to protect against that. I need to make sure I’m spending money on rejuvenating the Citation CJ line, the XLS, the Sovereign and the X, and I can’t do both. ” Pelton says the board of Cessna parent Textron has remained committed to product development through the downturn, despite the Columbus’s cancellation.

“We’ve worked hard as a leadership team to make sure our board understands that also in these economic cycles if you back away from those investments, because we’re such a long lead business to get new products, you’re really disadvantaged when things come back. And everyone’s buying into that, they’ve said ‘ok, I can either get better returns or I can protect the long term growth of Cessna’, and everyone’s saying ‘we agree with you Jack and we’re going to bet on making the investments’. ” That means new products and derivatives of existing aircraft are coming, and soon.

“We’re actively working on some exciting new products, the issue is timing. My head of marketing would tell me, ‘Jack you could announce today you have a supersonic business jet for $100,000 and nobody would care’, so they are saying wait till you get some momentum in the economy to where you can actually now take orders, so we’re balancing that and we’ll wait and see what makes sense. ” “We’re looking at what upgrades do we need to make to the existing aircraft and get that done quickly. And then what are the next new product platforms that we want to offer, and we’ve got some big investments that we’re going to make here and very quickly. ” As for the Columbus, “it will be back,” Pelton said. Like the company itself, it seems it is hard to keep a good Cessna down.