EBACE: Business aviation market 'by no means good', but improving

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Cessna, Embraer and Gulfstream are reporting glimpses of market recovery in the wake of a ravaging first quarter, a cautious optimism fuelled largely by signs of stabilisation in customer behaviour. Data from the three emerged during first quarter financial reports, a picture that will be augmented later in May when Bombardier issues its results. Hawker Beechcraft has cancelled its next earnings report, which was scheduled for 6 May.

The cautious optimism contrasts with the latest general aviation shipments data from the first quarter, showing a 36% drop in business jet shipments to 191 compared with 297 in the first quarter of 2008.

"While conditions are by no means good, I am pleased to report that they have improved materially from what we experienced in February," says Nicholas Chabraja, chairman of Gulfstream parent company, General Dynamics. Positive "data points" since February include an increase in flight hours in the fleet, "signs of thawing" in the pre-owned market and increased customer interest in new orders.

gulfstream g550
 © Gulfstream

The company in mid-March had reduced by about 20% its 2009 production targets for large- and midsize aircraft and cut 12% of its workforce, a result of what Chabraja calls "a terrible bloodletting in February" that caused customer defaults and requests for contract cancellations. "We see that activity has quietened," he says.

In addition to the "pruning" of orders and a planned variable-length employee furlough this summer, lessons in handling contracts learned from the previous downturn in 2002 have put Gulfstream in a relatively stable position going forward. The company received $30 million in liquidated damages on defaults, situations in which an aircraft is sold to new buyers or buyers moving forward in line, but where the original owner must absorb the difference between the original and discounted price.

"Cancellation is not in our vernacular," says Chabraja. The company has been successful in reselling defaulted positions, with only one "white tail" G550 at the end of the first quarter, an aircraft that is now under contract and will be delivered this quarter.

Chabraja says the downturn has created two markets - a "spot" market where "prices are slightly off, sometimes more than slightly", and a longer-term "regular" market. "Some [customers] might be buying a pre-owned aircraft and see an opportunity to get a new aircraft at distressed prices," he says. "They don't get to outfit the aircraft as they would have wanted, but they find purchase point attractive in that venue. We're happy to see those kinds of buyers."

Chabraja says he is also seeing people "expressing more interest" in the regular market, with customers "reappearing, albeit slowly", he says. That emerging confidence is apparent in continued interest in the new $60 million G650. "We lost a couple and picked up a couple [of customers]," says Chabraja, adding that the G650 backlog is "up marginally". The acid test of the market will come on first flight of the company's largest aircraft to date, set to take place before year's end, when the first 50 customers will be required to submit a progress payment. Gulfstream would not provide details as to the amount.

Success in the pre-owned market has not been as swift, with seven aircraft in the inventory and an expected five more to enter by year's end. Gulfstream did not sell any used aircraft in the quarter, says Chabraja.

Embraer chief executive Frederico Curado, echoes Chabraja's outlook. "I can dare to say that we may be reaching the bottom of the [business aviation] situation," Curado says of the company's executive aviation segment. "An important indicator is that people who have deliveries toward the end of the year have made their pre-delivery deposits."

The company in February cut its executive jet production plan to 127, including 17 Legacy 600s and Lineage 1000s. That is down from as many as 150 Phenoms and 36 of the larger aircraft that were in the plan as of November. Embraer has also cut 4,300 employees to suit the revised production figures, about 20% of its workforce.

Curado says Embraer has maintained about $6.6 billion in backlog for business jets, which includes 800 Phenom 100 and Phenom 300 jets as well as 20 Lineage 1000 and Legacy 600 models. The first $41 million Lineage will be delivered this quarter and Phenom 300 certification is due before year-end, he adds.

Plans remain in place to boost production capacity for the Phenom line to 22 aircraft a month (17 Phenom 100s and five Phenom 300s) by 2010. "Today, I don't think we'll go to that level," says Curado. "We will probably stabilise the rate at a lower level," he adds. "It will depend on how strongly the backlog holds toward the end of the year, when we'll reach 10-12 aircraft a month. Beyond that, it depends on the backlog."

Textron subsidiary Cessna is the coolest on recovery signs. "We're starting to see a tapering off of cancellations for 2009 deliveries, but we're still seeing cancellations in 2010 and 2011," says Textron chief executive Lewes Campbell. The company recorded 92 cancellations in the first quarter, half of which were for 2009 deliveries. "We see cases every day where people pay their deposits. They pick out their interiors and their paint, and cancel their order. They tell us, 'we can't fly our new aircraft into our town just having laid off 10-20% of our workforce'."