Gulfstream is slashing production of midsize business jets but is sticking with its plan to increase production of large aircraft this year, saying the backlog continues to hold up despite the economic downturn.
The CEO of Gulfstream parent General Dynamics, Nick Chabraja, revealed today the Georgia-based manufacturer now only plans to deliver “approximately” 30 midsize aircraft in 2009, representing about a 50% reduction in production compared to the 69 delivered in 2008. But Chabraja says Gulfstream plans to deliver this year 94 large green aircraft, compared to the 87 delivered in 2008.
As the profit margin for the larger jets is much higher, Chabraja is confident Gulfstream will see its profit increase in 2009 despite a decline in total aircraft deliveries from 156 to 124. “This is a total of 124 but with a distinctly favourable mixture,” he told analysts in a conference call to discuss fourth quarter earnings. Chabraja adds that in 2008 “Gulfstream exceeded $1 billion in operating earnings for the first time and we’re cautiously optimistic they will do even better in 2009.”
Gulfstream warned three months ago that production of midsize aircraft, in particular the G150, could be slashed in response to weakening demand. Today Chabraja revealed Gulfstream in mid November began talking with its largest supplier, Israel Aerospace Industries, about adjusting production. Gulfstream has since adjusted production downward multiple times and Chabraja says the 30 figure is still an approximation and could change by a few aircraft because it has not set a final rate for the G200.
Gulfstream was already preparing to ramp up large aircraft production in 2009 and Chabraja says it saw no reason to back down from this because the large jet backlog is significantly larger than the midsize backlog, demand for its larger products are not eroding like they is for the midsize products and it has been encountering fewer problems with its large aircraft customers. “We are stepping up production consistent with our prior plan because our backlog and the orders received, even in the second half [of 2008], supports that production rate,” he says. “If conditions develop as a result of further deterioration of the American economy and internationally we will change that production rate. We have the ability to change it quarterly.”
Gulfstream’s backlog now stands at 246 large aircraft, which “alone gives us gives us over two and a half years of entry into service deliveries at the proposed production rate.” Chabraja adds that managing this backlog “will not be without issues as we go forward, particularly if the economic climate worsens. But at this point we have a firm conviction we can manage through the anticipated issues.”
Gulfstream acknowledges six large aircraft customers defaulted in the fourth quarter but Chabraja says this is relatively small given the economic conditions and says other customers were willing to move up and take these aircraft. He says a few customers also requested to defer their deliveries which Gulfstream was able to accommodate as it had other customers willing to swap slots. He says Gulfstream still has a lot of large cabin customers which are dissatisfied with where they are in the queue and are willing to move up should there be more cancellations. “My view of the current backlog is it’s very, very strong,” Chabraja says. “It looks good to me for 2009 and 2010 as well.”
Gulfstream also has been working to reduce its exposure to pre-owned aircraft and will now only take back nine aircraft in 2009, compared to an original plan of 22. The manufacturer also is working to cut annual costs by $40 million without reducing head count.
Revenues at General Dynamic’s aerospace group were up 27% in the fourth quarter to $1.5 billion. Chabraja says 11% of this increase was driven by increased sales at Gulfstream and the remainder was driven by the acquisition of Jet Aviation, which was completed during the quarter. Gulfstream’s operating margin in the quarter was a healthy 18.7%, 40 basis points better than 2007. “In the context of the economy in general and the business aviation market in particular the fourth quarter was very strong,” Chabraja says.