Textron chairman Scott Donnelly says Cessna will bring down production costs for its new CJ4 light business jet by gaining concessions from key suppliers.
"Our conversation with suppliers is going to be, 'We haven't seen pricing power in the industry over the past few years; there's no reason you should have pricing power with us'," Donnelly says.
Cessna certificated and began delivering the $9 million Williams International FJ44-4A-powered twinjet in 2010, delivering 27 by the end of the first quarter in March.
Despite Cessna's revenue being up $123 million compared with the first quarter of 2010 - primarily due to more sales of light and midsized jets - the company lost $38 million in the quarter. "Underlying operational performance at Cessna was disappointing," says Donnelly. "The production ramp up of the CJ4 is going well technically, but it is above our production cost targets."
He largely blames suppliers, without naming any. "When we laid out the programme, the CJ3 was a product used to do most of the cost analysis," says Donnelly. "The reality is the cost for most of the key components have come in at a higher level than we would have forecast based on our modelling of what it should have cost, based on the CJ3.
Donnelly says the solution is "not complicated" and will involve "blocking and tackling" and going back through all those key components of the cost and sitting down with those suppliers and saying, 'Look this cost is out of line compared to what we buy from you on other programmes'," he says. "It's not complicated and there's not a lot of science involved. We'll hammer away at it one day at a time."
The company is ultimately expected to turn a profit of 1-3% by the end of the year, says Donnelly, with the "break-even point" this quarter. That optimism is based on several factors, including a drop in used Citation inventory to 14% of the installed fleet from 14.5% at the end of the year and a pick-up in the tempo of inquiries, primarily from Asia, Latin America, Europe and the USA.
The continued bonus depreciation benefit, which lets operators write off the full cost of a new aircraft in the first year, will likely drive a large spike in orders in the US market later this year, says Donnelly.
The company is working with potential customers to move many of those delivery slots to the third quarter or earlier to prevent what could be a bottleneck in the fourth quarter based on the experience with bonus depreciation last year. Cessna made 44% of its 2010 deliveries in the fourth quarter. "We don't want to go through that again," he says.
Donnelly expects a return to a positive backlog for business jets at Cessna by the end of the year, but that will not spell the end of changes at the company. "We have taken a number of actions over the past couple of years at Cessna, but clearly have more to do," he says. "We're taking the necessary actions to restore profitability even as we invest in new products and service offerings."