an editorial opinion

Overcapacity in business aircraft production forces OEM changes

Eclipse 500. The inevitable collapse of the Eclipse business plan put a chill on new start ventures in this industry.

Pilatus, maker of the PC12 turboprop, is also looking at producing larger business aircraft, including, possibly, a jet design. And Piper, a mostly piston company (the numbers in the chart cover just its Meridian turboprop), would like to bring its PiperJet Altaire to market.

Finally, there is the threat of new emerging market players getting into the business aircraft arena. Both India and China have investigated new concepts but, since these are government-backed ideas, they are likely to proceed very slowly, if at all. However, China took a notable step forward in February, when it acquired Cirrus Aircraft. Cirrus, like all the other prop makers, has a design for its own business jet, the Vision Jet.

Consolidation prospects

While the odds are clearly stacked against newcomers to the aviation industry, the business aircraft market has plenty of current players. There are now 6 established business jet players, 2 jetliner players, 1 emerging new jet player (HondaJet), and 4 turboprop players all seeking to move up in the market.

If too many new entrants succeed, or if the market fails to recover fast enough, the only possible answer is consolidation.

Cessna is easily the biggest wild card in the business aircraft arena. Its spectacular fall from grace in 2008–10, coupled with weakness at its corporate parent, Textron, make it a possible acquisition target. There has even been discussion in the past few months among activist investors forcing a Textron breakup, motivated in large part by a desire to spin off Cessna.

Hawker Beechcraft, owned by private equity players Onex and Goldman Sachs, has always been up for grabs, for the simple reason that almost all private equity players have a time horizon for selling an asset, and generally don't own it for strategic reasons.

However, this very peculiar economic downturn has turned experience on its head. In the past, companies owned by industrial conglomerates were generally viewed as more secure than companies owned by financial entities.

Piaggio P180 Avanti II. The manufacturer is trying to leverage its turboprop position to create a business jet product—the proposed P1XX.

This time, Textron's ownership of Cessna has done nothing to help the company weather the downturn, while Hawker Beechcraft's financial backers are secure enough to provide a measure of stability.

On the acquisition side, there is one very big wild card—General Dynamics (GD). The company is in very sound shape thanks to defense revenue, and it has had a generally happy experience owning Gulfstream for over 10 years.

It also acquired Galaxy Aerospace, and in 2008 purchased Jet Aviation, clearly showing a commitment to the business aircraft segment.

In June, GD Chairman & CEO Jay Johnson said (at a conference hosted by Sanford C Bernstein & Co) that he's "looking for acquisition opportunities." A Cessna or Hawker Beechcraft acquisition would give GD nearly half the market, and position the company very nicely for a market recovery. Of course, antitrust concerns could complicate either purchase.

HondaJet. Honda will be the 1st new entrant in the business jet industry since Embraer, and the 2nd new entrant since 1960.

Another problem with consolidation is that, to be meaningful, it requires creative destruction. While companies get traded and merged, it's very difficult to make them go away altogether. Nobody has really exited this industry for decades. Lockheed and North American/Sabreliner are among the very small group of producers to actually exit the market.

Similarly, very few established bizjet programs have actually ended their lives. Over the past 2 decades, only the BAe Hawker 1000, Learjet 31, Gulfstream G300/G350 and Dassault Falcon 50 have actually ended production. Everything else that has died has been replaced by a close cousin within the same company (as with Cessna's Citation V/Ultra/Encore series).

However, in Nov 2010, Hawker Beechcraft announced that production of the Hawker 400XP would be suspended for 2 years due to market conditions. Deliveries had fallen off, with just 1 aircraft delivered in 3Q2010.

Cirrus Vision Jet. China's investment in the company could help make Cirrus's longstanding jet aspiration a reality.

Assuming that it doesn't come back, the move caps an impressive 28-year run for the plane, which has also been known as the Mitsubishi Diamond and the Beechjet 400.

If industry consolidation is to be meaningful, we need to see more programs (or companies) follow the Hawker 400. Consolidation can't just be a story about asset trading—exit barriers need to come down too.

More than one industry forecast has the new build market resuming growth starting in 2012. But if it doesn't, and if we continue to see new market entrants, the only rational result is more program extinctions, hopefully as part of a rational industry consolidation.

Richard Aboulafia is VP Analysis at Teal Group Corp, an aviation and defense market intelligence and consulting company. He has tracked the business aircraft market for over 20 years.


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