Who 'Won' and Who 'Lost'

Analysis and Opinion by Rich Belzer (Former VP Sales, Columbia Aircraft)

The excitement, such as it was, of the Columbia Aircraft bankruptcy auction is over. Now it's time to take a look at who were the winners and losers in the Columbia saga.

The Winners (in order from the BIGGEST to the smallest)

1. Cessna Dealers - Over the past 6 years (ending in 2007'Q3), the SR22 from Cirrus Design has outsold the 182 and T182 combined by 146%, 2,554 aircraft versus 1,751. How many of these purchasers completed their training in 172's before switching gears and buying an SR22? How many of these pilots discussed the possible purchase of a Skylane with the sales rep at their local Cessna Dealer before placing an order for an SR22? Of course there is no way to quantify those numbers but I think you get the picture. Nothing hurts a sales rep like losing an order to a competitor so you can imagine how the Cessna Dealers were feeling about not having an aircraft to sell that would consistently cruise at 180 to 190 kts. Fast, safe, well built and fun to fly, the Cessna 350 and Cessna 400 are just what the doctor ordered for the Cessna Dealer network.
   
2. Cessna Aircraft - If you look at this from the viewpoint of a Textron shareholder, this acquisition is a virtual non-event. In 2006, Textron reported Cessna revenue of $4.16 billion and strong earnings of $645 million (15.5%). Were the "Columbia Aircraft Division" of Cessna to produce $120 million in 2008 revenue, a good possibility, and a 5% profit (not such a good possibility), this would represent an increase of 2.9% in revenue and just 0.9% in earnings over Cessna's 2006 numbers. For Textron as a whole, that's only a 1% increase in revenue and a 0.6% increase in earnings over their 2006 results. So what's the big deal? This acquisition will not only begin to give Cessna some valuable experience in the manufacture of composite aircraft, ahead of the NGP, but energize their dealer network as well (see above). For Cessna and Textron, this is not about the numbers but about a strategic move into the world of high-performance, composite piston-singles and they were able to arrive at this point at a cost far less than it would have taken to certify such aircraft.
   
3. Owners of Columbia 350's and Columbia 400's - During my three years with the company, roughly 430 owners took delivery of these aircraft and I was fortunate to get to know many of them. These were truly committed purchasers as, for most of those three years, Columbia Aircraft was operating on a shoestring and it showed. In my experience, Columbia owners love to fly and truly love their aircraft and that's been a must, given the cash-induced support issues they have had to deal with. Don't think it isn't discouraging when you bring your aircraft in to a service center for some warranty work and are told: "We won't perform warranty service on Columbia's any more because we never get paid." Last Tuesday morning, all of those Columbia owners realized a dream; they now own Cessna's and will soon be able to get their aircraft serviced at Cessna service centers. Talk about falling into some good luck; it doesn't get any better than this.
   
4. ING Capital and Bridge Associates - A great deal has already been written in motions to the U.S. Bankruptcy Court from the attorneys for the unsecured creditors about these companies - about how much they had been paid and how little they produced. What the Malaysian Government was after (see Losers, below) when they began this process with ING was to sell Columbia Aircraft for roughly the $100 million they had invested. Irrespective of how well they performed against that objective, ING and Bridge made millions in fees - money, as things turned out, that came out of the pockets of the many creditors of Columbia Aircraft. But the ultimate goal of consulting companies is to obtain fees and, to that end, the Columbia Aircraft engagement has been highly successful for both ING Capital and Bridge Associates.

The Losers (also in order from the BIGGEST to the smallest)

1. The Malaysian Government, Ministry of Finance - Yes, they invested roughly $100 million and guaranteed loans by Export Import Bank of over $30 million. How much will they reap out of the roughly $16 million coming from Cessna and, potentially, another $5 to $10 million that the lawsuit against Affiliated FM Insurance Company might produce? If the attorneys for the unsecured creditors have anything to say about it, they'll get next to nothing. Do they deserve to lose roughly $130 million? Given their track record as the owners of Columbia Aircraft, they are truly deserving of their position at the top of this list.
   
2. Unsecured Creditors of Columbia Aircraft - This group is as diverse as can be, from parts vendors who continued selling (COD) to Columbia Aircraft even though they had not been paid for 120 days (or longer) to service centers that performed warranty work for Columbia owners, submitted their invoices for payment and received nothing in return. There's also an ad agency that continued to diligently perform work for the company month after month even though they weren't getting paid. The common frustration among all of these creditors is that clearly the owners of Columbia Aircraft (see Malaysian Government above) had plenty of money to bring all of the creditors current but chose instead to escape from their obligations through bankruptcy. Naturally, the creditors will be shedding no tears over the losses the Malaysians are taking.
   
   
   
   
   
3. Arcapita - This is an investment company that has regularly produced a 25%-plus return on equity and their ownership of Cirrus Design has been a textbook case of how to invest in and help develop a company. Having finally reached the point where it was time for an exit strategy, certainly in excess of $200 million, they get hit by a truck. It's bad enough that losses in the sub-prime mortgage fiasco have hit potential investors in general aviation, now Arcapita must face the fact that nobody is likely to make an offer for Cirrus until they have seen at least a year of their head-to-head competition against the Cessna 350 and Cessna 400. What will a realistic valuation be of Cirrus at the end of 2008? It's anyone's guess and that must be causing considerable nervousness at Arcapita.
   
4. Cirrus Design - I have placed Cirrus below Arcapita on this list because they face a much different task - competing with the Cessna 350 and Cessna 400 in the marketplace. Cirrus is a well-run company with an outstanding management team so don't think that they aren't up to the task. On the other hand, they have led a somewhat sheltered life as the company with the aircraft most likely to pose difficult competition for them, Columbia Aircraft, was always facing one sort of financial crisis or another. So what happens now? I expect the Cirrus sales force to find many more of their prospects giving serious consideration to 350's and 400's than in the past; this will certainly cause some delay in obtaining new orders and, in my estimation, will reduce the total number of annual orders each of their sales reps will be able to obtain. This problem will be exacerbated by the fact that Cessna has dealers who are generally willing to take trade-ins while Cirrus (in the US) has a direct sales organization that only deals in new aircraft sales. The trick for Cirrus management will be to adjust to this new competitive environment without suffering an increase in sales/marketing expense that might adversely impact their bottom line.
   
5. Columbia Aircraft's Domestic and International Sales Centers (DSC's & ISC's) - Having worked with Columbia Aircraft's DSC's for three years and having established all of the company's ISC's during the year-and-a-half I focused on International markets, I still feel a sense of responsibility to these people, none of whom have a place in the new order. Many of these companies invested heavily in getting Columbia's sold during some very tough times and it looked like they were finally going to see a solid return on their investment in 2006 as orders were strong following the announcement of the G1000 in late 2005. Then Garmin had their well-documented certification delays which ultimately left 67 aircraft on Columbia Aircraft's ramp when the June, 2006 hailstorm hit. This proved to be the perfect storm for the DSC's and ISC's which had plenty of orders booked for aircraft which the company could not deliver until repairs were completed (commissions paid on delivery, of course). Think it couldn't get worse? The company delivered a bunch of these aircraft late in the year but, due to lack of cash, stopped paying commissions from November, 2006, through March, 2007. So these folks just received their "Thanks for all you've contributed and, by the way, you're fired" e-mail from Cessna and, to me, it's a sad ending for some great people and companies. The reality is that Cessna already has its own dealers, a company strength, so this result was a foregone conclusion.

Final Commentary: As I expect this to be my last article on the topic of Columbia Aircraft's bankruptcy, I'd like to thank Jim Campbell and Aero-News Network for providing me with the opportunity to shed some light on the events that led to last week's final resolution. As you can see, although the Cessna acquisition of Columbia Aircraft's assets has provided a happy ending for some, there are a few big losers who deserved a better fate. One group I left off the winner's list is the manufacturing workers of Columbia Aircraft who have been jerked back and forth like puppets over the past eight months. Not only will almost all of these workers obtain jobs (and job security) with Cessna but their ownership promises more jobs to come in Central Oregon.

That's a real Christmas present for some dedicated people who can really use it.

FMI: www.flycolumbia.com, www.clubcolumbia.org