Very Little That A Strong Economic Recovery Won't Fix

By Rich Belzer

In the aftermath of recent GA acquisitions – Piper by a venture arm of the government of Brunei, Cirrus and Continental Motors by AVIC (Aviation Industry Corporation of China), the huge, Chinese-government-owned aviation company – a great deal of concern has been expressed over the general health of GA. Of course, the impact of the recession which hit in full force in September, 2008, hit GA perhaps harder than any other industry. After a slow 2008 reduced deliveries by 12%, deliveries dropped a whopping 48% in 2009 followed by an additional 14% in 2010 (ref: GAMA statistics for propeller aircraft deliveries).
No GA company was immune to the effects of the recession. Piper, which has probably fared best among a group that includes Cessna, Cirrus, Diamond, Hawker Beechcraft and Mooney, delivered 65% fewer aircraft in 2009 than the prior year; even with a modest recovery in 2010, Piper still delivered 45% less aircraft in 2010 than in 2008.

Piper 50th Anniversary Cherokee

What appears to be little understood by the aviation community is the huge operating overhead inherent in the airplane manufacturing business. Large factories and capital equipment are intrinsic to building aircraft along with high levels of staffing. During my years at Columbia Aircraft, we employed over 600 people at our 2006 peak while delivering a modest 185 airplanes, mostly the speedy Columbia 400. So what happens to such companies when there is a sudden 50% decline in deliveries from one year to the next?

Obviously, lay-offs in the factory are a given although it can be difficult to assess what will happen from quarter to quarter so lay-offs tend to lag. If you lay off hundreds and then the business picks up, you may be faced with a difficult training process as you try to react and staff up once again. Such a process tends to result in lay-offs occurring at a slower rate than that at which deliveries are declining. And of course, in the GA business, deliveries trigger immediate cash as no aircraft ever leaves the factory until it has been paid for in full. The bottom line is that the process of slowly scaling back employees generally leads to a period of negative cash flow which quickly reduces cash reserves.

What about other possible reductions to address declining cash flows? Airport land leases are fixed as are facilities so it is virtually impossible to cut in these areas. This leaves engineering and sales/marketing organizations as the only potential targets for cuts.

Most GA companies were able to reduce sales/marketing costs by reducing the frequency of their advertising and cutting back on new programs with their advertising agencies. But airshow expenditures for Sun ‘n Fun, AirVenture (Oshkosh) and AOPA Summit are huge and considered by most GA companies to be essential. Fortunately, most GA companies employ dealers who receive discounts on new aircraft they sell and are not a drain when business declines; the most significant exception is Cirrus which maintained a direct U.S. sales organization of over 20 and faced a unique dilemma. Cutting sales staff is generally viewed as a sure way to further reduce sales and can result in a death spiral of ever declining revenue followed by further cuts in sales staff. Cirrus hung on and ate the additional overhead but seems to have moved lately into reducing sales staffing levels.

But the biggest area for potential savings for a GA company is in engineering/development – particularly in new aircraft certification programs which not only entail higher staffing levels but sizeable capital outlays for tooling and prototypes. Given the rapid decline in cash receipts which occurred throughout GA from 2008 through today, is it any wonder that Cirrus, Diamond and Piper put their respective jet programs on hold? When revenue is declining faster than you can cut back, the first action you take is to delay paying your vendors. The second is to eliminate any non-essential capital outlays and nothing I can think of up sucks up capital like development of a new aircraft.

As of today, however, all three jet programs are back on track. How did this happen and what does it mean for our GA industry?

Piper Altaire

Piper was first. The only U.S.-owned of the three companies developing new small jets, its owner, American Capital, having somewhat rejuvenated Piper, was shopping for a buyer. As of mid-2007, they had held controlling interest in the company longer than planned and were having trouble finding a deep-pockets investor to take them out. Along came Brunei, a small (600,000 people) but wealthy Asian country, located on the island of Borneo and possessing significant oil and gas reserves. The Sultan of Brunei, “owner” of the country and one of the world’s wealthiest individuals, was looking to diversify and his interest in Piper was to move his country into GA for the long-term. Brunei’s venture arm, Imprimis, not only bought out ACAS but invested in the PiperJet program so it did not need to be funded out of current revenue. Piper, with its new and highly professional management team, has been able to maintain its operations on a cash-neutral basis but could clearly not be funding their jet program without the additional capital from Imprimis.

The Cirrus situation was not altogether different from Piper although their majority owner, Arcapita, was the U.S.-based investment arm of the Bank of Bahrain. So Cirrus, although headquartered in Duluth, Minnesota, was already an “offshore company” when the recession hit. In similar fashion to Piper, Cirrus delivered 47% fewer aircraft in 2010 than in 2008, laid off hundreds of factory workers, delayed payments to vendors and put their Vision jet program on hold. Arcapita, unwilling to invest further in the company, actively sought an investor to take them out, finding an interested AVIC in early 2010. Negotiations took significantly longer than expected placing further cash pressure on the company but the acquisition finally closed this summer.

For some reason, there was far more uproar in the U.S. GA community over the Cirrus acquisition than over Piper which had actually been U.S.-owned. The good news for Cirrus, however, is that AVIC is already an aviation company and their investment in Cirrus seems to be with a long-term view. As with Piper and Imprimis, AVIC is already providing funding for the Cirrus jet program which is back on track.

Diamond DA42 NG

Diamond, an Austrian Company owned by the notably wealthy Christian Dries and with operations in London, Ontario in addition to Austria, was forced to shut down its D-Jet program, in spite of Dries’s deep pockets. Diamond has not fared as well as either Piper or Cirrus during the recession and experienced a 59% drop in deliveries between 2008 and 2010. Of late, an undisclosed investor has injected cash into their jet program and it appears to have resumed development.

Obviously, the recession has wreaked havoc in GA as both disposable income and net worth have taken a big hit although the stock market’s recovery over the past year-and-a-half has helped restore a significant portion of investor losses. In addition, though, businesses likely to purchase aircraft, both large and small, continue to operate on a conservative basis as our sluggish recovery continues. The reality is that, given the high overhead needed to maintain an aircraft manufacturing company, a massive recession such as we have experienced will put everyone under stress. Looking around, each of companies I have discussed has dealt with the situation and not only remained afloat but managed to come up with an influx of capital that has rejuvenated their development programs. The lone casualty over this period appears to be Mooney which has been a financially marginal company for some time.

But there is a common thread which has emerged over the past few years which is of concern – few of our U.S. GA companies are owned within the U.S. And the reason for this is a simple one:  U.S. venture firms are not interested in GA in a way, shape or form. Why is this when it seems as if there is so much offshore money finding our industry?

Simply put, the U.S. investment mentality, especially within the venture community, fears long-term commitment, especially if the capital requirements are high. (Energy development seems to be the only exception to this but potential returns are significantly higher than in GA.)  Development of a new GA aircraft which might sell for $2.5 million or less is a three-to-four year effort and can take anywhere from $50 to $120 million, depending on the size of the airplane. Given the slow ramp-up entailed in aircraft manufacturing, obtaining a return-on-investment acceptable to an investor is a six-to-seven year process, a long time for a U.S. investor to have that much cash at risk. I should add that these numbers don’t change much whether such a program is attempted by an existing company or a start-up.

To add to the problem, Vern Raburn (Eclipse) and Rick Adam (Adam Aircraft) raised huge amounts of investment capital to fund their respective airplane companies. When both failed, high-net-worth investors across the country were left with a bad taste in their mouths when it comes to throwing cash into GA ventures.

I recall a quote from Carrie Fisher’s book Postcards from the Edge to the effect that “instant gratification isn’t fast enough”. Compared with the long-term view taken in China for instance, this philosophy certainly applies to the U.S. investment community. For this reason, I have little optimism that companies such as Piper and Cirrus will ever again be U.S.-owned. This pretty much leaves Cessna and Hawker Beechcraft (although it is difficult to ascertain whether or not they are owned in the U.S. or U.K.) as the only major players in GA that are not owned offshore (not counting Gulfstream, of course).
But all is not lost for U.S. pilots. We continue to have the friendliest skies in the world for GA pilots and most lenient for pilot licenses and instrument ratings remain easy to obtain relative to the process in other countries. As of today, the U.S. market represents roughly 50% of the worldwide GA market although I expect significant growth in China over the next ten years to erode that lead.

So we can all rejoice in having a great country in which to fly, even if we’ll mostly be flying “foreign” aircraft.

Rich Belzer has been a pilot for 25 years as well as an aircraft owner, holding a commercial license with an instrument rating. Following 35 years in the computer industry, ten in senior executive positions, he joined Columbia Aircraft in 2004 as national sales manager. While at Columbia, he established all of their international distribution and eventually was granted full responsibility for worldwide distribution as the company’s sales vice president. He has been interviewed numerous times by written and broadcast media on aviation business issues and written a number of earlier articles on the Columbia Aircraft bankruptcy for Aero-News Network.

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