The Face of GA Is Changing... But Is It A Positive Change?

Guest Analysis/Opinion by Rich Belzer

ANN E-I-C Introduction: We continue to enjoy the contributions of outside experts and their analysis of the pressing issues that the aviation world is dealing with. And while we may not agree with their conclusions, methodology or research, there is no question that there is much to learn from the contributions of others with unquestioned insight and expertise into the topics at hand. Herewith, another inriguing analysis of the changing face of GA... by someone who has worked in the trenches of this business. And agree or disagree, we find a lot of food for thought in the following extrapolations... -- Jim Campbell, ANN E-I-C.

Piper was sold to Imprimis – the venture arm of the Sultan of Brunei, the virtual owner of this small Southeast Asian country and one of the wealthiest men in the world. Cirrus was first bought by Arcapita (formerly Crescent Capital), the venture arm of the Bank of Bahrain; early this year it was acquired by the Government of China through its wholly-owned aviation company, AVIC. Finally, bankrupt Columbia Aircraft, whose assets were acquired by Cessna in late 2007, was owned by Composite Technology Research Malaysia (CTRM), a company wholly owned by the Malaysian Government.

I have written in the past about the lack of American capital for general aviation (GA). Clearly, the product development cycles are too lengthy and expensive; the return on investment is too low given how much time it takes to arrive at a potential investor exit. Yes, Vern Raburn was successful in raising hundreds of millions of U.S. dollars for Eclipse but his business plan was the dream of an individual with little prior aviation business experience. Somehow, he was able to attract big dollars from high-net-worth folks.

Given recent events at Piper and earlier at Cirrus, this is probably an appropriate time to look at how foreign ownership is working out for the companies in question, their employees and their customers.

Columbia Aircraft

I’ll start with the simplest and, of course, the one for which I worked. From the day I arrived at the company, it was underfunded; for example, by the time I had been with The Lancair Company (its name was changed as part of the “Lance Neibauer removal project”) for 11 months, the company owed me $13,000 in unpaid expenses. Is it any wonder that, after the famous 2006 hail storm that damaged over 60 airplanes on the ramp, Columbia’s Malaysian owners let it fall into bankruptcy?

Sure, Neibauer looked all over for capital in the late 1990’s and the Malaysians were the only willing investors. But they knew little about GA and every infusion of cash required a vote of whatever passes for a legislature in Malaysia. All-in-all, Malaysian ownership virtually doomed Columbia Aircraft to failure right from the start.

Cirrus Aircraft

The case of Cirrus is far more interesting as, after all, they were the most successful GA company of the past decade. Although Arcapita’s money came from Bahrain, the firm was based in Atlanta and had a firm grasp of what makes a business successful. They not only provided sufficient capital when it was needed, they greatly enhanced Cirrus’ management team. As a result, deliveries of the company’s flagship airplane, the SR22, grew from 0 to 588 in only seven years, an incredible accomplishment for a brand new fixed-gear composite airplane in an industry marked by slow change.

By early 2004, there was an article in the Minneapolis Star-Tribune about the possibility of an initial public offering (IPO) of Duluth-based Cirrus. Clearly, this would have provided the means for Arcapita to slowly back out and achieve a reasonable return on their investment. But it never happened in spite of Cirrus’ rapid growth from 2004 through 2007. I can only surmise that the company never achieved earnings sufficient to provide a valuation acceptable to Arcapita. Then, of course, the recession hit and the decline in GA hit Cirrus hard – the 588 SR22s delivered in 2007 dropped to only 240 in two years! Clearly, the window of opportunity for an IPO was gone as the company coped with severely declining revenue.

For Arcapita, it was becoming clear that the longer they remained in Cirrus, the lower the probability of their achieving a reasonable return-on-investment; the only solution was a sale but how would you establish a valuation for a company that was not operating profitably and was unlikely to recover any time soon? In the meantime, they put the jet program on hold, banished founder Alan Klapmeier and put their CFO, Brent Wouters, in charge in an effort to stop (or at least slow) the bleeding.

Fortunately for Arcapita and Cirrus, it was becoming clear that China was about to embrace GA and the Aviation Industry Corporation of China (AVIC) had come to the realization that this was a business they needed to embrace. For the uninitiated, AVIC is the largest aviation company in the world with annual revenue of roughly $1 trillion. Wholly-owned by the Chinese Government, AVIC makes everything that flies for the Chinese military, from helicopters to fighter planes as well as missiles. Having visited their largest installation at the “aviation city” in central China, I can personally vouch for the fact that this is a true high-tech company.

Knowing that GA was expected to grow in leaps and bounds in China, a few years ago AVIC began to research the GA industry on a worldwide basis, meeting with almost every GA airplane company. Based upon this learning experience, AVIC reached the conclusion that the future of GA and perhaps aviation in general was in composites; after all, AVIC was one of many suppliers for the carbon-fiber Boeing 787. By early in 2010, they had settled on Cirrus as an acquisition target and entered into what turned out to be a lengthy negotiation which was finally concluded earlier this year. Within AVIC’s huge empire, Cirrus fell under the newly established GA division known as CAIGA, based in Zhuhai which lies nearby Macau in southern China.
At the moment, it appears to be business-as-usual at Cirrus although, in spite of the reported influx of capital, they have not brought all of their vendors current. The biggest change is that Brent Wouters, former Cirrus CEO and primary negotiator of the AVIC deal, is out and someone from AVIC is running the company. It also appears that sufficient funds are coming into the company to revive development of the Vision jet.

As far as the future goes, it is clear that AVIC will manufacture Cirrus airplanes in Zhuhai for the Chinese market which could leave the Duluth operation as somewhat of an afterthought. Once they initiate production in China, it seems likely that all Cirrus composite parts will be made in Zhuhai for both that location and Duluth. While it would be a stretch to attempt to deliver SR22’s for the worldwide market out of Zhuhai, shipping parts in containers should work just fine as a number of GA companies are learning with their Mexican operations.

Piper Aircraft

The most recent news involving foreign ownership is in regard to Piper. Founded in 1927 by Clarence and Gordon Taylor, the company went bankrupt in 1930 and its assets were acquired by William Piper. In 1937, with the last Taylor brother departed, the company name was changed from Taylor Aircraft to Piper Aircraft. Piper remained an American-owned company until May, 2009, when American Capital (Nasdaq: ACAS), its owner since 2003, sold the company to Imprimis, the Singapore-based investment arm of the small Southeast Asian country of Brunei Darussalam.

I have twice visited Piper’s facilities in Vero Beach, Florida – once in July, 2007 and again this past January. To start with, this is a company with significant expertise in aluminum fabrication and no background whatsoever in composites. Notwithstanding my own pro-composite leanings, I was very impressed by my visit early this year when I met with the company’s CEO, Geoff Berger, Executive Vice President, Randy Groom, CFO, David Wilson and others in the sales/marketing group. This entire team had been assembled following the Imprimis acquisition and, in fact, Geoff Berger had been managing director of Imprimis in Brunei before taking on the role of interim CEO of Piper.

In my rather lengthy (43-year) business career, one axiom that stands out is that strong management teams win, even if the products might not be best in class. Piper had clearly taken a strong step forward with their new team and, even though Berger held an “interim” title and had no prior experience running an aviation company, his leadership skills were such that I felt the company would benefit by retaining him as a permanent CEO.

What I also learned during my visit to Piper was that the Sultan of Brunei was looking to diversify his holdings and was interested in the aviation business as a long-term endeavor. So in addition to the investment it took to buy out America Capital, Imprimis was directly funding the development of the PiperJet as, due to the recession, normal operation was not generating the cash needed to do so.

Given all the positives about Piper’s new ownership and management, imagine my surprise when a reliable Asian source informed me that Imprimis had approached AVIC in early August and was looking to sell the company. My source told me that AVIC had passed because they had no interest in aluminum airplanes.
I immediately contacted Geoff Berger who told me that he had visited CAIGA’s Zhuhai facility and “established a dialogue with the senior-most leadership” but that this dialogue nothing to do with a sale of Piper. When I relayed this feedback to my source, he insisted that this was absolutely not the case. He then informed me that the Sultan of Brunei had been having some “difficulties” and had sold a number of major hotel properties. My source was insistent that Piper was for sale; I relayed this back to Berger, stating that our discussion would go no further. End of discussion.

Now, of course, Berger is no longer with Piper nor is Randy Groom and PiperJet development has ceased. Both Berger and Groom signed non-disclosure agreements and cannot discuss current events at Piper. So what is really happening?

My gut feel at this point is that my Asian source was correct about Imprimis looking to unload Piper. The fact that the PiperJet program was stopped is a clear indication that Imprimis has turned off the cash spigot that was funding the program. What about Berger and Groom? These individuals were probably drawing the two highest salaries in the company (and rightly so); their departures were probably just one more way to save on cash. In addition, my guess is that Imprimis felt it was more important that Berger try to get the company sold than to actually run it.

Is there a potential buyer for Piper? I find it highly unlikely that a U.S. buyer would turn up for a GA company. Perhaps a wealthy aviation novice in the fast-growing Chinese market might find Piper attractive. On the other hand, given that AVIC, highly knowledgeable in aviation, has shown no interest, might this be taken as a warning by other potential Chinese buyers to stay away?

Personally, I find the Piper story upsetting. They might not have been a leading-edge aviation technology company but they were good at what they did, had a strong investor behind them and had put together a topnotch management team. As of today, the team has been depleted and it appears as if the money has as well. Too bad for all concerned.

Conclusion (Thoughts On The Survival Of GA)

Foreign ownership of U.S. aviation companies appears to be a fact of life. I need only go back to an e-mail sent to me by Geoff Berger after he had read one of my ANN articles: “As someone who has raised billions of private institutional capital for various entities, I can confirm that for the most part domestic VC’s don’t really have long-term vision or desire to become involved in capital intensive industries anymore.”

As a pilot, former aircraft owner, and participant in the GA industry, I find this a sad situation. After all, we live in the most GA-friendly country in world and if you don’t believe me, talk to pilots from some other countries. With companies such as Piper, Cessna, Beechcraft and now Cirrus, we virtually invented GA and it seems to be slowly slipping out of our hands. In some cases, foreign ownership may turn out well; clearly Cirrus is better off now than before the sale to AVIC. Piper, on the other hand, could be trapped in a cash-poor environment for the foreseeable future.

Also, the landscape of the GA market is changing. When I joined Columbia Aircraft in 2004, the company was doing no business outside of the U.S. and no one seemed concerned about it. At that time, company management figured that the U.S. was 75% of the market so why bother with the overhead of international certifications and the management of international sales channels. John Bingham during his days at Cirrus demonstrated that, with some work, you could obtain 50% of your aircraft sales from outside of the U.S.
The GA market in China is poised for an incredible boom that, within a 10-year timeframe, could make them the largest airplane market in the world. That is where the money’s at.

BIO: 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 the company’s 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 articles for Aero-News Network.

FMI: www.gama.aero