Downdraft in general aviation spurs mergers, new flight plans
The core of a thundercloud is filled with sharp updrafts and wicked downdrafts. And such is the composition of general-aviation sales. After soaring in the late '70s, the makers of business jets and small aircraft have been riding a severe four-year downdraft. Industrywide sales dropped from a record 17,811 in 1978 to 2,438 last year. So it came as no surprise this week when Cessna Aircraft, the world's largest manufacturer of light planes, landed in the arms of General Dynamics.
It is, in fact, the flight path taken by all but one major producer in the industry.
In August, Gulfstream Aerospace merged with the Chrysler Corporation. Last year, Bangor Punta (parent of Piper Aircraft) was acquired by Lear Siegler. In 1980, Raytheon Company became Beech Aircraft's keeper. The Gates Learjet Corporation is the only major independent that does not yet roost with a larger entity. But it's struggling, too. Last Friday, Gates announced plans to lay off 500 workers to cut costs.
This was supposed to be a turnaround year for the industry. Sales last December were the second highest ever. But as talk in Washington turned to tax reform, corporate customers turned wary, says Drew Steketee of the General Aviation Manufacturers Association in Washington.
Proposed changes included no tax write-off on a purchase unless the company-owned aircraft was used for business more than 90 percent of the time. Also, a suggested change in the depreciation schedule from five years to 12 threatened to increase ownership costs by 44 percent, the GAMA says. And at one point the Internal Revenue Service wanted to charge individuals for any personal use of a business aircraft at three times the first-class air fare of a commercial flight.
These proposals have been modified, but the effect has been that ``buyers pocketed their wallets and waited to see what the government was going to do,'' Mr. Steketee says. ``And we had our worst winter quarter in history.''
Industry analyst Ed Lewis of B. C. Christopher Securities in Kansas City, Mo., comments: ``They've all had a disappointing year -- and it's hard to say who's most disappointed. Cessna, in its annual report, said it expected $900 million in sales this year. It looks like it might end up with about $750 million.''
Mr. Lewis adds, ``This is the third year of the strongest recovery since World War II, and this industry has yet to participate.'' His remark hints at possible structural problems in the industry.
The boom years of the mid- to late '70s left the market saturated. ``We delivered more than 60,000 aircraft in five years,'' says Steketee. ``There are only 213,000 general-aviation aircraft in total.'' And only 55,000 are classified as strictly business aircraft.
Companies can get almost-new planes cheaply. ``A top-of-the-line Cessna Citation I costs about $1 million,'' notes Tassos Philippakos, a Moody's Investors Service analyst. ``You can pick up a used Citation I for about $500,000 or less.''
The last recession hit the biggest buyers of small aircraft hardest. Many of these traditional customers -- oil, gas, and mining corporations as well as farmers (for crop dusting) -- are still struggling. They can't afford new aircraft.
Belt-tightening during the recession also helped extend the life of aircraft in service. Dow Chemical, for instance, cut the use of five planes at corporate headquarters in Midland, Mich., by 30 percent in 1983.
This brings up another problem: Aircraftmakers face weak replacement demand. ``The expected service life for many aircraft is 15 to 20 years,'' says Lewis of B. C. Christopher. The oldest aircraft in Dow's fleet are two 17- to 18-year-old French-made Dassault Falcon 20s.
But Robert Smith, Dow's director of corporate safety and services, says Dow doesn't plan to replace them for two to four years. Another company contacted said the service life of its 14-year-old jet was ``indefinite, as long as we can get parts and continue to maintain it.''
Top these handicaps with foreign competition, more regional commuter flights due to deregulation of the airline industry, and rising premiums for product liability insurance and the industry outlook would appear bleak.
Perhaps so, but prices of used aircraft are starting to rise, indicating that that glut may be getting sopped up. Most of the producers now have well-capitalized parents and have cut costs, becoming more efficient operations. While selling fewer total aircraft, they have endured by emphasizing the more profitable top-of-the-line ones. New wider, more fuel-efficient planes are being developed, which may help stimulate sales.
Moreover, there is a move to diversify beyond pure general-aviation manufacturing. Gates Learjet, for instance, now has an aviation services subsidiary. And most manufacturers are eyeing defense contracts as a means of boosting revenues.
Analysts commending the Cessna-General Dynamics union cite GD's experience with the Department of Defense as an advantage to Cessna in securing defense work. GD benefits, too. At $30 a share, General Dynamics is purchasing Cessna's assets at ``rock-bottom prices,'' says analyst Lewis. GD got a good price, he says, because Cessna's production facilities are not being fully used and not generating profits.
The merger gives General Dynamics flexibility. If defense spending slows, GD could emphasize general aviation. Of course, capital spending, tax reform, and the economy would need a favorable wind, too. CHART: Business aircraft makers:
Squeezing more profit out of fewer and fewer sales 1979
'85 (est.) Shipments (in thousands) 20,000 15,000 10,000
0 Factory billings (in billions) 3.0 2.5 2.0 1.5 1.0 0.5 0 Source: General Aviation Manufacturers Association