State of the Industry: Cessna
The good news for Cessna Aircraft is that analysts expect the Wichita-based aircraft manufacturer to maintain its position as the business aircraft market leader in terms of volume over the next decade. But the bad news is that it will have to fight an ever-increasing amount of competition, most notably from Embraer, meaning the company must continue to be relentless in refreshing its business jet product lines and launching new ones.
Fortunately, Cessna has an excellent track record of updating its Citation models, according to business aviation analyst Brian Foley. “Over time, Cessna has averaged more than one Citation announcement/enhancement each year,” he said. “On average, individual Citation products are updated every three to four years and delivered two years after launch. All-new designs are launched around every five years and take four-and-a-half years to enter service. In short, Cessna arguably has the most continuously upgraded product line in the business, which is part of a successful core strategy.”
However, this strategy was severely disrupted last year by financial troubles at Cessna parent company Textron. Specifically, large losses on loans made by Textron Financial caused Textron to go on a strict financial diet. In an effort to conserve cash, Textron forced Cessna to trim its budget, and the casualty was the large-cabin Citation Columbus program.
Some 15 months after its February 2008 launch, Textron decided in May last year “to suspend the development of the Citation Columbus widebody jet due to prevailing market conditions.” Three months later, Cessna announced that the large-cabin jet was “formally cancelled,” bringing the program to a screeching halt.
With the cancellation, Textron recorded a $43 million write-off to cover facility and tooling assets, returned some $50 million in customer deposits for the large-cabin jet and refunded $10 million in incentives from Sedgwick County and the city of Wichita for the Columbus program. It was more than just a financial wound–the cancellation put a dent in Cessna’s pristine track record for new aircraft programs.
Meanwhile, Cessna maintained a stoic face and concentrated its remaining R&D budget on the then-in-development Citation CJ4, which earned FAA certification in March and started to be delivered to customers in April. The new $9 million light jet competes head-to-head with the $8.14 million Embraer Phenom 300, deliveries of which started late last year.
Half the Company It Used To Be
While the Columbus program termination was painful, declining sales and order cancellations for in-production models over the past two years have been absolutely devastating for Cessna. In fact, the company is quite literally half the size was just two years ago.
“Light cabin jets, which include most of Cessna’s product line-up, were hit the hardest by the economic downturn that started in 2008,” Foley told AIN. Teal Group aerospace analyst Richard Aboulafia agreed: “Cessna has 100-percent exposure to the bottom of the market, and the bottom fell out of this portion of the market.”
The results were predictable–falling sales combined with throngs of order cancellations led to production cuts and massive workforce reductions. Cessna aircraft deliveries dived from a record 467 Citations in 2008 to 289 jets last year to something less than 225 this year. It’s unknown just how low Citation deliveries will go in 2010, as Cessna “readjusted” its production rate estimate from 225 jets to an unannounced lower number last month “due to continued weakness in new aircraft orders.” In its business jet market report issued last month, JPMorgan Equity Research projected just 175 Citation deliveries this year, though other analysts are expecting a slightly higher number.
Coupled with these production cuts have been layoffs–lots of them. Since January last year Cessna has laid off some 8,000 employees, more than half of its workforce. Last December, the company announced it would close its three component-production plants in Columbus, Ga., and move the work to its facilities in Independence, Kan., and Chihuahua, Mexico. In tandem, the company announced plans to “accelerate” moving some subassembly work from its Wichita facilities to Mexico.
When Cessna said it was scaling back 2010 production last month, it also announced it would further reduce its Wichita workforce by 700 employees. This would leave about 7,600 workers companywide, down sharply from the 16,000 employed by the company in November 2008. However, Foley and Aboulafia both believe these latest workforce cuts are premature and too deep, leaving Cessna unprepared for the “inevitable” upturn in the business aircraft market.
In the Near Term
While Cessna currently has a solid line-up of Citations, Brazil-based Embraer is nipping at its heels. The Embraer Phenom 100 light jet is putting pressure on the Cessna Citation Mustang, and the Phenom 300 is challenging the CJ3+ and CJ4.
According to a recently released 10-year business aviation forecast developed by Zenith Jet vice president of aviation services George Tsopeis, “The Phenom 100 is a much better aircraft than the Mustang. For approximately $700,000 more, the Phenom 100 is faster [by more than 50 knots], has a higher takeoff weight with the same range, has a larger cabin, a true lav and a much nicer interior. These advantages should be able to offset Cessna’s lower pricing and historically strong market position with customers in the lower-end segment.”
Though he believes that “the Phenom 300 offers more value than Cessna’s CJ3+ and CJ4 offerings regarding range and price…Cessna has an installed base to draw on for potential new orders, whereas Embraer, being new to the segment, will have to rely solely on competitive takeaways, which are much harder to secure.”
Tsopeis expects the XLS+ to remain the “clear leader” in the super-light jet segment. In fact, if Bombardier ceases production of the Learjet 45XR as he predicts, then Cessna will have this market segment–which is currently worth about $400 million a year but projected to be about $1.6 billion in 2019–all to itself.
Despite the entry of the Embraer Legacy 500 and 450 in 2012 and 2013, Cessna will continue to be a major player in the midsize and super-midsize segments with its Citation Sovereign and X, respectively, noted Tsopeis. However, all of the analysts interviewed for this article agree that Cessna needs to refresh both of these aircraft for them to remain competitive once Embraer’s offerings
in this business jet segment enter service.
Another area of consensus among the business aviation analysts is that Cessna must go “upmarket,” meaning a large-cabin aircraft. “If they don’t go upmarket, then Cessna’s future will be one of erosion,” Aboulafia told AIN. “Cessna’s failure to soon relaunch the large-cabin jet will lead to an era of expected decline.”
“Operators in emerging business aviation markets–including Brazil, Russia, India and China–will need large-cabin jets,” said Foley. “The Columbus is important. However, Cessna’s decision to put the Columbus on hold allowed Embraer to catch up with the Legacy 650. The first entry in new market segments usually does better.” The Legacy 650 is slated to be certified by year-end.
According to Zenith Jet’s forecast, “We see Cessna reinitiating the Columbus program…with an entry-into-service date of 2016. We believe that the recession gave them the political cover to go back to the drawing board and rethink their specs. So expect a much more capable aircraft.”
Provided that Cessna soon steps up to the plate and refreshes its current products–key among them the Citation Mustang, XLS+ and X–and relaunches a large-cabin business jet, the company will prosper, analysts say. “Cessna must keep its eye on the ball for new aircraft and upgrades,” Foley said. “If it does this, I think it certainly has a bright future.”
Tsopeis said Cessna will secure the largest unit deliveries by volume–about 35 percent–each year over the next decade. This would be about double the volume of second-place Bombardier, he noted.
“It will be a long time, if ever, before Embraer overtakes Cessna in the market. Cessna has time, but it needs to act sooner rather than later,” Aboulafia concluded. “It must move upmarket and refresh its line-up, as well as focus on its core strengths–product support, strong brand name and customer loyalty.”