Posted on 02/21/2012 10:32:01 AM PST by DefenseMatters
PREMISE This article is a summary of the problems at Hawker Beechcraft beyond the context of the lingering effects caused by the 2009 economic downturn, and provides a possible prescription regarding a transformation that would allow for a much more viable entity to emerge. DISCUSSION Another reporting period has passed with more bad news coming from Hawker Beechcraft. Even a cursory glance through the company’s recent SEC filings can make for some unsettling reading if you are an industry watcher. If you happen to be an employee, supplier or debt holder, the news is downright scary. Management is either stoically keeping up a brave face or is blissfully unaware of what the entire market at large already knows: that Hawker Beechcraft cannot continue in its current structure.
Isolating the problem The problem with Hawker Beechcraft is not just the havoc caused by the current economic climate. First and foremost, gross margins are too low which is symptomatic of a bloated and inefficient production process. In fact, year-over-year cost of sales (2008 to 2009) increased by 1% even though revenues decreased by 10% over the same period. In addition, backlogs are dwindling, R&D budgets are miniscule, employee pensions are underfunded by $296 million and the prospects of paying down its long-term debt are remote. At this point, it would be a monumental task just to roll-over the debt, let alone pay it off entirely. At the root of the problem is the state of Hawker Beechcraft’s business jet product lines. While the Premier II and the now still-born H450XP would have contributed somewhat to increased sales, it is the H750/H900XP and the Hawker 4000 that are crucial to Hawker Beechcraft’s future as a business aircraft manufacturer. The former was to bring in margin while the latter was counted on as the “growth” product. Both will miss their mark in their intended roles. The H750/H900XP will sell but it will do so only through heavy discounting which will cut into its program margins. HBC is probably thinking it can sustain this margin hit until the market recovery takes hold. The problem with this strategy is that by that time, the Lear 85 and the Legacy 450 will enter service. No amount of discounting will be able to fend off the technology proposition of these two competitors, especially on an aircraft model that’s in its 19th iteration since it was first introduced in 1964.
The prospects for the Hawker 4000 are even grimmer. HBC boasted how the Hawker 4000 had a 28% delivery market share in 2009. There is no question that they did; but they realized it because the brunt of these aircraft were scheduled to be delivered to customers before 2009. The company was late delivering them and had amassed about 20 or so aircraft that they were eventually able to release to their customers. As HBC knocks off the last of these late deliveries for the Hawker 4000, future market share performance is forecasted to be much lower. The model faces an entrenched market leading competitor in the CL300 (which Bombardier is expected to announce a much anticipated upgrade); a newly upgraded G250 slated to enter service next year and a formidable new competitor in the Legacy 500 scheduled to enter service in 2013. In the mean time, the Hawker 4000 is being sold for less than it costs to make, with the company anticipating this trend to continue through the entire current fiscal year. (Refer to page 26 of the 2009 Annual Report for further elaboration.) In addition, many early model Hawker 4000s were being sold with 10 year warranties which the company seems to not have entirely accounted for in their warranty provisions as accruals in 2009 were lower than they were in 2007. You would assume that even buried beneath consolidated figures, an increase due to the 10 year Hawker 4000 warranties would be somewhat discernable over this period.
Hawker Beechcraft’s current strategy At the heart of HBC’s current strategy is the assumption that a market recovery will fix what’s ailing the company, and that is just not true. The company’s business aviation products are seriously underperforming with new products relegated to minor upgrades due to a token R&D budgets based on an across-the-board derivative strategy. As previously mentioned, the company’s only technology leading product (the Hawker 4000) is being sold for less than it costs to make. As a consequence, the state of its business jet product lines is hampering the ability to adequately sustain its general aviation and military products. In addition, management is currently negotiating with its production workforce on a new collective bargaining agreement hoping to secure an arrangement whereby a considerable portion of its current production workforce is moved offshore to a region with cheaper labor costs i.e. Mexico. This approach is particularly short-sighted as I cannot see the wisdom of transferring high-skilled labor jobs with steep learning curves (such as the composite work on the Hawker 4000) that were eventually lowered only after a long and arduous process. Moving these jobs offshore would effectively reset the learning curves to a production workforce not even remotely as skilled as the one in Wichita. If the objective is to sustain a negative program margin on the Hawker 4000, this is the way to do it. Finally, overhead cuts to the salaried workforce have been already pared down to the point that there is no material cost savings to be had from any further reductions.
A Possible Plan Forward Hawker Beechcraft needs to take decisive action and divest everything except its King Air line allowing it to emerge as the industry’s business aviation turboprop leader. The proceeds of the piston, trainer and business jet divestitures could then be used to secure new long-term financing which would provide sufficient funds to upgrade the venerable King Air products at a level sustainable by the new entity. This would also allow the company to keep its Wichita footprint, albeit staffed by a smaller complement of workers.
Granted, embarking on such a drastic plan requires serious corporate introspection from management and its ownership. However, they must realize that there is a short window of opportunity to act while there is still some perceived value for its targeted business lines to potential suitors. The alternatives (e.g. forced divestiture or bankruptcy) are far less appealing.
Then quick, let’s award the Light Air Suppport contract to the AT-6 Texan II before it’s too late, no matter how superior the A-29 Super Tucano may be...
Well, not exactly in this particular case. There are plenty of self-inflicted wounds in this story. Even with a pro business government, these guys could still be underwater.
That’s a good idea. What we need now is a military driven bailout of a company owned by Goldman Sachs and the Canadian investment firm Onex. Obama owns GM, so why not Hawker.
Do they still make the King Air ?
“Do they still make the King Air ?”
Yep, and here’s the amazing part. The King Air, basically a 50 year old design, is the ONLY thing in their product line that consistently makes money.
And that in itself says a lot about there problems.
It’s a very good airplane.
More economical than a jet and close to the same speed.
Maybe Uncle Sugar could put a big military contract their way?
“Then quick, let’s award the Light Air Suppport contract to the AT-6 Texan II before it’s too late, no matter how superior the A-29 Super Tucano may be...”
...a bird in the hand....
“It’s a very good airplane.”
Absolutely true but not the point. They have developed many other aircraft in the last 40 years, and none of them have been anywhere near as profitable for the company. Hence their current situation.
The King Air IS a good plane but it can’t carry the entire company. When the company is broken up, it will probably be the King Air line that will draw the most interest.
Business schools are like terrorist schools. They only teach students how to take off and fly in fair weather, never how to land without making a crater.
You rode on private jets and you’re a conservative?
And Baraq hasn’t called you out on national tv?
Wow.
Oil company.
You know how evil they are...
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