Business

May 8, 2012

Debt, not market, drove plane maker to bankruptcy

by Joshua Freed and Roxana Hegeman
Associated Press

Economic turbulence has shrunk the market for business jets, and it’s causing an especially bumpy ride for Hawker Beechcraft.

The Wichita, Kansas,-based aircraft maker filed for bankruptcy protection this week, seeking approval for a plan that would write an estimated $2.5 billion in debt off its books and eliminate almost $125 million in annual cash interest expenses.

Hawker Beechcraft Corp., which is owned by Onex Partners and GS Capital Partners, a Goldman Sachs private equity fund, has struggled with the sluggish business jet market more than other plane makers because it was purchased in a highly-leveraged deal at the peak of the general aviation market, just before the market tanked.

“It is one badly damaged firm, in a badly damaged market segment – just a unique set of circumstances,” said Richard Aboulafia, an aviation analyst with Teal Group, a Fairfax, Va.,-based aerospace and defense analysis company.

The economic downturn that began in late 2008 hit business jet makers especially hard, as corporate customers that were lining up for their own planes earlier in the decade began looking for ways to trim fat. The public outrage that Detroit auto executives took private jets to Washington seeking bailout money that November reinforced the planes’ image as a symbol of corporate excess. Two months later, the White House pressured Citigroup to cancel the planned delivery of a jet.

Wichita, the self-proclaimed “Air Capital of the World,” is the home of major manufacturing plants not only for Hawker Beechcraft but also for Boeing, Spirit AeroSystems, Cessna, Bombardier and more than a hundred smaller aircraft suppliers. But the business jet segment of industry has struggled as its sales sunk by 56 percent during a global economic downturn. Another blow for Wichita came earlier this year when Boeing announced it was closing its defense plant in Wichita.

“Frankly, given what Wichita has been through, this is unpleasant but relatively small,” Aboulafia said.

More than 13,000 aircraft workers here have lost their jobs since the 2008 start of the Great Recession, which pummeled sales of the small and mid-size business jets made by three of Wichita’s major manufacturing facilities.

“This is definitely another blow, another nail in this situation we have been going through and it is definitely not good news,” said Jeremy Hill, director for The Center for Economic Development and Business Research at Wichita State University.

Since its founding with the highly-leveraged 2007 purchase of Raytheon’s former aircraft unit, Raytheon Aircraft, Hawker Beechcraft has carried a heavy debt burden, reporting a total debt of $2.3 billion at the end of 2011, according to its annual statement to the Securities and Exchange Commission.

Hawker Beechcraft will likely emerge from bankruptcy keeping a majority of its business, although one or two of its product lines could be shut down, Aboulafia said.

“This is a company with good products and a good name,” he said. “They just happen to be carrying a lot of debt and they are going to have to make some tough choices about what they are going to do next.”

In 2009, Hawker delivered 98 business jets. Deliveries plummeted to 51 last year. It has stopped making its Hawker 400XP until demand improves, according to a filing last month.

Hawker Beechcraft sold $2.3 billion worth of business and general aviation planes in 2009. Last year those sales were almost $1 billion lower.

There’s little reason to buy a new jet right now. There are more than 4,000 used business planes on the market right now, said Gordon Blalock, vice president for sales at Omni International Jet Trading. “The market’s so depressed,” he said. “We’re seeing some of these airplanes selling for less than 50 percent of what they sold for brand new.” Several years ago, some planes actually appreciated in value because demand was so high, he said.

Cai von Rumohr, an analyst at Cowen and Co., said Hawker Beechcraft’s financial problems have made it harder to sell jets in the down market, because jet owners want to know that the company that built its plane will be around to service it and make parts.

“They have been losing share in the (business jet) market,” he said. “The crisis of confidence among their customers has been an issue.”

The company also makes trainers and other small planes for the military, but civilian planes are still 56 percent of its revenue, compared to 27 percent for military planes. Hawker has delivered more than 700 T-6 trainers, most of them to the U.S. Air Force and Navy. But that contract is winding down. Hawker is trying to sell a light attack version of that plane to the Air Force, which is reconsidering its initial pick of a competing plane.

For Wichita as well as Kansas, the stakes in the future of Hawker Beechcraft and the aviation industry are high.

Aircraft sales comprise the state’s number one export, accounting for a third of the products it makes, Hill said. In 2008, aerospace accounted for $4.3 billion of Kansas exports – a number which plummeted to $2.1 billion by 2010. Kansas used to be the sixth largest city among U.S. aviation exporters in 2008, dropping to tenth by 2010.

Hawker Beechcraft employs some 7,400 people, with roughly 4,700 working at its Wichita facility. It also has factories in Little Rock, Arkansas, Britain and Mexico, as well as more than 100 service centers worldwide.

 




All of this week's top headlines to your email every Friday.


 
 

 

Headlines April 20, 2015

News: Sale of U.S. arms fuels the wars of Arab states - As the Middle East descends into proxy wars, sectarian conflicts and battles against terrorist networks, countries in the region that have stockpiled American military hardware are now actually using it and wanting more. U.S. spending $1 billion to reassure European allies - From Army rotations...
 
 

News Briefs April 20, 2015

Last two Raiders give congressional medal to Ohio museum The last two ìDoolittle Tokyo Raidersî have presented their Congressional Gold Medal for permanent display at a museum in southwest Ohio. The medal arrived at the National Museum of the U.S. Air Force near Dayton in a ceremonial B-25 bomber flight. The medal was awarded by...
 
 
Northrop Grumman photograph

Space Solar Power Initiative established by Northrop Grumman, Caltech

Northrop Grumman photograph Northrop Grumman’s Joseph Ensor (left) and Caltech’s Ares Rosakis (right) shake hands as part of the recent SSPI commemoration event held at the California Institute of Technology, Pasade...
 

 
Navy photograph

Triton UAS conducts first flight with search radar

Navy photograph The MQ-4C Triton unmanned aircraft takes off from Naval Air Station Patuxent River, Md., April 16, to conduct its first flight from the naval base. The aircraft began sensor testing on April 18 and flew with its...
 
 

UTC introduces active side-sticks to large commercial aviation

UTC Aerospace Systems is introducing the world’s first active side-stick controller for large commercial aircraft. UTC Aerospace Systems is a unit of United Technologies Corp. UTC Aerospace Systems’ Actuation & Propeller business unit is supplying the active side-sticks for the cockpit of the new Irkut MC-21 single aisle aircraft. The MC-21 family of aircraft will...
 
 

Boeing presents flight test 787 Dreamliner to air, space museum

Boeing, elected and community leaders joined together April 17 to celebrate the permanent display of one of the original 787-8 Dreamliner flight test airplanes at the Pima Air & Space Museum. “Boeing has a strong presence in Arizona and is proud to share this important achievement in aviation history with the community, our employees and...
 




0 Comments


Be the first to comment!


Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>