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.


 
 

 
Courtesy graphic

Lockheed Martin conducts flight tests of aircraft laser turret for DARPA

AFRL photograph The Aero-adaptive Aero-optic Beam Control turret that Lockheed Martin is developing for the Defense Advanced Research Projects Agency and the Air Force Research Laboratory has completed initial flight testing. T...
 
 

Lockheed Martin advances live, virtual, constructive training in flight test

https://www.youtube.com/watch?feature=player_embedded&v=jvXmOW8L3mU Lockheed Martin successfully tested a new solution for integrated live, virtual and constructive training during a flight demonstration at the company’s Aeronautics facility in Fort Worth, Texas. During the flight test, a pilot flying in a live F-16 engaged in a synthetic training exercise with a pilot flying as wing...
 
 

Raytheon begins full rate production on TALON Laser Guided Rockets

Under a $117 million contract awarded to Raytheon, Raytheon Missile Systems has begun production of the TALON Laser Guided Rocket. In 2013, the Armed Forces General Headquarters of the United Arab Emirates awarded Tawazun a contract to procure the TALON Laser Guided Rocket. “Full rate production of the TALON LGR is a significant milestone for...
 

 

Advanced Photonix awarded contract for U.S. Navy missile weapons program

Advanced Photonix, Inc.® announced Sept. 15 that it has received a contract worth approximately $1,600,000 from a leading military contractor, which acts as a prime supplier for the U.S. Navy’s Guided Missile Weapon System. The contract is for a custom photodiode and is expected to be completed within the next 18 months, and payment is...
 
 

U.S. Air Force expands RQ-4 Global Hawk fleet

The U.S. Air Force has awarded Northrop Grumman a $354 million primarily firm-fixed-price contract to expand their RQ-4 Global Hawk unmanned aircraft system fleet by three aircraft. Global Hawk operates multiple sensors simultaneously to gather intelligence, surveillance and reconnaissance data. The new aircraft are Multi-INT models that carry sophisticated imaging and electronic signals sensor...
 
 

U.S. Navy awards General Dynamics $234 million for nuclear-sub support work

The U.S. Navy has awarded a $234 million contract to General Dynamics Electric Boat to provide planning yard work, engineering and technical support for nuclear submarines. The contract has a total potential value of $1.5 billion over five years if all options are exercised. Electric Boat is a wholly owned subsidiary of General Dynamics. Under...
 




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>