Cessna gets its production aligned with the market
For the folks who make small airplanes, 1980 was like a jolt of heavy turbulence. But 1981 looks like it might turn out to be a smooth flight to more profitable skies.Skip to next paragraph
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"We hope that 1980 stands out -- as a bad year," Russell W. Meyer Jr., chairman and president of Cessna Aircraft Company, laughs ruefully. "It was not a good year at all. But we hope this year is much more representative of what we can do."
Buffeted by the rough winds of high interest rates and higher fuel costs, the US general aviation industry (the nonmilitary, noncommercial airline market for airplanes) was able to sell just 11,877 aircraft in 1980, down more than 30 percent from the 1979 total of 17,048 planes.
At Cessna, with over half the general aviation industry's market, the picture wasn't much brighter. While the Wichita, Kan., firm's sales for its fiscal year that ended Sept. 30 were up over 7 percent to just past $1 billion, its net earnings nose-dived from $46 million in 1979 to $28.1 million in 1980. It paid its shareholders 59 cents a share, 17 cents less than in 1979.
But with signs of improvement coming quickly, Mr. Meyer and other company officers flew into Boston this week as part of a three-day Eastern trip, hoping to interest securities analysts in the firm's stock. Mr. Meyer, a former US Air Force and Marine Corps Reserve pilot, flew the Cessna plane himself.
"When interest rates went from 14 to 20 percent in the space of a couple of months," Mr. Meyer remembers, "it really devastated the light-aircraft, single-engine market. We cut our production [of light planes] just about in half. That was responsible for part of our reduced profitability."
At the same time, he adds, "we had a very, very high customer demand" for the larger aircraft, including jets, twin engine, and pressurized single engine planes. These aircraft are mostly bought by corporations and small commuter airlines, which can write off part of the cost as a business expense and can afford to carry higher interest rates, which are also tax deductible.
But at Cessna, Mr. Meyer acknowledges, there were problems the company can blame on no one but itself.
The "high customer demand" was accompanied by "very poor production efficiency. As we tried to increase our production, the inefficiency kind of pyramided. The result was a substantial amount of incomplete, inprocess inventory." Translation: There were a lot of unfinished planes sitting around that could not be sold to help pay off the $92 million in short-term debt the company was carrying. (It has no short-term debt today.)
One reason for the poor production, Mr. Meyer notes, is similar to that faced by much of US industry. It could not find enough qualified people who were willing or able to be trained for the highly skilled jobs needed to build airplanes. "We were in a hiring mode. In a 12-month period we went from 15,000 to 21,000 employees. Qualified people were just about impossible to find."
They might have been easier to find if Cessna was located somewhere besides Wichita. Two of its major rivals, Beech and Gatyes Learjet, also have headquarters there. Added to the flock is a Boeing plant, which does not make small planes but still competes for skilled aircraft workers.
Cessna's founder, Clyde Cessna, came to Wichita in 1911 (eight years after the Wright Brothers skimmed the sands at Kitty Hawk) because, as Fred Hopkins of the E. F. Hutton office there says," . . . It's a good flat spot to land an airplane."
In Clyde Cessna's day, he often had to make most of his own parts. Today, his company must depend on many suppliers for some parts and equipment. Here again, Cessna had to compete with other aircraft manufacturers -- including commercial jet buildersn and defense contractors all over the US -- for the production of instrument makers, engine builders, semiconductor manufacturers, and others for pieces of its planes.
"They [Cessna] got into some inventory control problems" as a result, Mr. Hopkins said, and many planes were undelivered for a time last year.
But this year, "while not exactly like the difference between night and day," is definitely a contrast, Cessna's Mr. Meyer says. For while the quarter ending in March saw sales dip slightly below the same quarter last year, from $256 million to $253 million, before-tax income went up from $11.5 million to $28.9 million, and profits more than doubled, from $5.9 million to $14.8 million.
Although a slight decline in interest rates gets part of the credit for this, Mr. Meyer says, a larger reason is the airline deregulation law passed last year. It simply accelerated a trend the major airlines had begun years before: They reduced the number of cities they serve and the frequency of service to many of the other cities.
As a result, a growing number of companies are buying their own planes to fly their executives around, a move Mr. Meyer argues can often be cheaper than flying on commercial airlines. For instance, he says, it costs $1,524 to fly three people round-trip from Wichita to New York, a trip they can make in a pressurized single-engine aircraft for $1,056, or 31 percent less.
"A substantially greater number of companies that are not using [their own] airplanes today are going to find that they have to have air transportation" of their own to cities no longer served by commercial airlines. Many of these companies, he notes, are now buying small aircraft and flying to "the more than 12,000 airports that can be served by general aviation."
In addition, he says, "we're getting a fair amount of business" from the growing number of commuter airlines that are serving many of those cities the larger carriers no longer serve, another effect of deregulation.