Market-making at Cessna
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Posted Date: 16/09/2008
Issue: Executive & VIP Aviation International October 2008
Publication: Executive & VIP Aviation International
Not all markets are geographic. Cutting across continents are different classifications of aircraft operation; such as commercial airline groups sitting traditionally alongside private charter companies. But the waters are being muddied as airlines enter the private charter fray and entrants like Lufthansa Private Jet visit the likes of Cessna to acquire private jet fleets to complement premium airline services.
Cessna’s Roger Whyte maintains that bold moves at Lufthansa will encourage other airlines to consider the opportunity of absorbing business jet strategies into their own operations. He reminds us that Austrian Airlines already has a cooperation with Jetalliance, with whom Cessna works very closely. He speaks of TAM in Brazil with its air taxi charter business and Delta Elite – the private jet arm of Delta Airlines.
“Lufthansa has done a lot of research and believes it is important to have a complete package to offer their customers. I can only imagine other airlines are going to look very closely at this and some of them will follow suit,” remarks Whyte.
But, reminds Whyte, the airlines are also making significant use of business jets for training purposes. “Lufthansa, once again, is a prime example. Until now they had propeller airplanes, piston airplanes and turboprops in their training fleets. Now they are getting CJ1s.”
CJ1s and Mustangs are also in use for airline training purposes in China and Cessna is negotiating with a number of airlines around the world to put further jet fleets in place for training purposes.
But private jets are not only being put to new use by airlines; there are also diverse ownership opportunities and new methods of accessing aircraft being developed beyond the US market and into Europe, the Middle East and Asia. From fractional ownership to jet cards, the opportunities for ownership options are constantly shifting upwards and this is good news for the OEMs.
Tackling territories
None of this is lost on Whyte. “We are working very hard in eastern Europe at the moment,” comments Whyte. “Not just Russia but we’re seeing activity as far away as Kazakhstan, Ukraine, Bulgaria, Romania, Serbia, Croatia and we sold our first CJ2 to Kosovo this year. All those countries that used to be part of the Warsaw Pact and the Baltic states are starting to take aeroplanes. We have programmes in these regions ourselves and through our representatives to help people get into business aircraft use through management schemes, financing and so on.”
These regions are expanding rapidly for Cessna. The manufacturer recently announced an order for 20 Citation Mustangs from Russian air taxi operator Dexter. Cessna expects certification for the Citation Mustang by Russian authorities in early 2010, having already achieved certification in more than 47 countries. Dexter plans to expand its fleet of new PC-12 aircraft with the Citation Mustang to create a national air taxi network.
It is not just aircraft acquisitions from within the former eastern bloc that is generating private jet activity within this region; European operators are flying increasingly into this geographic bloc and are setting up operations in Russia and other east European countries but registering their aircraft in the west. “Even the companies that are taking Mustangs in Europe – such as London Executive Aviation and Blink – fully intend to operate in eastern bloc countries,” Whyte reminds us.
Whereas eastern bloc countries are generating plenty of private jet revenue already, Asia is the source of future excitement. “India has gone from being almost not a market at all – because there were restrictions on importing jets and being able to transfer foreign exchange out of the country – to a market that is actively starting to take aeroplanes. But the units are still fairly small in India. It is an interesting market that we are watching very carefully. We have assets on the ground there and good representation,” he comments.
Then there is China, a market that is evolving but is fraught with regulatory challenges and restrictions on movement in Chinese air space. And there are very few airports in China given the size of the country. This too is a region for Cessna to watch but Whyte is not oblivious to the challenges.
Facing up to fuel
There is no doubt about it: fuel prices have scared away some of the more recreational flyers but simultaneously pushing airline business passengers to consider air taxi and other business jet operations as private flight pricing compares favourably with surcharged premium airline pricing. If fuel prices are pushing the private aviation market both ways, how does a manufacturer like Cessna – with products that span from VLJs to mid-sized jets – make accurate assumptions about future fuel pricing and build those assumptions into its product development?
“We watch fuel prices very carefully,” states Whyte emphatically. “We have also been mindful of the efficient use of energy. The whole Citation concept was produced on the basis that Cessna created a very efficient jet – and that was 36 years ago.” Whyte is emphatic that, at whatever point we find ourselves in the economic cycle, Cessna’s customers need to fly.
He points to the pioneering work Cessna has undertaken with Williams to achieve low fuel consumption with the FJ44 series engines, and to Pratt & Whitney Canada’s engine for the Columbus, which he describes as “achieving the next step in fuel efficiency”. In the fuel efficiency equation, aerodynamic expertise falls to Cessna and, Whtye assures, the company is certainly on top of that with fuel prices in mind.
Of course fuel issues do not just resolve around pricing; they also relate to environmental concerns and Cessna has just established its Environmental Strategy Council to assess the company’s impact on the environment and to formalise initiatives to minimise that impact. The company is looking at boosting its efforts in recycling – both personal and industrial – conserving energy, aircraft operations and aircraft design. In the course of this initiative, Cessna is coordinating with industry and government groups, including the Federal Aviation Administration, the General Aviation Manufacturers Association, the Aerospace Industries Association and the National Business Aviation Association.
Materials make planes
Getting right down to fundamentals, Executive & VIP Aviation International brings up the subject of raw materials – their cost and availability. Whyte comments: “We have long-term agreements for the supply of aluminium, titanium, nickel, steel and composites. This pretty much guarantees that we are going to get the materials as we need them. Sometimes the cost will catch up with us as we renew our agreements. At this time, we do not have any critical shortages of materials but rising prices always concern us.”
Of course Cessna has a large order book to fulfil so it has to get the raw material issue right in order to carry out its commitments to its customers. But does it concern Whyte that some of its customers may not be able to fulfil their commitments to Cessna and may try to trade on their delivery positions which may put pressure on market values?
To an extent, the trading of delivery positions is within Cessna’s control, explains Whyte. “We are very careful about selling aeroplanes. We just do not sell them to people who we think are likely to speculate. That does not stop some aeroplanes being on the market but we discourage people from buying aeroplanes for speculation. We do not, as a company, allow contracts to be assigned except in exceptional circumstances.”
Of course, once the aircraft is delivered, Cessna has no control over the ownership of the aircraft but, between signing an order for an aircraft and taking delivery, Cessna insists on privity of contract between the parties. And, insists Whyte, despite the aviation downturns, there have not been significant order cancellations. “It has just not happened,” states Whyte firmly.
Turbulence ahead?
Pointing to the long-term trends, Whyte is confident that private aviation based on the categories in which Cessna specialises will continue to be a growth market, despite the cycles.
“We are used to this – that does not mean we like it – but we are used to it,” he says philosophically. “But the whole business has a backlog, the likes of which has never been seen before. Cessna’s current backlog is $14 billion.”
With cycles lasting 13-24 months – and Whyte points out these down cycles seem like they endure forever when you are in the middle of one – they are really very contained. At Cessna, sophisticated analysis and modelling guides the company’s planning through more turbulent times.
For Whyte, the biggest comfort for the company is the true internationalisation of Cessna’s products. “In 2002, about 25% of our jets were being delivered internationally; this year that number is forecast to be 54%. That does not mean we have seen the US domestic market turn down – it has continued to grow – but internationally it is growing faster. This is a cushion we did not have before.”
This speaks volumes, but added to this is the downturn in commercial aviation, which will potentially unleash a whole new breed of premium airline passenger on the business jet charter market who simply cannot get the service they need out of an ailing airline market. “This bodes well for our business,” he concludes.
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