is cutting light jet production rates and reducing costs as the company is now facing the prospect of another down year.
The moves follow a first quarter in which Cessna posted an $8 million loss and its business jet deliveries fell to 32. The loss eclipsed the $6 million segment loss in first quarter 2012. And, first quarter 2013 deliveries were down by six jets over the same period in 2012.
Cessna had expected a soft first quarter for its Cessna Aircraft business unit, with sales improving throughout the year. Cessna had predicted deliveries would be near if not up over last year’s 181 deliveries.
But the early returns have been so weak that the company is now saying deliveries for the entire year will be below the 2012 level, once again pushing off anticipation of a market recovery by another year.
“Based on current business jet market conditions, we are reducing our 2013 business jet delivery outlook and now expect that deliveries will be down this year compared to 2012,” says Scott Donnelly, chairman and CEO of Cessna parent. He added that as a result, Cessna is adjusting production schedules and implementing other “appropriate cost actions.”
These include workforce reductions, which Donnelly says will include voluntary actions. The reductions will come from lower production in the light aircraft models and up through the CJ4. Cessna is expected to incur costs of $25 million as a result of the reductions.
“We were hopeful that demand would recover as the impact of last year’s elections and fiscal uncertainties moved behind us. We also thought the recent strength in U.S. equity markets would have supported improved business confidence and therefore business jet demand,” Donnelly told analysts. “Sales dialogue, customer inquiry was reasonably active in the quarter. However, customers, especially in the light jet segment who tend to be small business owners, continued to defer purchase decisions, reflecting continued concerns about their financial outlook … The demand just isn’t there.”
Donnelly did not say how much the company is scaling back on business jet delivery expectations. But he did say it expects the “top line” to be down “a couple hundred million.”
While the depressed light aircraft market drove the dampened results, midsize aircraft are showing some signs of improvement, Donnelly says. “The market in that medium segment has been more consistent with our expectations.” But the light market is driving down pricing to a point where the company just isn’t willing to sell, he says.
But he adds that “While we are taking these immediate actions, we believe the global business jet market still has significant long-term growth potential.”
Donnelly also stresses that the company is forging ahead with its product development plans, including the introduction of the M2, Sovereign and Citation X business jets this year, followed by the Latitude in 2015 and the Longitude in 2017.
In the quarter, the company sold off the five remaining legacy Sovereigns as it prepares to bring the new Sovereign to market. But since both the Sovereign and Citation X are in transition to newer models, Cessna is not expecting to delivery any of each model in the second quarter.
On a brighter note, used aircraft sales improved – up $18 million in the quarter – and actually led revenues to increase $39 million in the first quarter. Also contributing to that increase was an $18 million jump (9%) in aftermarket revenues. But at the same time, Cessna backlog at the end of the first quarter was down another $28 million to $1.03 billion.
Cessna affiliate company Bell also had a slower quarter, with lower military deliveries and commercial aftermarket sales. Bell revenues decreased $45 million and profit was down $16 million as it delivered two fewer military helicopters (were down one to nine and H-1s were down one to six).
But Bell’s commercial business for new helicopters continues to surge, up 33% from 30 helicopter deliveries in the first quarter of 2012 to 40 in the most recent quarter. However, backlog fell $386 million to $7.08 billion by the end of the first quarter.
RBC Capital Markets calls the Bell results unexpected, particularly with reduced civil helicopter aftermarket sales. “As a result, operating profits came in below our forecasts,” says RBC analyst Robert Stallard, who adds Bell’s margins are still “robust” at 13.6%.
But Cessna – back in the red – remains a risk, Stallard believes. Like Bell, revenues were lower than expected, he says, and points to the reversal in outlook for 2013. Any pickup in indicators has yet to translate into actual orders, he adds.
“With the limited backlog at Cessna, investing in Textron on the basis of a belated pickup in business jets was always a bit of a leap of faith, and this weak quarter for bizjet is likely to again test investors’ confidence in whether we are likely to see a turnaround in the small/mid cabin sector within a reasonable time frame,” Stallard says.