The ongoing light business jet market malaise and the transition to upgraded Citation Sovereigns and Xs led to a $50 million second-quarter loss and a more than 50% plunge in business jet deliveries, Cessna parent reported July 17.
Cessna further expects this to continue into the third quarter as the market has shown few signs of improvement and avionics software certification delays push deliveries of two new products, the M2 and Sovereign, into the fourth quarter, and the X to next year.
Cessna’s business jet deliveries fell to 20 in the second quarter, compared with 49 a year ago. As a result, revenues at Cessna decreased $203 million. The manufacturer, which posted a $35 million profit in the second quarter of 2012, posted a $50 million quarterly loss. At the same time, backlog – once at $16 billion – continued its erosion, dipping $23 million to $1.01 billion.
The down performance does not come as a complete surprise. Textron chief Scott Donnelly warned analysts last quarter that the Wichita airframer was slowing light jet production in the face of a still down market. He also noted that production on the original models of the Sovereigns and Xs was ceasing as the company transitioned to the upgraded models slated to hit the market later this year and early next year.
But even with those warnings, the returns came in below Wall Street estimates.” Management set a low bar for Cessna’s quarter on its previous earnings call, and in recent days, it appeared that deliveries would even fall short of our cautious expectation,” JP Morgan had said.
“Demand continued to be soft,” Donnelly told analysts July 17, but noted the company has taken actions in preparation, including the slowing of the light-jet production rates and reducing its workforce accordingly.
The company has also begun to take a harder line on discounting aircraft, which Donnelly says has cost some sales. After looking at first-quarter sales, he says, “it was getting to the point where it wasn’t making any sense to do these deals.” As a result, Cessna “achieved positive new net pricing on both a sequential and year-over-year basis which was our intent,” he says. “We’re hardly taking aircraft back to list pricing. These are still attractive prices for customers versus historical levels.” But the line on pricing still resulted in fewer sales, he adds.
Donnelly cites continued economic concerns of small and midsize businesses for the ongoing struggles at the light end of the market. These businesses tend to be more market sensitive and concerned about residual values, he says. “We have not seen a price recovery in used aircraft values,” he says.
Even with the existing product concerns, sales of new products have been better. In fact, Donnelly says Cessna is examining its production line to add slots in 2014 for the M2, an entry-level jet that is a step up from the Mustang very light jet.
But given the slower market and delays in certification of the M2 and Sovereign, Donnelly was hesitant to say that Cessna would break even in the third quarter, saying only that it is the company’s goal to break even this year. In light of the certification delays, which are also pushing the Citation X to early 2014, Cessna is lowering its revenue estimates for the year to $3 billion, just below the 2012 level.
But Donnelly notes that despite the market, Textron is satisfied that Cessna is taking the necessary steps to weather the decline and prepare for an eventual upturn. “The Cessna team out there is doing a heck of job in a pretty tough environment,” he says. “They have driven a lot of cost productivity.” While he concedes “we can’t possibility be happy about anything that has a red number associated with it,” Donnelly adds Cessna executives have worked to drive productivity and invest in new products at the same time.
Cessna affiliate Bell also turned in a slower performance, with revenues sliding $31 million, reflecting the delivery of three fewer commercial aircraft in the second quarter (44). Segment profit was also down $17 million due to an “unfavorable” mix and fewer commercial deliveries. Backlog also fell in the quarter, down $137 million to $6.95 billion.