Thursday, February 16, 2012

What the Aircraft Industry Can Learn From Wichita's Woes

Analyst Richard Aboulafia believes that the self-proclaimed 'Air Capital of the World' deserves better than to serve as a cautionary tale.

Richard Aboulafia: There was no shelter from the perfect storm that hit Wichita's once-burgeoning aircraft-manufacturing cluster.

By Richard Aboulafia, vice president, analysis, Teal Group

2011 was a good year for aircraft, and 2012 looks better still. Total industry output by value expanded 4.1% over 2010. Looking at rate plans and what's in the military pipeline, output will expand by 9.3% in 2012.

Since most aircraft are built in the developed world, and the developed world's economy in 2011 was either sluggish (United States) or terrifying (Europe), our industry remains an island of prosperity in a difficult environment.

In fact, the industry sailed through the 2008-2011 period with a 1.8% compound annual growth rate. There were some weak segments -- used jetliner values took a beating, and the aftermarket biz took a hit -- but our industry grew through the worst recession since World War II. That's a victory.

Unfortunately, all the pain in our industry isn't concentrated in inanimate flying objects and abstract market segments. There's also Wichita, and the people who live there.

Arriving in Wichita, you see the sign, "Air Capital of the World." Wichita is understandably proud of its status as one of the world's five great aviation clusters. (Dallas-Fort Worth, Montreal, Seattle and Toulouse are the others). But in legacy, Wichita has a collection of great aero brands, rivaled only by Los Angeles before it largely got out of planemaking.

They started with Beech, Cessna, Mooney and Stearman (now Boeing, and soon to be a large abandoned building). They were joined by Learjet, and later Hawker.

Wichita's talent, heritage, and physical plants earn it the right to put up that sign.

But of all the aircraft-industry segments, the bottom half (by value) of the business-jet market has been hit worst, falling 60.4% by value in 2008-2011. All of Wichita's business-jet output is in this bottom half, and 90% of the world's bottom-half business jets are built in Wichita.

The only other bottom-half player is Embraer, which chose exactly the wrong moment to get into this market.

'It Was Like Grandma Died'

 

How bad has Wichita been hit?

Output at Wichita's business-jet primes fell a shocking 64.3% between 2008 and 2011 (a minus-29% CAGR). According to Wichita State University's Center for Economic Development and Business Research, Wichita lost more than 12,700 aviation-manufacturing jobs over the last four years.

Recent events have been insult to injury.

In December, Hawker Beechcraft's AT-6 -- viewed as a slam-dunk for the Air Force's Light Air Support program -- lost to Embraer's Super Tucano. (The contract has since been delayed for legal reasons, raising the question of whether Air Force procurement has been fixed since the KC-X and CSAR disasters).

This was followed by another blow in January when Boeing announced plans to close its Wichita facility in a few years. That's another 2,160 lost aero jobs and the end of a factory with 82 years of history. It's a magnificent facility where I once got to walk on top of a B-52.

As one Wichita resident told me, "It was like Grandma died."

(Sidebar: Remember when Boeing and EADS kept upping their tanker jobs estimates and wound up with about 48,000? Those were fun days. Both guys fabricated numbers, but this is extremely ironic: Boeing won KC-X with Kansas political support, but in five years Airbus will employ more people in Wichita than Boeing does. Without being judgmental, let's just say "Boeing Community Affairs Manager" is not a job title I'd want right now.)

What can the industry learn from Wichita's woes? 


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