Monday, October 29, 2012

Hawker Beechcraft: Industry expects jet division to be grounded

The mid-western town of Wichita, Kansas, may be nearly 1,500 miles from the offices of New York City’s financiers. But the story of Hawker Beechcraft, headquartered in the town and the industry’s highest-profile victim of the falling demand of recent years, is a powerful parable of the past decade’s financial excess.

The manufacturer – whose range runs from piston-engined propeller aircraft and mid-sized jets to military attack aircraft – was buoyed for much of the past decade, like other corporate jet makers, by the lending-fueled boom in corporate aviation demand.

However, it struggled during the industry’s downturn to service the $2.2bn debt that two private equity funds – Goldman Sachs Capital Partners and Onex – took on in 2007 when they bought the company from Raytheon, the military contractor, for $3.3bn.

Hit by the double burden of servicing the debt and declining orders, the company finally sought Chapter 11 bankruptcy protection in May .

The question is, how many of its activities will have a future when it emerges from bankruptcy, probably in the first quarter of 2013.

“On the jet side, they’re struggling,” a close observer of the corporate aviation scene says. “They’re playing in a very competitive environment.”

The King Air piston engine division of the former Beechcraft piston and turboprop company remains strong, however.

“It’s still a very economical, reliable, practical aircraft for simple passenger transfers,” the observer adds. “It doesn’t really have a competitor.”

The company had to match its capacity and costs to the demand for its products, says Bill Boisture, Hawker Beechcraft’s chairman.

“We worked hard to get the costs down and to get our production balanced with what the market would absorb – but, frankly, absorb at prices lower than we would have charged in 2007 and 2008,” he says.

The company struggled to restructure and was eventually forced to seek Chapter 11 protection, through a deal with four lenders that provided financing. The company entered the process expecting to focus primarily on the King Air fleet, according to Mr Boisture.

But a search for potential buyers discovered interest from Superior Aviation Beijing, an aircraft maker 40 percent owned by Beijing’s city government, which was potentially keen on keeping the whole business going.

“Superior’s [proposal] was significantly stronger than the others,” Mr Boisture says. “We elected to go into an exclusive process with Superior, which meant they would negotiate with no one else and we would negotiate with no one else.”

Yet a sale to a Chinese company presented significant challenges – including the separation of the military division, which Hawker Beechcraft expected not to be allowed to sell to a Chinese company. The problems eventually proved insurmountable and Hawker Beechcraft announced on October 18 that talks had ended without a deal.

“It’s a complex transaction – government approvals on both sides – and we were unable to successfully reach a deal,” Mr Boisture says.

The breakdown of talks leaves the jet division’s future again uncertain. Mr Boisture says the company is undertaking a “short and focused effort” to examine strategic alternatives for the division. But it had previously said failure of talks with Superior would almost certainly mean closure of the jet production lines. The company has said it plans to call itself Beechcraft – the name of the turbo-prop and piston-engined business – on leaving bankruptcy.

Ascend Worldwide analysts note that, having delivered 246 aircraft in 2009, the Hawker jet division has delivered only 88 so far in 2012. The fall has almost certainly been exacerbated by would-be customers’ concerns about the company’s future ability to honor warranties.

Mr Boisture point out, however, that the Hawker 900 – the best-selling business jet ever – remains popular with some customers. “I think there’s a possibility of a future there for the right buyer,” Mr Boisture says. Yet, with competitors struggling with the excess capacity and weak demand that helped to force Hawker Beechcraft into a crash landing, most observers expect the jet division to close. The company will emerge as a maker of propeller-driven aircraft, centered on the King Air fleet’s renowned ability to withstand even the most punishing of environments.

“It’s good and reliable and able to operate in a lot of the developing markets that cannot support more complex, complicated equipment,” Mr Boisture says.


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