A veteran Wall Street aerospace analyst and a DC-based analyst are asking whether Cessna’s latest round of layoffs will leave the company unprepared for a recovery in the beleaguered business jet market.
Cessna announced last week that it will lower its production rate and cut another 700 jobs because of a prolonged slump in new orders. The cuts will push the company’s workforce below 8,000, less than half the level it was when the global economic downturn intensified two years ago. But Bank of America Merrill Lynch analyst Ronald J. Epstein questions whether the cuts are an “overreaction” that will leave the Wichita, Kan.-based aircraft manufacturer unprepared for when a recovery takes hold. “No other competitor has dropped production recently,” he wrote in a note today to his clients. “We worry Cessna has cut through muscle and bone into marrow.”
A sputtering U.S. economy and jitters over Europe’s debt crisis have prolonged a severe business jet downturn and held off a recovery in orders that Cessna had been expecting in the second half of 2010. “We have not yet seen a discernible improvement in business jet order activity,” Scott Donnelly, the president and CEO of Textron, Cessna’s parent company, said last week.
But Epstein says a business jet recovery “is quietly percolating under the surface of an otherwise tepid market. Sooner or later, demand will punch through. We think orders will begin to pick up steam in the fourth quarter.” He notes that while Bombardier is also suffering from weak demand it has not cut jet production recently. “Downturns are always followed by recoveries,” he notes.
Teal Group analyst Richard Aboulafia shares worries about Cessna cutting too deeply in manufacturing and new product development as it faces an onslaught of new competition from Brazil’s Embraer. Cessna halted the $775 million development of the 4,000 naut.-mi.-range Citation Columbus 16 months ago. “Everything Embraer is doing is basically aimed at what Cessna does” at a lower cost, Aboulafia says.
Aboulafia also concurs with Epstein that business jet orders are likely to begin picking up soon. He notes that corporate profits – a driver of business jet demand – have staged a strong rebound. But even if that happens, he cautions that delivery rates are not likely to begin growing again for some time. “I don’t see anything good happening in 2011,” Aboulafia says. “I don’t see any recovery in deliveries until 2012.”