Cessna: The Other Shoe Has Dropped

On April 24th, the Wichita Eagle's Molly McMillin reported a rumor of another possible 2,800 layoffs at Cessna.

Today, she writes, "Cessna Aircraft announced more production cuts and another 2,300 layoffs Wednesday as business jet cancellations continue to pile up during the down economy.

"Cessna issued 60-day layoff notices to 1,600 workers at every level of the company on Wednesday, including 1,300 in Wichita.

"Cessna also will issue layoff notices to 700 salaried employees by mid-June, the majority of them in Wichita."

The great general aviation bubble of 2007 has burst with a nasty splash. Earlier McMillin had written that business jet usage is down dramatically quoting UBS Securities analyst David Strauss, "Domestic and international business jet usage was down 30 percent in March and 30 percent for the first quarter of 2009."

Thus the accelerator's vengeance is visiting the industry. Moreover, cancellations are eating into the general aviation industry's backlog as the corporate jet has become the leprosy bell of gray flannel America.

Why is Textron so keen on cutting jobs at Cessna?

First, as I have written previously, 2007 is looking like it was a bubble year for the aircraft industry and specifically for the general aviation industry. The industry seems to have over expanded in 2008. Boeing, Spirit's biggest customer, in contrast, expanded production more cautiously in 2008. Spirit has used various strategies to preserve its talented workforce with considerable success.

Textron, Cessna's owner, says it has no plans to sell Cessna. McMillin quotes CEO Lewis Campbell: "Given the success we have had with the Textron Financial liquidation so far, and given the recent sale of two high-value assets and other cash-production opportunities, I feel now that it's highly, highly improbable and unlikely that we'll ever have to divest of any more assets."

Yet Textron itself is in play. Cutting jobs and costs is one way to try and boost profits in a lousy market and try to get the stock price high enough to keep the wolves at bay. I suspect Textron management may more worried about keeping their jobs than the state of their shareholders' wealth.

If the parent is sold, Cessna will be cut off from the defense end of Textron's portfolio.

On April 9 2009, the Financial Times' Justin Baer and Julie MacIntosh reported that, "Shares of Textron soared by 49 per cent amid speculation the industrial conglomerate could be broken up and sold to a consortium of Middle East and US investors.

"Al-Watan, a Kuwaiti newspaper, reported on Thursday that a United Arab Emirates group was close to a deal to acquire Textron, whose businesses range from Cessna aircraft and Bell helicopters to E-Z-Go golf carts, for $21 a share, or more than $5bn. The buyers would then find a US company to take over Textron’s defence division."

Before the price jump, the market was valuing Textron's shares at $2 billion. After the price rise, they were worth $3 billion. Textron has about $10 billion in debt.

Baer and Julie MacIntosh reported, "Industrial bankers have long held the view that there is no single buyer for Textron because of its incongruous mix of aerospace and defence assets, the struggling financial division and an industrial business that builds products including golf carts and tools."

Bob Tita in the Wall Street Journal notes, "Industry observers predicted that any purchase of Textron's civilian aircraft business by a foreign consortium would have to be accompanied by the acquisition of Textron's military business by a U.S. company at the same time."

Might Boeing wind up owning the military piece of Textron? Tata wrote, "Loren Thompson, a defense analyst for the Virginia-based Lexington Institute, said Boeing Co. would likely be the frontrunner for the military business. The aerospace giant is already a partner in the production of the Osprey. 'The military operations would be a good fit with Boeing.'"

And what about the Wichita economy?

Wichita State's forecast of higher employment in 2009 than 2008 looks wildly optimistic. WSU's Center for Economic Development and Business Research (CEDBR) in its Barton School wrote "Employment in 2009 is expected to remain relatively flat with a gain of 0.3 percent, adding 3,829 jobs."

Cessna is no longer our number one employer: Spirit now is.

And yes, management makes a difference.