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´The bubble has burst,´ aviation expert says
´The bubble has burst,´ aviation expert says

This week´s news that Hawker Beechcraft and Cessna Aircraft will cut jobs is not surprising, analysts say.

"You cut costs in advance of downturns, and we´re definitely heading toward a market downturn," said Teal Group analyst Richard Aboulafia.

Only a few weeks ago, planemakers pointed to record order backlogs and high volumes of international orders and said they were well positioned to weather an economic downturn.

"The bubble has burst," said Cowen & Co. analyst Cai von Rumohr.

The credit market that´s seizing up will translate into a large drop in demand, von Rumohr said. The degree and speed of market disruption in the past several weeks is unprecedented, experts say.

"When cash suddenly freezes up and people have a hard time financing planes, that´s different than an ordinary downturn," Aboulafia said.

The credit crunch and weakening markets have spread globally.

The effects of this downturn may run about as deep as the one following the Sept. 11, 2001, terrorist attacks, Aboulafia said.

"We put off a day of reckoning for the last five years" with cheap interest rates and easy cash, he said.

"We kept doing that for so long, the chickens are coming home to roost."

JSA analyst Paul Nisbet predicts the recession will last a year or more and will mean deferrals or cancellations of some orders, particularly in the smaller end of the business jet market.

Lewis Campbell, chairman and chief executive of Textron Inc., Cessna´s parent company, said financing is the biggest issue.

But in some cases, a "chilling of order intake" may simply be because "our customers have more to do right now than order airplanes," Campbell said. "They´re dealing with their own businesses and what´s going on."

Key market signals

Planemakers keep an eye on key market indicators, such as corporate profits, used airplanes available for sale, and the use of business jets.

U.S. corporate profits have been falling since 2006. Now, India, China, Brazil and the others are seeing slowing growth and falling corporate profits.

And used business jets for sale rose at their fastest levels ever last month, according to a research report by J.P. Morgan analyst Joe Nadol. Used aircraft inventories for sale are now 11.4 percent of the active fleet, the highest level since 1996.

The surge in inventory came as a surprise, Nadol said.

And utilization levels have declined.

However, Honeywell Aerospace, which releases an annual comprehensive business jet forecast, has not changed its outlook for this year or next.

It´s standing by its predictions of early last month that the industry will deliver almost 1,200 jets this year and between 1,300 and 1,400 next year, company spokesman Bill Reavis said.

"We still think that will happen," Reavis said.

Jobs outlook worsens

The sunny local jobs forecast of 30 days ago has faded, said Rob Allison, interim director of Wichita State University´s Center for Economic Development and Business Research.

At the annual Outlook Conference on Oct. 7, economists projected the Wichita area would add about 6,000 jobs in 2009, led by 2,500 in the aircraft industry.

Now, they´re reading about aircraft layoffs.

"We will be revising it downward, yes," Allison said. "It would be difficult not to based on what we are seeing out there."

But, he added, the aircraft backlog still leaves the area better off than most.

On Monday, Hawker Beechcraft announced it would cut 5 percent of its work force -- about 490 jobs -- as it lowers production.

On Tuesday, Cessna Aircraft told employees it would reduce its work force but did not say by how much.

The cuts are the right approach, said Cowen & Co.´ s von Rumohr.

There is a lot of inventory and a lot of aircraft are being built, and companies don´t want to produce planes customers can´t take delivery of, he said.

Cessna officials have been talking to customers scheduled to take shipment of aircraft in 2009.

Some want to defer delivery by three to six months, Campbell said.

In some cases, their planes may be partially completed.

"We´re trying to work with them," Campbell said.

Order cancellations have not been any higher than normal, he said.

Based on the recent feedback from customers, Cessna revised its delivery schedule downward for 2009 -- from an expected 535 jets to slightly up from this year´s levels of 475.

Slowing next year´s deliveries will allow Cessna to avoid 0 million in costs it would take to increase production to higher levels next year, said Textron chief financial officer Ted French.

Keeping production steady also balances the rates in 2009 and 2010, Campbell said.

At Bombardier Learjet, "the situation is dynamic," said spokesman Leo Knaapen. But "we´re not planning any layoffs or work force reductions."

The company has not had order cancellations, although orders have softened.

The Wichita facility employs 2,700 to 2,800 people, up from 2,300 at the beginning of the year. It employs 3,100 if consultants and contractors are added in, Knaapen said.

The site is working to take on assembly of its new Learjet 85 and expanding production of the Learjet 60.

"We´re in a growth mode," Knaapen said.

Read the full version of this article at Kansas.com

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