Aerospace and automotive: high flyers and crash landings

In a hangar belonging to business jet maker Gulfstream on the outskirts of Savannah, Georgia, aircraft in varying states of assembly sit nose to tail, workers bustling around them. By the time the twin-engine G650s reach the front of the hangar they are nearly ready to be flown to their customers. The aircraft, which can fly 7,500 nautical miles non-stop as the extended-range (ER) version, cost up to $66.5m for the ER — and demand is buoyant. The company is due to manufacture 115 of the top-end jets this year, and orders are rolling in faster than Gulfstream’s workers can build them.

In Wichita, Kansas, 1,200 miles to the west, the production line for Hawker, a manufacturer of smaller corporate jets, has been silent since shortly after its then parent, Hawker Beechcraft — an amalgam of two companies from the early days of powered flight — entered bankruptcy in 2012. Hawker proved incapable of operating sustainably in the same business conditions that have produced buoyant demand for Gulfstream.

The two groups’ contrasting fortunes reflect many of the factors that determine whether companies in aerospace — and another capital-intensive manufacturing sector, the auto industry — survive or perish. Gulfstream has flourished because the G650 has features customers want — particularly its range — and can find on no other aircraft. Hawker Beechcraft failed to differentiate itself in a crowded field and invested heavily in developing aircraft with carbon composite fuselages, which commanded an insufficient premium for the costlier, lighter material.

Development projects in the auto industry tend to be on a smaller scale than in aerospace, but similarly critical. It was because they devoted too little capital to product development that the US’s big three carmakers — General Motors, Ford and Chrysler — failed in the past decade to compete effectively with overseas rivals’ products in the US. On the other hand, many analysts attribute the failure of Germany’s Volkswagen to compete well in the US market in recent years to its failure to develop products in step with US consumers’ tastes.

Loren Thompson, an analyst at the Lexington Institute, a Virginia-based think-tank, explains the risks with reference to Boeing, one of the duopoly that dominates the world market for commercial jets. The company has broken more ground than most rivals, building a pioneering turboprop aircraft, the first modern jetliner and the 747 jumbo jet.

Each time Boeing innovated with a new plane, it ended up betting the company

But Thompson adds: “Each time Boeing innovated with a plane, a new product, it ended up betting the company. If the bet had gone wrong, Boeing would have gone the same way as the Glenn L Martin Company, one of the pioneers of jet aviation.” (Founded in 1912, Martin merged with a building products and chemicals company in 1961.)

The risks are so complex, says Richard Aboulafia, an analyst at Virginia-based Teal Group, an aerospace market research firm, that successful companies generally need a degree of luck. In the US automotive business in recent years, for example, recovering manufacturers have been buoyed by one of the longest, strongest sales recoveries on record.

Among the makers of big business jets, Gulfstream had the good fortune to face a competitor that was distracted. For much of the past decade, Canada’s Bombardier — traditionally the market leader, ahead of Gulfstream and France’s Dassault — has been preoccupied by the costly and time-consuming process of trying to break into the narrow-body commercial jet market with its C Series aircraft. The process has delayed development of Bombardier’s Global 7000 and 8000 jets, planned competitors for the G650. The company has “shot itself in the foot with the C Series”, Thompson says.

It was Hawker Beechcraft’s misfortune to have been operating in a more competitive field, which included the jet business of industry pioneer Cessna, Bombardier’s mid-size Learjet aircraft and Brazil’s Embraer. It was still more unfortunate that Embraer proved to be “aggressive and extremely good”, says Aboulafia. “It basically took [Hawker’s] market share.” Hawker Beechcraft’s fall from grace was complete in 2014 when was it bought by Textron, Cessna’s parent.

Carmakers can mitigate risk by developing common platforms for vehicles with different bodies that can be introduced worldwide. The smaller volumes in aerospace, however, make the calculations different. Boeing, the biggest aerospace company in the US by sales, is still accumulating losses on its groundbreaking 787 carbon-composite long-haul jet, whose development took far longer and cost far more than intended. Rival Airbus has yet to recoup the development costs of its A380 super-jumbo, which has proved less attractive to airlines than expected.

Fokker

Founded 1912
Aircraft maker

When other European aerospace companies were joining forces in the company now called Airbus, Fokker of the Netherlands — once one of the world’s most important aircraft manufacturers — stayed proudly aloof. But that position proved uncomfortable in an increasingly consolidated industry. Fokker tried co-operating with McDonnell Douglas (since taken over by Boeing) with little success. The company sought to develop two new aircraft — the Fokker 50 and Fokker 100 — but faced mounting costs that forced it to seek a government bailout in 1987. Fokker limped on, but when its strategic partner, Germany’s Dasa, cut off funding in 1996, it was almost immediately declared bankrupt and went out of the aircraft manufacturing business. Other parts of the company were bought and lived on, from 2010 as Fokker Technologies — which in October was acquired by GKN Aerospace.

Tom Enders, Airbus’s chief executive, told the Financial Times in 2013 that both companies had got “carried away” in the past after trying to introduce new technologies that turned out not to be “as mature as they should be”.

Hawker Beechcraft invested heavily in developing carbon-composite fuselages for its Premier I business aircraft and subsequently the Hawker 200. While the Gulfstream G650 features some composites, its fuselage and wings are predominantly traditional aluminium.

Aboulafia sums it up: “Hawker Beechcraft said, ‘Composites are the future; people will pay for composites.’ Gulfstream said, ‘We just don’t see that at all; we’re not in the business of developing technology for technology’s sake.’”

The calculations involved are similar to those in the auto industry over whether to abandon steel for some vehicle bodies in favour of aluminium. Ford last year took the audacious decision to launch an aluminium-bodied version of its F-150 pick-up truck — the F-Series accounts for the majority of its worldwide operating profits. Other carmakers are following its lead.

The differing approaches of Gulfstream and Hawker Beechcraft meant they entered the economic downturn — when demand for Hawker’s midsize jets collapsed — in very different conditions. Hawker’s problems were exacerbated by the reluctance of its owners, a consortium of investment bank Goldman Sachs and Onex, a private equity firm, to provide more capital.

There are similar lessons from the fate of Fokker, the Dutch commercial aircraft maker, whose costs for simultaneously developing two new models — the Fokker 100 and Fokker 50 — ran out of control. The company went bankrupt in 1996.

Bombardier faces a markedly similar crisis after costs for developing its C Series ballooned from an initially projected $3.4bn to $5.4bn and introduction to service slipped from 2013 to a date currently set for early next year.

When car sales collapsed in 2008, Chrysler faced an especially intense crisis because it was owned by Cerberus, a private equity firm with limited appetite to commit more capital. Alone among the big three US carmakers, Ford avoided going into bankruptcy protection largely because in 2006 it had expanded its borrowing capacity to $25bn to prepare for a potential slowdown.

Chrysler

Founded 1925
Carmaker

Historically, Chrysler’s position as third-largest of the US’s big three carmakers, after General Motors and Ford, has meant it has struggled to achieve scale and market reach. That prompted an ill-fated expansion into Europe in the 1960s. Then, in 1998, it merged with Germany’s Daimler, whose sale of Chrysler in 2007 to Cerberus, a private-equity firm, left the company vulnerable just as the US market neared one of its biggest-ever slumps. Chrysler had to seek bankruptcy protection in 2009 and was bought by Italy’s Fiat in 2011, but the debt-laden group is seeking yet another merger to secure its future.

The lesson of these cases is to “have a home with deep pockets”, Aboulafia says — as Gulfstream, owned by General Dynamics, the military contractor, does.

“When Hawker Beechcraft went under, it was owned by private equity, who were getting tired of not seeing the light at the end of the tunnel,” he says. “For Gulfstream, if there are bad times now, it is owned by General Dynamics.”

Yet the importance of the aerospace and the auto industries — the scale of the projects, the numbers of jobs they generate and the risks involved — means, according to Thompson, that a non-commercial relationship can also be critical. Company after company when facing tough financial times has turned to its government. The US and Canadian governments extended lending to Chrysler and invested heavily in GM to ensure they continued to operate.

In aerospace, that relationship is most obviously vital for companies making military aircraft. Lockheed Martin of the US, for example, is the world’s biggest military contractor in part because the US government decided to supply its air force, navy and marines with variants of a single fighter aircraft, the F-35. Lockheed Martin won the contract to build the aircraft.

Involvement goes beyond the military, however. Airbus owes its existence to European governments’ decisions in the late 1960s and early 1970s to bring together their national aerospace industries to work collectively. Boeing has regularly turned to the US military for orders at times when commercial orders have been weak.

To survive, large companies occasionally have to turn to the government for help

Meanwhile, Bombardier could be about to write a new chapter in its story. Having failed to persuade Airbus to buy a majority stake in the C Series, the company looks to have few alternatives to seeking help from Quebec’s provincial government. Bombardier is reported to have approached the province’s Caisse de dépôt et placement investment fund about a potential cash injection.

Such a move would be no surprise to Thompson. “It’s a myth that large industrial companies survive indefinitely without occasionally turning to the government for help,” he says. “They look wherever they must in order to survive hard times.”