After the ruinous crash of 2008, the renamed company is back on its feet again
In the boom years leading up to the 2008 global financial crash, leveraged buyouts were all the rage among the world’s top private equity (PE) firms, and they didn’t come much bigger than Goldman Sachs Capital Partners, the PE arm of one of the world’s biggest investment banks. Sales of executive jets were booming in 2007, and with the jet market growing at a compound annual rate of 18% Capital Partners decided to get together with Onex Partners, to put together a highly leveraged buyout of Raytheon Aircraft Company, renamed Hawker Beechcraft by the new owners. The deal was welcomed by management as the real challenge for airframe OEMs at that time was finding the funding to ramp up production. However, while the new owners brought around a billion of their own money to the table, the deal also saddled Hawker Beechcraft with a mammoth US$2 billion in debt which hadn’t existed before the PE houses came along.
However, that didn’t seem like a major issue at the time. For those who are unfamiliar with leveraged buyouts, while the debt was large, it was – and still is – the custom in a leveraged deal for the buyer to use the target company as collateral to raise the vast bulk of the cash needed for the transaction. The ‘due diligence’ that is a normal part of every deal requires everyone involved, particularly the participating banks, to be comfortable that the company can bear the debt and meet the interest payments. With airframe OEMs having 18 months and more of backlogged orders for new aircraft, paying down the debt probably did not seem like too big a task for Hawker Beechcraft. Moreover, the new company seemed initially to be on a roll. The Hawker 4000 super mid-size jet had been certified in November 2006 and this success was followed in August 2007 with certification of the Hawker 900XP, an evolution of the mid-size Hawker 800-series that had sold extremely well. 2007 was also the 75th anniversary of Beechcraft and the company marked the occasion with celebrations throughout the year.
The American Bonanza Society held their annual convention at Beech Field, flying in nearly 350 Bonanzas and Barons to celebrate this milestone in the company’s history. Certification of the Hawker 750 business jet followed in February 2008 a month short of the company’s first full year as a private company. On 19 May the company launched the Beechcraft Premier II light business jet, a successor to the Premier IA.
So far so good. Then came the 2008 crash. On 16 September Lehman Brothers filed for bankruptcy and Wall Street went into meltdown. The financial disaster spread around the world. Bank liquidity dried up. Anyone wanting to buy an executive jet practically had to have the cash in their pocket to get the sale to fly. Corporates who had the cash lived in fear of looking as if they were living high on the hog while everyone else was having a tough time, so they stopped buying jets. Order backlogs vanished like the morning dew on a bright summer’s day. Sales fell off a cliff. Suddenly that US$2 billion of debt that Capital Partners and Onex had loaded onto the company did not look very clever at all. With sales vanishing the company had nowhere to go. No management in the world could have prevented Hawker Beechcraft from sliding inexorably towards administration and bankruptcy once that horrendous deal was inked and the assumption of a continuing economic boom, upon which the deal depended, was proved false.
In 2009 Bill Boisture was named Chairman and CEO of Hawker Beechcraft, succeeding James Schuster who had retired. The management challenges facing Boisture were serious and taxing, to say the least. “All OEMs had to deal with the fact that the large supply of pre-owned aircraft coming onto the market suppressed the price of new airplanes. What was just as bad, the collapse in pricing meant that banks did not know what the real value of aircraft assets was, so that made lending against the aircraft extremely difficult, which paralysed financing for aircraft sales,” Boisture notes.
The end took a while coming. In 2010 Hawker Beechcraft lost over US$680 million, with further steep losses in 2011. The company had put down the equivalent of a large bet on the viability of the super-midsized market, with the Hawker 4000, and the bet had demonstrably crashed. The irony -– or the saving grace, depending on your perspective -– was that revenues and sales from the remaining, really viable part of Hawker Beechcraft, namely its huge installed piston and turboprop fleet, ranging from Bonanzas and Barons, to the King Air family, were holding up rather well, but being dragged to the cliff edge by the company’s efforts to make its jet portfolio fly.
It was obvious that Hawker Beechcraft was in difficulties. The debt load on the company combined with the high cost of continuing to try to bring its Hawker 4000 flagship jet to market took a great deal of the company’s remaining resources.
“When it became apparent that a restructuring was inevitable and that we would eventually run out of cash if we carried on down the same road, there was a concerted effort by management at the end of 2011 and early 2012 to produce an acceptable plan to put before the stakeholders. The aim was to preserve the company’s assets as far as possible and to devise a new entity that would have a strong future,” Boisture says. A deal was worked out with the company’s creditors to swap around US$2 billion in debt for ownership of the company, and on 3 May 2012 Hawker Beechcraft sought bankruptcy protection. There was a flurry of excitement in July 2012 when it appeared for a while that the Beijing-based Superior Aviation, owned by Chinese industrialist Shenzon Cheng, would step in as a white knight and buy the whole company, jets and all. But while initial talks went well, the Municipal Government of Beijing, one of the principal backers of the deal, reportedly took a very different view of parts of the contract from the position agreed between Cheng’s company and Boisture’s team.
The differences proved terminal, not least because of the political atmosphere in both China and the US. President Obama was running for a second term, while the Chinese leadership was engaged in one of its periodic leadership changing processes. But as Boisture points out, Hawker Beechcraft had protected itself by securing a US$50 million upfront guarantee from Superior at the start of the bid process.
Once the Superior bid vanished, Hawker Beechcraft returned to its primary plan, which involved selling the assets related to the production of Hawker jets and focusing on Beechcraft’s traditional base in commercial and military piston and turboprops. “It was simply too expensive for us to keep the Hawker 4000. If you look at the current market demand and the relatively low forecast in the super mid-size market for the next five to seven years, it was clear that even though selling the Hawker inventory and assets was a painful decision, it was the right one. We could not risk the future of the sound parts of the company in such a crowded and highly competitive space. However, we are committed to product support for the Hawker range going forward and that is an integral part of our business plan for our Global Customer Support business,” he comments.
A refinancing package for the restructured entity, henceforth to be known simply as Beechcraft Corporation, was agreed and on 15 February 2013, the new company exited administration, with the Court’s approval, with 85% less debt and with the physical footprint of the company having been shrunk by over 35%. Boisture is adamant that the company’s successful re-emergence owed a great deal to the fact that it was able to maintain a very good working relationship with its labour unions and retained the loyalty of much of its staff through what had been, in the experience of all concerned, a torrid and highly stressful few years.
“Throughout the process we communicated openly and energetically with our suppliers and our staff, both pre-bankruptcy and post bankruptcy, and that had a lot to do with everyone’s confidence that Beechcraft would not only survive the process but would emerge a much stronger company and be well positioned, going forward, to build on its leadership as the world’s premier turboprop manufacturer,” Boisture says. Importantly, despite a major hiccup caused by the Obama Administration announcing that Beechcraft would be excluded from the DoD Light Air Support contract, the company’s military production has continued to be a strong revenue earner. Boisture successfully challenged the Obama proscription and despite the bankruptcy process the company managed to deliver all the T-6 trainer turboprop planes that it had contracted to supply to the US Air Force on or ahead of schedule. The T-6 is a version of the Pilatus PC-9, heavily modified by Beechcraft and was the company’s successful bid for the JPATS (Joint Primary Aircraft Training System) procurement programme which began in the late 1990s.
On 10 May this year the company announced a further contract worth US$210 million with the US Air Force for a further 35 T-6s, the 19th production lot ordered by the US Air Force and the US Navy. In addition to the military contracts, before a single King Air is sold Boisture points out that the Beechcraft can rely on getting about 25% of its annual revenue base from the provision of maintenance and parts for its huge, global fleet of piston and turboprop aircraft. There are almost 36,000 aircraft out there for it to sell products into. This is not to underplay the contribution from its military contracts. Since 2000 the T-6 has built a well-deserved reputation as one of the most proven and cost-effective primary aviation training systems available, with sales going to NATO, the Hellenic Air Force, the Israeli Air Force, the Moroccan and Mexican Air Forces and even the Iraqi Air Force.
There might be at least a tiny gleam of an idea of Beechcraft getting back into jets at some time since the company has retained ownership of its TCs in the Hawker 400 and Hawker 125 series aircraft, which have a large installed user base, but you won’t hear Boisture saying anything like that. The story going forward is largely focused on the turboprop. “We were very encouraged by the fact that the King Air market had stayed a lot more stable than the jets market through the downturn,” Boisture recalls. The King Air market suffered like any other from a glut of pre-owned stock coming to market through the downturn, but that has now been sold down and the numbers of planes in the pre-owned market is back down under 10%, a level that is generally regarded as constituting a ‘healthy’ state for the market to be in.
Boisture singled out the company’s relationship with its staff and unions as a key factor in the company’s ability to emerge from Chapter 11 in such good shape. “We enjoyed the cooperation of the union throughout the restructuring process. The continuous improvement we have been able to make in our manufacturing processes is in large part due to the knowledge and talents of many of our staff. Employee morale is good and we are having significant success in attracting some key engineering talent to replace the skills lost during the bankruptcy process,” he says.
Beechcraft’s strategy from here is to continue to make improvements to the King Air across a range of factors, from avionics, to the power plant and the interior. The aim is to really differentiate a new King Air from the large installed base of aircraft out there. “Our biggest competition comes not from another manufacturer but from a pre-owned King Air, so the more desirable and different we can make the new airplane, the better,” Boisture says. Designing in and building significant difference will be a lot easier for the new Beechcraft, since all the R&D money will not be siphoned off into R&D on the Hawker jets, which had been hogging all the R&D budget!
A good part of the reason why the King Air market has been so strong through a lacklustre recovery is that the King Air is a great business airplane. It can carry six to eight passengers and has a good deal more capacity than a light jet to haul luggage and equipment along with those eight passengers. It is also much cheaper to fly. “The King Air can carry far more than a light jet, complete with a full fuel load out and still get airborne from very short airfields and land on unimproved fields. This is an absolute differentiating factor, while the interior is everything a business jet user would expect,” Boisture notes.
Beechcraft has already announced that it is looking into a new single engine turboprop that could be brought to market at the price points currently occupied by the King Air, and that if it was to produce such an aircraft, it would be very competitive against the single engine turboprops already available. “We’re continuing to do the design work, but we have to be sure that an airplane at a price point like this will be worth risking all that non-recurring development cost on. At the moment the market is not in a condition that would make this a particularly good idea,” he notes.
Beechcraft has a strong relationship with both Rockwell Collins on the King Air turboprop planes and with Garmin on the piston aircraft, and intends to keep its aircraft very current with new cockpit technology. “There is no doubt that our aircraft and the owners and pilots who fly them will benefit greatly from the new synthetic vision capabilities and other features coming through in avionics,” he says.