Cessna Mired in Private-Jet Slump Raises Prices
Textron Inc. (TXT)’s Cessna unit bucked the slump in business-jet sales by raising prices, betting that it can halt tumbling aircraft values even if it means sacrificing orders, Chief Executive Officer Scott Donnelly said.
“We’ve been reducing prices for the last few years and it’s gotten to the point where it doesn’t make sense to do business at those prices,” Donnelly said yesterday in an interview. “We are seeing some improved pricing, but as you can imagine we are seeing some reduced demand.”
That stand is the only way to break a “dive to the bottom” in which manufacturers’ price cuts for new planes erode the value of used jets, adding to the industry strain, Donnelly said at the Paris Air Show. He declined to give details on the size or timing of the increases at Wichita, Kansas-based Cessna.
Business-jet makers have yet to pull out of a slide that began in 2008 as corporate buyers and wealthy individuals pared purchases during the global financial crisis. Industry-wide deliveries of 672 last year were 42 percent less than in 2008, according to a June 6 report by Joseph Nadol, a JPMorgan Chase & Co. analyst in New York. He rates Textron as overweight.
It’s not clear whether the price-increase strategy is going to work, said Donnelly, 51, who became CEO of Providence, Rhode Island-based Textron in December 2009.
“Until we’ve been out there six months or nine months, you don’t really know if you’ve done this correctly or not,” he said. “We’re going to hold where we are and wait to see some more recovery in the market.”
Textron fell 8.3 percent through yesterday to $26.90 since April 16, the day before the company said that Cessna was shrinking output after reporting a drop in first-quarter aircraft shipments to 32 from 38 a year earlier.
List prices for Cessna’s Citation jets range from $3.3 million for the Mustang, which can carry five passengers and boasts a range of 1,150 nautical miles (2,130 kilometers), up to $26 million for the Longitude, which seats eight people and can fly 4,000 nautical miles, according to the company website.
Sales of the lightest jets, a category that includes planes such as the Mustang, have been hit the hardest, Nadol wrote in a June 6 report.
Buyers choosing between new and used planes in recent years have found prices sliding in the secondhand market. The average price fell 3.2 percent last year following a 5.5 percent decline in 2011, Nadol wrote. After holding “flattish” in first four months of this year, the average price dropped 3.6 percent in May, he wrote.
Indicators such as corporate profits, low company debt and a growing U.S. economy have been pointing to a rebound of the business jet market, Donnelly said. After predicting that turnaround for the last couple of years, Donnelly said he’s “not guessing anymore. Nobody knows.”
Beechcraft Corp.’s shutdown of its Hawker jet business last year as part of a bankruptcy restructuring eliminated a money-losing competitor and strengthened the industry, Donnelly said.
Cessna plans to stick with its development plans for new models, betting the market has to rebound eventually, Donnelly said. This year, the company plans to introduce the seven-passenger Citation M2 and the Sovereign, which seats nine people. The Citation Latitude is scheduled for 2015 and the eight-passenger Longitude in 2017.
In the meantime, Cessna is bracing for the pain from price increases, Donnelly said.
“We know that’s going to affect demand, but that’s what we’re going to do,” he said.