Saturday, May 2, 2015

Mergers, and Acquisitions

Cessna as a company has not been an independent company for approximately 30 years.  In 1985, it was bought by General Dynamics, a large aerospace and defense company, who then later sold it to Textron is 1992.  The initial agreement between Cessna and General Dynamics was one where Cessna would be a wholly-owned subsidiary, retaining much of the same structure and leadership team it had in place as an independent company.  While all the details are not known, it appears this move was a product extension merger, with both companies set to benefit from the experience and product lines of the other.  Cessna was a very large and experienced producer of general aviation aircraft, and General Dynamics had the experience and leadership to be able to pull Cessna out of a struggling time in its history.  For several years prior to the merger, Cessna had not been profitable.

Strategic Alliances

Cessna has formed a strategic partnership with King Schools to produce and market flight training materials for students.  This has served to increase the business for King Schools by permitting them to offer Cessna-branded materials, and it also increases the quality of instruction from Cessna pilot centers.  Rather than having individual flight instructors conduct ground school in their own manner, aspiring pilots have the ability to view videos from King Schools to acquire the same information in a structured, consistent manner.  It also permits students to save on their flight training by not having to pay an instructor for their time on the ground, and also permits them to learn at the same pace.  Instructors can also take on more students, as less of their time is spent teaching ground school and more time is spent in the air demonstrating maneuvers.

Sunday, April 19, 2015

Cessna's Corporate Diversification

Since it is rolled up into Textron's financial report, gathering data for Cessna's performance as a company in and of itself has proven next to impossible.  Looking at Textron's financial report, though, the aviation division is significantly diversified.  Apart from Cessna (which in and of itself is made up of multiple divisions), Textron Aviation also contains Beechcraft and Hawker, new acquisitions to the corporation.  One thing I've learned is that diversification can have many levels set up and get quite confusing if one is interested in gathering information on one business unit in the whole.

Tuesday, April 14, 2015

Diversification - A Winning Strategy?

In this installment, I want to again take a step back from Cessna and focus on Textron, its parent company.  Textron started as a small textile company in 1923 and started diversification in 1953 after significant success from the textile boom in WWII.  The strategy of purchasing smaller firms paid off, and in while in 1958 sales dropped 4%, earnings rose 24%.  The company branched out to the aviation industry in 1960 with its acquisition of Bell Helicopter.  At this time, the company was diversified rather into rather unrelated businesses.

With the appointment of new leadership in the late 1980s, Textron began to focus on related businesses.  Today, the company is still very diversified, but now that diversification is related into aviation, vehicles, and aircraft simulators.  A full list can be found at  Who would have imagined that a small textile company would grow into what it is today?

Sunday, April 12, 2015

Climbing to Vertical Integration

Vertical integration refers to the number of steps in a value chain that a company has internalized.  The more steps that a company controls, the more vertical integration it has.  To see how vertically integrated Cessna is, I actually want to step back and talk about its parent company, Textron.

Cessna was acquired by Textron in 1992, placing it in a conglomerate of other companies owned by this giant.  Let's take a look at a standard new Cessna 172 and see which components come from inside Textron and which are from outside manufacturers:

Airframe: Cessna 172; manufactured by Cessna aviation (internal)
Avionics: Garmin G-1000 suite; manufactured by Garmin (external)
Engine: Lycoming IO-360-L2A 180 hp piston; manufactured by Lycoming (internal)
Propeller: McCauley two-bladed fixed pitch propeller; manufactured by McCauley (internal)

Of the major components to producing an aircraft, Textron has internalized everything except for the avionics.  This goes a long way in terms of decreasing costs to produce a new Cessna 172 and streamlining manufacturing.

Collusion in the General Aviation Market

Collusion in aviation is not unheard of, and a handful of years ago several commercial carriers were implicated in price collusion that cost the flying public a significant amount of money.  The companies included in this incident colluded to fix fuel and cargo surcharges between 2000 and 2006 to make up for lost profits (  The price collusion came to light after some of the participating airlines came clean, toppling the scheme.  If the airline industry was affected by price collusion, could this also be a possibility for general aviation manufacturers?

Many individuals who fly are concerned with the price of doing so; between the cost of purchasing an aircraft, regular maintenance, and fuel prices, owning and operating even the most basic of aircraft can cost $150,000+ initially and upwards of $10,000/year in annual costs, depending on how often the plane is flown.  With such high costs, one would wonder if the general aviation industry is colluding on pricing against consumers.  Let's take a look at how the general aviation industry compares to a typical industry that facilitates the development of price collusion:

1) Small number of firms: According to the General Aviation Manufacturer's Association, there were 12 companies that delivered GA aircraft in 2013 (the last reporting year).  In addition, there were several companies listed in the report that are still in existence but had no deliveries in the same year.  The number of firms in the industry is not small, by any means.

2) Product homogeneity: While there are similarities between some GA aircraft, once outside of the basic trainers, products diverge rather significantly.  For those looking for just speed, one could purchase a Mooney or a Cessna TTx and travel at 200+ knots.  However, these aircraft are not as spacious as others, and, especially in the case of the TTx, out of the reach of some budgets.  For those with large families and not a lot of capital, a Cessna 182 or Piper Arrow might be a better fit.  Lastly, there are several aircraft for the casual weekend flyer just looking to get in the air.  A Cub or anything from the American Champion line would be a good low-cost fun flyer.  In short, there is not much product homogeneity.

3) Cost homogeneity: For new aircraft deliveries, costs range from $100,000 for a new light sport aircraft all the way up to $1.15 million for a new Piper M350.  This is just a comparison between piston single aircraft.  For turboprop or multi-engine aircraft, prices just continue to go up from here.  Prices are all across the board.

4) Price leaders: While there may be price leaders for aircraft that can fulfill similar missions, no one company stands out as being above the rest.

5) Industry social structure: While general aviation pilots can be seen as part of a club in and amongst themselves, I do not know enough about the social structure of the industry to comment on this.

6) High order frequency and small order size:  As large capital purchases, aircraft are purchased in small quantities, and rather infrequently.

7) Large inventories and order backlogs: While there may be order backlogs after an unexpectedly large order, it is not in the interest of any manufacturer to keep a large inventory on-hand.

8) Entry barriers: There are significant entry barriers to a company looking to get started in general aviation aircraft.

In looking at the above analysis, general aviation aircraft manufacturers are not in a position that facilitates price collusion.  The high costs associated with a new aircraft are likely due to market factors and not any deals behind the scenes.

Cessna and Flexibility

The last two posts I made would both apply to the flexibility of Cessna.  I will again revisit the design of the 162 as it is a great example of the company exerting its options in being flexible.  While I do not have the actual numbers, I assume that Cessna completed a complete analysis prior to launching the project.  However, in order to achieve the low manufacturing costs needed for the LSA market, Cessna invested in a new factory in China.  While this was officially announced in 2007, there were delays in plant opening that likely added unexpected costs to this and other expansion projects Cessna had in mind.

The addition of a plant in China would permit Cessna to achieve lower production costs not just for its 162 Skycatcher line, but also for some of its other models.  Since expanding operations into China, Cessna originally had grown to multiple factories, but has since decided that this move was not practical and has consolidated operations abroad.  Unfortunately, the projections around both the 162 and the Chinese expansion were far above what reality had in store for Cessna.  Thankfully, the company did not invest so much that it was unable to recover from this failed venture.