The Face of GA Is Changing... But Is It A Positive Change?
Guest Analysis/Opinion by Rich Belzer
ANN E-I-C Introduction: We continue
to enjoy the contributions of outside experts and their
analysis of the pressing issues that the aviation world is dealing
with. And while we may not agree with their conclusions,
methodology or research, there is no question that there is much to
learn from the contributions of others with unquestioned insight
and expertise into the topics at hand. Herewith, another
inriguing analysis of the changing face of GA... by someone
who has worked in the trenches of this business. And agree or
disagree, we find a lot of food for thought in the following
extrapolations... -- Jim Campbell, ANN E-I-C.
Piper was sold to Imprimis – the venture arm of the Sultan
of Brunei, the virtual owner of this small Southeast Asian country
and one of the wealthiest men in the world. Cirrus was first bought
by Arcapita (formerly Crescent Capital), the venture arm of the
Bank of Bahrain; early this year it was acquired by the Government
of China through its wholly-owned aviation company, AVIC. Finally,
bankrupt Columbia Aircraft, whose assets were acquired by Cessna in
late 2007, was owned by Composite Technology Research Malaysia
(CTRM), a company wholly owned by the Malaysian Government.
I have written in the past about the lack of American capital
for general aviation (GA). Clearly, the product development cycles
are too lengthy and expensive; the return on investment is too low
given how much time it takes to arrive at a potential investor
exit. Yes, Vern Raburn was successful in raising hundreds of
millions of U.S. dollars for Eclipse but his business plan was the
dream of an individual with little prior aviation business
experience. Somehow, he was able to attract big dollars from
high-net-worth folks.
Given recent events at Piper and earlier at Cirrus, this is
probably an appropriate time to look at how foreign ownership is
working out for the companies in question, their employees and
their customers.
Columbia Aircraft
I’ll start with the simplest and, of course, the one for
which I worked. From the day I arrived at the company, it was
underfunded; for example, by the time I had been with The Lancair
Company (its name was changed as part of the “Lance Neibauer
removal project”) for 11 months, the company owed me $13,000
in unpaid expenses. Is it any wonder that, after the famous 2006
hail storm that damaged over 60 airplanes on the ramp,
Columbia’s Malaysian owners let it fall into bankruptcy?
Sure, Neibauer looked all over for capital in the late
1990’s and the Malaysians were the only willing investors.
But they knew little about GA and every infusion of cash required a
vote of whatever passes for a legislature in Malaysia. All-in-all,
Malaysian ownership virtually doomed Columbia Aircraft to failure
right from the start.
Cirrus Aircraft
The case of Cirrus is far more interesting as, after all, they
were the most successful GA company of the past decade. Although
Arcapita’s money came from Bahrain, the firm was based in
Atlanta and had a firm grasp of what makes a business successful.
They not only provided sufficient capital when it was needed, they
greatly enhanced Cirrus’ management team. As a result,
deliveries of the company’s flagship airplane, the SR22, grew
from 0 to 588 in only seven years, an incredible accomplishment for
a brand new fixed-gear composite airplane in an industry marked by
slow change.
By early 2004, there was an article in the Minneapolis
Star-Tribune about the possibility of an initial public offering
(IPO) of Duluth-based Cirrus. Clearly, this would have provided the
means for Arcapita to slowly back out and achieve a reasonable
return on their investment. But it never happened in spite of
Cirrus’ rapid growth from 2004 through 2007. I can only
surmise that the company never achieved earnings sufficient to
provide a valuation acceptable to Arcapita. Then, of course, the
recession hit and the decline in GA hit Cirrus hard – the 588
SR22s delivered in 2007 dropped to only 240 in two years! Clearly,
the window of opportunity for an IPO was gone as the company coped
with severely declining revenue.
For Arcapita, it was becoming clear that the longer they
remained in Cirrus, the lower the probability of their achieving a
reasonable return-on-investment; the only solution was a sale but
how would you establish a valuation for a company that was not
operating profitably and was unlikely to recover any time soon? In
the meantime, they put the jet program on hold, banished founder
Alan Klapmeier and put their CFO, Brent Wouters, in charge in an
effort to stop (or at least slow) the bleeding.
Fortunately for Arcapita and Cirrus, it was becoming clear that
China was about to embrace GA and the Aviation Industry Corporation
of China (AVIC) had come to the realization that this was a
business they needed to embrace. For the uninitiated, AVIC is the
largest aviation company in the world with annual revenue of
roughly $1 trillion. Wholly-owned by the Chinese Government, AVIC
makes everything that flies for the Chinese military, from
helicopters to fighter planes as well as missiles. Having visited
their largest installation at the “aviation city” in
central China, I can personally vouch for the fact that this is a
true high-tech company.
Knowing that GA was expected to grow in leaps and bounds in
China, a few years ago AVIC began to research the GA industry on a
worldwide basis, meeting with almost every GA airplane company.
Based upon this learning experience, AVIC reached the conclusion
that the future of GA and perhaps aviation in general was in
composites; after all, AVIC was one of many suppliers for the
carbon-fiber Boeing 787. By early in 2010, they had settled on
Cirrus as an acquisition target and entered into what turned out to
be a lengthy negotiation which was finally concluded earlier this
year. Within AVIC’s huge empire, Cirrus fell under the newly
established GA division known as CAIGA, based in Zhuhai which lies
nearby Macau in southern China.
At the moment, it appears to be business-as-usual at Cirrus
although, in spite of the reported influx of capital, they have not
brought all of their vendors current. The biggest change is that
Brent Wouters, former Cirrus CEO and primary negotiator of the AVIC
deal, is out and someone from AVIC is running the company. It also
appears that sufficient funds are coming into the company to revive
development of the Vision jet.
As far as the future goes, it is clear that AVIC will
manufacture Cirrus airplanes in Zhuhai for the Chinese market which
could leave the Duluth operation as somewhat of an afterthought.
Once they initiate production in China, it seems likely that all
Cirrus composite parts will be made in Zhuhai for both that
location and Duluth. While it would be a stretch to attempt to
deliver SR22’s for the worldwide market out of Zhuhai,
shipping parts in containers should work just fine as a number of
GA companies are learning with their Mexican operations.
Piper Aircraft
The most recent news involving foreign ownership is in regard to
Piper. Founded in 1927 by Clarence and Gordon Taylor, the company
went bankrupt in 1930 and its assets were acquired by William
Piper. In 1937, with the last Taylor brother departed, the company
name was changed from Taylor Aircraft to Piper Aircraft. Piper
remained an American-owned company until May, 2009, when American
Capital (Nasdaq: ACAS), its owner since 2003, sold the company to
Imprimis, the Singapore-based investment arm of the small Southeast
Asian country of Brunei Darussalam.
I have twice visited Piper’s facilities in Vero Beach,
Florida – once in July, 2007 and again this past January. To
start with, this is a company with significant expertise in
aluminum fabrication and no background whatsoever in composites.
Notwithstanding my own pro-composite leanings, I was very impressed
by my visit early this year when I met with the company’s
CEO, Geoff Berger, Executive Vice President, Randy Groom, CFO,
David Wilson and others in the sales/marketing group. This entire
team had been assembled following the Imprimis acquisition and, in
fact, Geoff Berger had been managing director of Imprimis in Brunei
before taking on the role of interim CEO of Piper.
In my rather lengthy (43-year) business career, one axiom that
stands out is that strong management teams win, even if the
products might not be best in class. Piper had clearly taken a
strong step forward with their new team and, even though Berger
held an “interim” title and had no prior experience
running an aviation company, his leadership skills were such that I
felt the company would benefit by retaining him as a permanent
CEO.
What I also learned during my visit to Piper was that the Sultan
of Brunei was looking to diversify his holdings and was interested
in the aviation business as a long-term endeavor. So in addition to
the investment it took to buy out America Capital, Imprimis was
directly funding the development of the PiperJet as, due to the
recession, normal operation was not generating the cash needed to
do so.
Given all the positives about Piper’s new ownership and
management, imagine my surprise when a reliable Asian source
informed me that Imprimis had approached AVIC in early August and
was looking to sell the company. My source told me that AVIC had
passed because they had no interest in aluminum airplanes.
I immediately contacted Geoff Berger who told me that he had
visited CAIGA’s Zhuhai facility and “established a
dialogue with the senior-most leadership” but that this
dialogue nothing to do with a sale of Piper. When I relayed this
feedback to my source, he insisted that this was absolutely not the
case. He then informed me that the Sultan of Brunei had been having
some “difficulties” and had sold a number of major
hotel properties. My source was insistent that Piper was for sale;
I relayed this back to Berger, stating that our discussion would go
no further. End of discussion.
Now, of course, Berger is no longer with Piper nor is Randy
Groom and PiperJet development has ceased. Both Berger and Groom
signed non-disclosure agreements and cannot discuss current events
at Piper. So what is really happening?
My gut feel at this point is that my Asian source was correct
about Imprimis looking to unload Piper. The fact that the PiperJet
program was stopped is a clear indication that Imprimis has turned
off the cash spigot that was funding the program. What about Berger
and Groom? These individuals were probably drawing the two highest
salaries in the company (and rightly so); their departures were
probably just one more way to save on cash. In addition, my guess
is that Imprimis felt it was more important that Berger try to get
the company sold than to actually run it.
Is there a potential buyer for Piper? I find it highly unlikely
that a U.S. buyer would turn up for a GA company. Perhaps a wealthy
aviation novice in the fast-growing Chinese market might find Piper
attractive. On the other hand, given that AVIC, highly
knowledgeable in aviation, has shown no interest, might this be
taken as a warning by other potential Chinese buyers to stay
away?
Personally, I find the Piper story upsetting. They might not
have been a leading-edge aviation technology company but they were
good at what they did, had a strong investor behind them and had
put together a topnotch management team. As of today, the team has
been depleted and it appears as if the money has as well. Too bad
for all concerned.
Conclusion (Thoughts On The Survival Of GA)
Foreign ownership of U.S. aviation companies appears to be a
fact of life. I need only go back to an e-mail sent to me by Geoff
Berger after he had read one of my ANN articles: “As someone
who has raised billions of private institutional capital for
various entities, I can confirm that for the most part domestic
VC’s don’t really have long-term vision or desire to
become involved in capital intensive industries anymore.”
As a pilot, former aircraft owner, and participant in the GA
industry, I find this a sad situation. After all, we live in the
most GA-friendly country in world and if you don’t believe
me, talk to pilots from some other countries. With companies such
as Piper, Cessna, Beechcraft and now Cirrus, we virtually invented
GA and it seems to be slowly slipping out of our hands. In some
cases, foreign ownership may turn out well; clearly Cirrus is
better off now than before the sale to AVIC. Piper, on the other
hand, could be trapped in a cash-poor environment for the
foreseeable future.
Also, the landscape of the GA market is changing. When I joined
Columbia Aircraft in 2004, the company was doing no business
outside of the U.S. and no one seemed concerned about it. At that
time, company management figured that the U.S. was 75% of the
market so why bother with the overhead of international
certifications and the management of international sales channels.
John Bingham during his days at Cirrus demonstrated that, with some
work, you could obtain 50% of your aircraft sales from outside of
the U.S.
The GA market in China is poised for an incredible boom that,
within a 10-year timeframe, could make them the largest airplane
market in the world. That is where the money’s at.
BIO: Rich Belzer has been a pilot for 25
years as well as an aircraft owner, holding a commercial license
with an instrument rating. Following 35 years in the computer
industry, ten in senior executive positions, he joined Columbia
Aircraft in 2004 as national sales manager. While at Columbia, he
established all of the company’s international distribution
and eventually was granted full responsibility for worldwide
distribution as the company’s sales vice president. He has
been interviewed numerous times by written and broadcast media on
aviation business issues and written a number of articles for
Aero-News Network.