Going for Broke

Hawker Beechcraft Corporation's (HBC's) Chapter 11 bankruptcy filing in early May left owners, operators and prospective buyers of Hawker business jets and King Air turboprops wondering what happens now? James Wynbrandt reports.

Superior Aviation Bejing’s (SAB’s) planned purchase of Hawker Beechcraft Corporation (HBC), announced in early July, and HBC’s bankruptcy filing in May, have left owners, operators, and prospective buyers of Hawker business jets and King Air turboprops around the world wondering what the bankruptcy and potential sale means for them. Those questions may echo more loudly in the Middle East, where Wichita’s HBC has made a concerted effort in recent years to raise its profile and increase its sales. Other than the purchase price ($1.79 billion), publically disclosed elements of the acuisition by China’s SAB are sketchy, and the deal is far from done. But the more immediate impact of the bankruptcy on HBC’s operations were addressed at the annual European Business Aviation Convention and Exposition (EBACE) in Geneva in May. HBC turned its press conference at the expo into a tutorial of American bankruptcy law, capital financing, and HBC’s prospects going forward.

At HBC’s EBACE press conference, Sean Vick, executive vice president of customers noted that: “Chapter 11 protection should not be confused with liquidation or insolvency. There is simply too much value in Hawker Beechcraft, its people, products and brands to allow that to happen.”

But how did the bankruptcy happen in the first place? That stems from investment firms Goldman Sachs’ and Onex Partners’ purchase of Hawker Beechcraft in a leveraged buyout in 2007, leaving the company $2.5 billion in debt and with  $125 million annual interest payments.

At the time of the purchase, annual business jet sales amounted to some 1,600 units, with projections of 15% annual growth. But, in the aftermath of the 2008 financial collapse, sales plunged 65% and aren’t expected to recover to 2008 levels until late in this decade. Vick said HBC’s problems had deepened over the previous three to four months as some suppliers, concerned about the company’s solvency, cut back or stopped deliveries, affecting some production lines. “Someone asked how many parts it takes to build an airplane,” Vick said, before adding dryly: “All of them.”

HBC’s Chapter 11 bankruptcy will allow the company to continue operating while restructuring its debt and financing. Under the terms of the Chapter 11 reorganisation, creditors will exchange their debt for ownership of the company, and have also extended $400 million to finance on-going operations while the restructuring is concluded.

“Investors who know Hawker Beechcraft best trade debt for equity, but lend even more,” Vick summed up. “That’s confidence in the long term value of Hawker Beechcraft. Now that we have entered Chapter 11, a well-defined and structured process, we’re well positioned for the future.”

Goldman Sachs and Onex, which each own 49% of Hawker Beechcraft, will retain small positions in the company. Vick said in the near term the company will “continue to operate and to meet all customer commitments; restore our supply agreements; operate our production line; develop and finalise our reorganisation plan; and emerge from bankruptcy”.

That’s welcome news in the Middle East where, since 2008, HBC claims some 34% of the region’s turbine sales with its Hawker line of business jets, and about 88% of turboprops through its King Air series aircraft – an almost quadrupling of its sales over the previous five years.

Last year HBC awarded full-authorised service centre (ASC) status to ExecuJet Dubai, adding more than $3 million in parts to its inventory, helping to ensure faster parts deliveries to customers in the region.

Asked about the impact the bankruptcy would have on support for HBC aircraft, Mike Berry, MD of ExecuJet Middle East, said: “We are committed to meeting the needs of Hawker Beechcraft owners in the region and will be monitoring developments to ensure the fleet is supported appropriately.”

Berry said work on HBC products accounts for “between 12 and 15% of our MRO business” adding: “We have seen no impact to our MRO business supporting Hawker Beechcraft in the Middle East since the Chapter 11 filing.”
 

Arabasco in Jeddah, Saudi Arabia, is also an HBC authorised service centre. In addition to authorised service facilities, HBC recently enhanced its back office support capabilities in the region, opening an expanded office in Dubai’s Jumeirah Lake Towers and adding a contracts specialist, technical representative, vice president of sales, and two sales associates to its staff.

Concurrently with its increase in sales, HBC has raised its profile in the region through sponsorship of events such as the Emirates Airline Invitational Pro-Am Golf Tournament in Abu Dhabi and the Abu Dhabi Grand Prix. The company declined to say what impact the filing would have on such sponsorships in the region.

As to what will enable the company to survive in an era of reduced sales, Vick said it had been transformed into a much more competitive organisation over the past three years, having made significant investments in lean manufacturing and employee training, and having reached critical labour agreements with its workforce.

He also pointed to bright spots on the horizon: the Hawker 400XPR and 800XPR upgrade programmes are on schedule, with the first flight of the Hawker 400XPR taking place on May 3, the same day as the bankruptcy filing.

Meanwhile, the company is preparing to bid again on the US Air Force contract for a light air support aircraft with its AT-6, following the USAF’s cancellation of its contract with Sierra Nevada for 20 Super Tucanos made by Brazil’s Embraer.

HBC was scheduled to file a reorganisation plan with the bankruptcy court by the end of June and expects to emerge from bankruptcy by the end of 2012. But the company probably won’t survive in its present state.

HBC has said it is considering all options for its future, including a sale of all or part of the company.

Textron, Cessna’s parent company, and airframer Embraer are among the companies that have reportedly expressed interest in Hawker’s assets. Bids have already been received by the bankruptcy court for various portions of HBC but have not been made public. HBC lawyer Patrick Nash Jr told a federal bankruptcy court in May: “Depending on what [offers] we get, this case could become even more interesting.”

But, given the value of the brands and their unique capabilities, owners and operators in the Middle East can remain confident that whatever happens to the company, the Hawker and King Air lines will remain alive and well supported.