AOPA Pilot Blog: Reporting Points

Not long ago Diamond’s plant in Canada laid off all but 51 workers. That 51st employee was there to oversee the paperwork on the Diamond D-Jet. At the time I was told that there were still partially completed airframes on the line, and when those were delivered as new aircraft, employees would be called back. Now 34 workers have returned, including those needed to lay up more composite airframes. Through all this the Diamond headquarters in Austria has operated normally. A Diamond plant in China continues to churn out 30 to 40 four-passenger DA40 aircraft a year to be delivered in Asia, at this point meaning China. That plant has never built a gasoline-powered model, putting a Thielert diesel engine on the very first one. Only now is the plant transitioning to Austro diesel engines, the engine Diamond turned to when Thielert hit financial and mechanical problems (now solved). Thielert, with its Centurion marketing and warranty arm, is on the verge of emerging from bankruptcy–meaning someone is going to buy it. Whoever does that will suddenly have a family of diesel engines, right up to a 350-hp certified but undeveloped engine.  There are already negotiations in progress which the company can’t disclose. The financial questions that led to Frank Thielert leaving the company will be resolved soon, too, by a German court. Thielert engines have one problem–time between replacement. That means you trash the engine (destructive testing is the nicer phrase) when it reaches 1,500 hours rather than overhaul it. Overhaul might be offered in the future by the new owner. Purchasing the engine is still economical if you happen to live in Europe where avgas is $12.58 or in Niger where it is $22 a gallon. Diesel engines cost 30 percent more but you save 24 to 35 percent on fuel–a good deal for those flying 500 hours a year.

Beechcraft Corporation will sell off the jets the company once made as the former Hawker Beechcraft by mid-year. Dow Jones Business News had a report on the possible sale last month. The last time the jets were almost sold, the interested parties, according to the Dow report, were: Textron (parent company of Cessna), Mahindra and Mahindra of India, Embraer of Brazil, New United of China, and Carlyle Group, an investment company. There are new parties interested, the Dow report indicates.

Sure, Hawker Beechcraft is emerging from bankruptcy, but the magazine Corporate Jet Investor says that isn’t the end of the drama. Next stop? A bidding war for the jet assets. Alasdair Whyte of the magazine says in a personal newsletter that bidders ought to step up, now that Beechcraft (the new name) is rising from the depths. The magazine has previously speculated on who the bidders might be. In that article, the contestants listed are: Mahindra & Mahindra, India’s largest auto maker and supplier of components to Boeing and Gulfstream; Nextant/Directional Capital which already offers the Hawker 400XP aircraft; AVIC, known as China Aviation Industry Corporation (AVIC) that has joint ventures with both Embraer and Cessna and owns Cirrus Aircraft; Xi’an Aircraft International that acquired Austrian composite parts maker FACC in 2009; Hunan Boyun that makes carbon-fiber auto and aircraft parts; and BAE Systems that just might want its own commercial aircraft business.

The savvy jet industry publication, Corporate Jet Investor, has an article detailing what might happen next in the stage of the Hawker Beechcraft bankruptcy–soon to emerge as just Beechcraft Corporation. Here is a list by Corporate Jet Investor of companies that are, should be, or have been interested in the company in the past.

Mahindra & Mahindra
India’s largest auto maker supplies components to Boeing and Gulfstream.

Nextant/Directional Capital
Nextant, which already offers the Hawker 400XP aircraft, might want to offer modifications for other models.

AVIC
China Aviation Industry Corporation (AVIC) has joint ventures with both Embraer and Cessna and owns Cirrus Aircraft.The article states the company could still be interested in Hawker. Other Chinese firms might be interested, Corporate Jet Investor said.  Xi’an Aircraft International acquired Austrian composite parts maker FACC in 2009. Hunan Boyun that makes carbon-fiber auto and aircraft parts could possibly be interested in Hawker’s carbon-fiber jet.

BAE Systems
BAE Systems sold Hawker to Raytheon in 1993. It had been hoping to merge with EADS, which owns Airbus, but the deal fell through for political reasons, the magazine said. “Hawker could give it a commercial aircraft business of its own,” the magazine article said.

It should be no surprise that the bill from Kirkland & Ellis, a New York law firm specializing in bankruptcies and restructuring, has hit $5.1 million, plus expenses of nearly $200,000, for handling the Hawker Beechcraft bankruptcy. Click here and check out document 638. It’s popular but naive to assume that’s too much, or even that it’s a further financial burden on Hawker. The firm negotiated a loan to keep the company going and to pay for the bankruptcy, so the money is there. They negotiated everything during 8,000 hours of work this year, from dealing with the pension plan to getting the approval of two-thirds of the people Hawker owes money to for the pre-China-deal bankruptcy plan. Oh, forgot. They negotiated the deal to sell the company to a Chinese businessman who heads Superior Aviation Beijing. When you read news reports, you assume that’s the final answer. It’s not. Document 638 says the future sale is sitting on a toggle switch, and can go either to China or back to a conventional bankruptcy at any second.The issue missing from the news stories to come–ones that will focus on a $5 million and growing legal bill–is the Chinese deal. What happened? Nothing, so far. Court documents went so far as to promise that the full 45 days granted by the federal bankruptcy court in New York for exclusive negotiation with Superior Aviation Beijing wouldn’t be needed. They were, and we are a month beyond. If I am proven wrong and the deal goes through tomorrow (the lawyers have worked and even filed papers on most Saturdays since the bankruptcy started last spring), I promise to leave this post up as proof that I was wrong. But instead, I think something is wrong with the deal. It’s pretty hard during a recession to find banks, even in China, that will kick in what analysts think is a ridiculous $1.79 billion to buy Hawker. I think they are balking, as I would, although my balking would start at $179 instead of that number with all those zeros. Let’s not distract ourselves by discovering that lawyers make a lot of money. They’re going to make much more than $5 million.

A New York bankrupcty court has granted until Feb. 27, 2013, for Hawker Beechcraft to find a solution to its bankruptcy problems. During that time HB will continue to negotiate with Superior Aviation of Beijing for a $1.79 billion buyout, but is not limited to that solution alone. When the deal was announced, HB and the Chinese owner of Superior Aviation said they needed 45 days to work on the deal to the exclusion of all others, adding that it probably wouldn’t take the full 45 days. That period has passed with no deal, but with HB saying progress is good. An attorney told the court there could even be a negotiated deal this week. HB attorneys wanted the additional time–and have reserved the right to ask for an even longer period of exclusive negotiation–before others can file a Chapter 11 plan. The company is still free to drop the Chinese sale and pursue alternatives.  No matter which way the company goes it seems certain HB will move towards being a service company for the aircraft already in the fleet. Industry analyst Brian Foley says the company was already headed that direction before filing for bankruptcy.

The action will be fast and furious this coming week as Hawker Beechcraft tries to (1) win bankruptcy approval to talk exclusively to a Chinese businessman about buying the company (prediction–they’ll get it), (2) receives $25 million almost instantly to keep jet production lines open that Hawker was on the verge of closing immediately (prediction–the money will arrive on time). Not sure anyone is geeky enough to watch the court action document by document, but I wanted to post this link. See Hawker court action here. The hearing is Tuesday. Another question is, will an industry analyst be found that actually thinks the deal will succeed? So far there isn’t one. Analysts don’t even believe the businessman and his wife will be able to find $1.79 billion and will part out the company to raise the purchase money as though Hawker had gone to a Chapter 7 bankruptcy action.

UPDATED

Almost before the naysayers could finish expressing shock at the Chapter 11 bankruptcy of Hawker Beechcraft, an end to the bankruptcy is in sight.

Hawker Beechcraft Vice President Shawn Vick met with Aviation Week and other reporters at the three-day European Business Aviation Convention and Exhibition (EBACE) in Geneva, Switzerland, today to say the company, which filed for bankruptcy May 3, will emerge from bankruptcy before the year is out. When it does, former owners Goldman Sachs and Onyx will be bit players, while creditors owed the majority of the company’s $2.33 billion in debt will become the new owners. EBACE ends May 16. An interesting tidbit emerging from the press conference is the reluctance suppliers have had to fill orders from the Wichita-based manufacturer. The bankruptcy will allow the company to re-establish its supplier network using the $400 million it has to continue operations during bankruptcy. The refusal of some of the suppliers to fill orders may explain why the company has had two layoffs it attributed to a shortage of composite parts. Local Wichita reporters reported last year that other manufacturers were not experiencing the same shortage.

Vick also reported orders are picking up for the Hawker 900XP and 400XPR models, with 900XP orders running double those received last year.

The only drama remaining from Hawker’s trip to the brink and back is what the restructuring will look like. Court documents suggested various alternatives, including shutting down its jet line and concentrating on the King Air and piston markets. Given that Vick just announced increasing orders for the 900XP and 400XPR models, a total abandonment of the jet market doesn’t seem likely, but we will know more when the reorganization plan comes out at the end of June. Cessna officials have indicated interest in whatever may drop from Hawker’s table, as have others. The King Air line of turboprops is enticing to competitors–along with the service those aircraft require–but will Hawker Beechcraft want to sell it? Not likely. Also, the company has expressed a belief before the present management change that its Bonanza and Baron lines serve as a step-up to its jets, meaning it might not want to sell them. Even if it did, those models are less attractive to competitors.

Could the Chinese be Hawker’s savior? Not according to stock analyst Heidi Wood, who said China has settled on Cessna as a partner, and is no longer shopping.