Donnelly hints at start of upturn
When Scott Donnelly took on his role(s) of chairman, president and CEO of Textron in December 2009, he did not expect to be talking about a tough business jet market for the next nine years. But he has got really good at it. Over Textron’s last 36 earnings calls he found lots of ways to describe tough markets and falling backlogs.
But on his 37th call this week, it is clear that things are changing. Donnelly is far too prudent to say it, but things are definitely looking up. And he may soon need to get his thesaurus out and look up more bullish words.
The manufacturer’s first-quarter aircraft sales were up 4% to $1 billion thanks to more deliveries and higher prices. It delivered 36 jets in the first quarter (one more than in the first three months of 2017) and 29 turboprops (up from 20 in the same period last year). The division made a profit of $72 million for the quarter, up from $36 million.
But Textron Aviation’s $1.6 billion backlog is the most significant change. It has changed how it accounts for backlog, but this is its highest first-quarter backlog since 2012 (when it was still delivering aircraft ordered in 2008) and the first time it has risen organically since 2008 (it rose to $1.5 billion in the first quarter of 2014 when Beechcraft was acquired). It is still a long way from a $14.5 billion backlog in the first quarter of 2008 – but it is up significantly on $1 billion in 2016 and 2017. The first quarter is typically a slow sales period for all manufacturers, so the backlog can be expected to rise further as this year progresses.
Donnelly says Textron is seeing stronger demand for jets in the US, helped by tax reforms and growing business confidence. And it is also seeing more international buyers for turboprops.
“People are looking to invest. It has been, frankly, a long time. A lot of people are out there who have aircraft that are certainly getting older. They are upgrading a lot more infrequently than they used to because we went through some of those down years,” said Donnelly. “I would like to say that it is not crazy, but there is natural demand in the market. People are out there and looking to upgrade aircraft, and that is why we have seen a solid order flow.”
He also says Textron is discounting less than before. “The amount of capital, the amount of investment that you make in this business, warrants getting a better return and we need to see better pricing in the end market and so that is the trade we are making. We have been walking away from deals at price levels that are just not acceptable to the business.”
Donnelly says that Textron expects to get the Citation Longitude certificated in the next few months and expects to sell more this year. He also said that the Citation Hemisphere project remains suspended while the company waits for Silvercrest engines. A lot of coverage this week has focused on the Hemisphere delays, but Textron does not need the aircraft now.
As good GE alumni, Donnelly and Scott Ernest, the president of Textron Aviation, are not given to hyperbole. Both like talking about “incremental demand” and are naturally cautious when forecasting. But 2018 looks set to see more than an incremental improvement for Textron aircraft. After nine years, things are looking up.
NOTE: The below originally appeared as the editorial in our One Minute Week newsletter. To find out more, and sign up for free, please click here.