RichardAboulafia.com 

:: October 2007 Letter ::

link

Dear Fellow Aircraft Mourners,

I get sad when planes start to die. I fear that’s what’s happening to Sino-Swearingen’s SJ30. Just last year Teal’s Corporate Strategy Guy Phil Finnegan and I trundled out to Martinsburg, WV in Phil’s new car. The prospect of an actual aircraft factory within road trip range was neat. We were greeted by a hyper-optimistic CEO who said deliveries were about to start and that customers were so enthusiastic that one wanted to sleep in the factory next to his uncompleted aircraft. But a few weeks ago, after spending $700 million and delivering exactly one plane, the Taiwanese packed it in. In a dubious face-saving move, they unloaded the company to a distributor (Action Aviation) and a private equity firm (ACQ Capital) with considerable experience…in real estate.

I seriously doubt that real estate investors and an aircraft sales group can accomplish what the Taiwanese Government failed to do: bring this plane to market. If there was any hope, the Taiwanese would have seen the project through and then sold it at a higher price. Whether anyone salvages the plane or not, let’s at least try to salvage a few lessons from this 20 year old program:

1. This industry loves “truthiness.” It wasn’t just the CEO with the sleepover anecdote. I met with a succession of Sino-Swearingen CEOs over the years, all of whom assured me that deliveries were just around the corner, that one more cash tranche would do the job, and that the SJ30 was the greatest airborne invention since the vacuum toilet. They continue to claim ~300 firm orders, which just goes to show that bizjet order books from new producers are basically worthless.

But I don’t take it personally. It was the CEOs’ job to be…economical with the truth. And every day we’re deluged with dubious guidance: “We’ll just push those 2008 Dreamliner deliveries into 2009.” or “Experienced workers don’t matter in building tanker aircraft, and Alabama demands an apology.” or “The French Government bought Lagardere’s EADS shares because we were underinvested in EADS.” or “Eclipse [anything].” Life often resembles a Ulysses-like journey through delusions, distortions, and inflated order books.

2. Being best doesn’t matter. Often, the worst enemy of the Best is the Good Enough. The SJ30 was the first aircraft to adapt the impressive Williams FJ44 turbofan, a post Cold War design miracle. The SJ30 offers excellent range and speed for its price. But while Sino-Swearingen was futzing around trying to bring this jet to market, Cessna sold over 1,000 less ambitious but enormously popular CitationJets. Cessna had the cash to start volume production and to ensure a steady stream of new variants. It also has the sales network to sell it to the broadest market possible, and the support infrastructure to keep these customers happy. The SJ30, while impressive, never had a chance. It’s a Beta versus VHS thing.

3. This industry is still death on newcomers. If Sino-Swearingen succeeded it would have been the third new jetmaker in the world established since 1960. Embraer started in 1969. Second is the ever-precarious Eclipse, about which the less said, the better. For all the reasons described in the above paragraph, barriers to aircraft market entry remain extremely high. It’s concentrated, too: the top nine aviation players hold over 85% of the market.

4. Governments shouldn’t run commercial enterprises. Sino-Swearingen’s government backers moved at a typically glacial pace, providing minimal resources on an occasional basis. Basically, a government ministry decided to compete with Cessna. That’s like the Department of Motor Vehicles trying to build a better car than Toyota. West Virginia state government involvement further complicated things. In 1999 I visited Taiwan and when the SJ30 came up in conversation, officials just averted their eyes and said, “yes…about that….” Looking back, I think they gave up on the project years ago and were just looking for a way out. They were just moving slowly. Watching all these government-backed regional jets—SuperJet, ARJ21, several Japanese jets, etc—reinforces my view that governments are less agile than the private sector. For example, regional jets are the only no-growth segment of our booming industry, but the government apparatchiks haven’t read the memo.

5. Emerging aircraft producers aren’t serious. A country wishing to build its own aircraft industry should start with someone else’s plane, if only to learn design and production techniques. Taiwan had the opportunity to start a business jet industry. They’re walking away, just like they walked away from Douglas Aircraft in 1991 and BAe/Avro in 1993. In 1996 China’s AVIC had the opportunity to purchase Fokker. They walked away. In 2003 a now defunct Chinese investment firm purchased Fairchild Dornier, including a prototype of the best RJ never built, the 728JET. AVIC walked away, and FD was scrapped. Conspiracy-minded observers think Airbus’s aerostructures plants will never be sold to AVIC because Europe doesn’t want to create a competitor, but I doubt that’s the issue. There’s a pattern here. China, Taiwan, and other countries want an aviation industry. They just don’t want to pay for it.

Aside from these lessons, can the SJ30 be salvaged? Not by the current owners, unless they have several hundred million dollars they don’t mind risking. At least one established manufacturer—Bombardier—could use an aircraft in this class, but that’s an outside chance, at best. I’ll probably never again be able to drive to an airplane factory near my home.

We’re not updating the SJ30 report this month. We issued an update in August with a zeroed production forecast. However, we are updating the A380, 787, C-5, Premier One, Citation Series, Caravan, 717, 757, CL-215, OH-1, and Bell 430. A new report covers Embraer’s Phenom Series. Have a great Halloween.

Yours, ‘Til The ARJ21 Factory Opens Near Washington,

Richard Aboulafia

 

© Richard Aboulafia 1997-2006, All rights reserved.
RichardAboulafia.com
  ~  Last updated on January 08, 2006