Monday, November 28, 2011

Cessna Feels The Pinch...and Pinches Back

In a recent piece on AvWeb, Paul Bertorelli takes a good look at Cessna's decision to bump the price of the Skycatcher by a cool $35K - yes, that's 35 thousand.  Okay, it's not every day we see a 31+% price hike in a retail price of anything, especially in this economy.
Yet Cessna's move should come as no surprise to anyone who knows, as Bertorelli points out, that the price of aircraft has grown faster than the rate of inflation for decades.  Thirty years or so ago, a new Cessna Skyhawk could be had for around $30,000.  Today it's 10 times that number, or more than $300,000, whereas inflation applied to that original $30K number would put the figure just north of $100,000...about three times higher.
The Sky's no greenbacks.
Meanwhile, the aviation giant has up until now done its best to keep the price close to it's original near-$100,000 level.  Most recent raise was from $112,000 to around $114,000.  
Originally announced in 2007, more than 1,000 orders were racked up in short order.  
Then came more than two years of delays - first deliveries were made last year and 150 or so Skycatchers have been delivered this year.
All along, Cessna tried mightily to hold the line on price increases even in the face of production cost increases: it of course wanted to hold onto that $75 million in orders; wholesale decimation of the Skycatcher order book would have been a heavy hit, even for Big C.
The company pressed on through at least one major tailfeather redesign to keep the program viable, and keep original placeholders on board with a gradually-climbing price that stayed close to the original ticket of just under $110,000.  
Now the scrappy Skycatcher has climbed the U.S. delivery numbers to its recent, current position of #2.  Only longtime leader board-topper Flight Design has registered more LSA in this country.  Hey, isn't that a John Cougar Mellenkamp song?: "S-L-S-A in the U-S-A!".
In this day of bait-and-switch psychology, where the bottom line justifies any financial means, I think customer service props (and recognition for savvy business acumen) go to Cessna.  Look at the price of equivalent-quality S-LSA out there: you're looking at a typical sticker-shock number of $125-150K.  Big C is only raising its product to market parity, and to help support production costs, after having worked hard at it's "holding the line" image.  Also factored in: many of the instrument options are now standard, so the price increase isn't baldly wholesale: some perks are factored in.
Still, those options are re no longer voluntary.
I wonder how deep in the red Cessna went with the delays in production, increased design and retesting costs - the company has proudly, and deservedly, boasted that it took Skycatcher through a program more rigorous than the ASTM standard, including spin testing...that's how the original design flaw was uncovered in the first place. 
Bertorelli goes on to reflect on the marketing and psychological effect of the price jump, and whether it will cause a bailout of significant numbers of remaining production number holders.  He also has some interesting insights on how Cessna has always been good at maintaining its profit margin, even if it meant raising prices and accepting the lower sales numbers that resulted.  That's how companies survive, after all
It's a good read, check it out for an insight into how big aviation business cope these days.
He concludes with a compelling question that deserves more thought and some comment: if Cessna, with it's offshore Chinese production, can't produce a relatively "low cost" S-LSA, does that put the kibosh on the notion entirely?
I have my own thoughts, viewed from a slightly different angle: look at my recent post on the Pipistrel Alpha Trainer that was just introduced around $80,000, and that's not a stripped model either.  I read an online forum thread a couple days ago in which several posters flat out decried the $80K price point.  "Impossible!" they cried.
Yet here is a lean, mean, well-oiled design/production house in Slovenia that is showing us the way of the future, perhaps.  The company just sold 200 of Alphas to India...and the production prototype is being debuted in April.
I believe the company President, Ivo Boscarol, when he says he will produce the airplane at that price: his vision all along has been that if you do things in a very targeted, innovative and efficient manner, you can produce affordable, quality aircraft that will sell, even with the Euro/Dollar exchange rate, in the $80K range in America.
Take another look at what we complain about as a "high cost" light aircraft: adjusted backwards to the before-inflation rate (1975, roughly), we're looking at $8,000!
Before we cry in our $7 microbeers, we should lament the destruction of our currency by the craziness of world economics for the last 70 or so years.  That is the real culprit. An ounce of gold still buys approximately the same goods it bought in 1950...1920...1900.  It's not that things are more expensive.  It's our currency, no longer backed by gold or silver, that's taken the hit.
Why do you think China among other national governments is buying gold like it was on fire sale?  Because it is.
Aviation companies like every other enterprise must find ever-more-efficient ways of surviving, let alone thriving, by continuing to discover how to do the impossible, even if they have to grapple with perceived realities, such as this misplaced notion that there are no cheap light aircraft.
Put another way, I'll buy an $8,000, all-composite, well-equipped, good-performing aircraft for $8K any day of the week...even if I have to find a few partners to help me out with the purchase, since my salary also buys 10% of what it did a generation ago.  But that's another, and unfolding, story.


Anonymous said...


I have used the Piper Cub elsewhere as an example of the difficulties of measuring inflation. Specifically, I've used it in challenging economists to think harder about how they measure inflation.

Rather than use gold (which has all sorts of problems as a store of value), a simple measure of cost is the number of hours the median worker would have to work to earn enough to pay for the product. For a labor-intensive product like an airplane, if it took (say) 9,000 hours for a median income earner to earn enough to buy a C172 30 years ago (and that's about what it took), it should still take about 9,000 hours. After all, by using hours-of-work as the basis for costs, you're trading hours-worked-by-the-buyer for hours-worked-by-the-builders. But, 9,000 hours today is a hair under $200,000 - not $300,000. The additional cost can't be labor cost: it has to be something else.

I have heard claims that it's legal costs, certification costs (there have been great increases in Part 23's complexity) and other explanations, but I have not seen any cost breakdown provided by a source who actually knows what they're talking about.

So, I don't know either. But I believe, intuitively, that in a competitive market, over time, airplanes could wind up costing 1/3 to 1/2 of what they do now, in hours-of-labor terms. The Pipistrel trainer, at just over 1/2 the price of the C162, is a big step in that direction.


James Lawrence said...

That's a good way of looking at it too. Bottom line is, whatever yardstick we use, it's whacking us...hard...and has been since before I was born. We need fundamental overhaul of how we approach everything...which the current Euro crisis and the political divide in this country are only two of many signposts.

Anonymous said...


Don't get too depressed: America is not as weak as I think you think it is, and many people are surprised to learn that America produces vastly more manufactured goods today than it did 30 years ago.

Inflation-adjusted prices make airplanes look 3 times more expensive than they were 30 years ago (your calculation), but in hours-work-required-to-buy they are "only" 1.5 times more expensive. That's not good, but it's a whole bunch less than 3 times.

The difference between 1.5x and 3x is productivity. It's not so much that airplanes cost more in hours-of-work terms (although they do cost 50% more); it's that an hour's worth of labor can produce a lot more of most other things today than it could 30 years ago. In fact, you can buy about twice as much of other things, on average. That's what turns 1.5x into the the shocking 3x difference: it takes 1.5x as many hours to buy an airplane, but that could buy you 3x as much of other stuff as it did 30 years ago.

It's productivity that points the way to the solution, too. Basically, airplanes are taking as many hours to build now as they did 30 years ago. That's what needs to change: there's a need to modernize production methods. If you double productivity (in line with advances in other goods), you wind up with an airplane that should take only 4,500 hours of income to buy, or about $100,000. Even adding the mysterious "modern" $100,000 in additional costs, you're back to $200,000 - or 9,000 hours of work to buy, just like 30 years ago. And, if we can understand and address those mysterious excess costs, airplanes could be cheaper, in hours-worked terms, than they were 30 years ago.

That would be something to crow about!