GulfStream Reports Sales Rebound

 

While defaults continued to chip away at Gulfstream Aerospace’s backlog, parent company General Dynamics (GD) provided hope that the business jet market is reviving, announcing that Gulfstream’s first quarter yielded the largest number of new orders since mid-2008. “The Aerospace group is off to a very good start in 2010,” Jay Johnson, GD’s president and chief executive, told analysts last week in reporting the first-quarter results.

Gulfstream’s order intake was particularly strong for large-cabin aircraft, “with international orders dominating the orderbook,” Johnson said, adding, “Orders were representative of every major international region.”

The returns drew a positive reaction from industry analysts, with Credit Suisse noting that the Aerospace Group stood out during a mixed quarter for GD. JP Morgan adds that Aerospace posted solid earnings, and improving economic conditions are driving some margin traction.

Even so, revenues for GD’s Aerospace Group – comprising Gulfstream, GD Aviation Services and Jet Aviation – slid 6.7% to $1.4 billion in the first quarter, when compared with first quarter 2009. The results reflected a lower production rate and reduced completions activity. Gulfstream delivered 28 aircraft in the first quarter, including 20 large-cabin aircraft. In first quarter 2009, Gulfstream had delivered three more green aircraft and 17 additional completions. Of the 17 additional completions, 15 involved mid-sized cabin aircraft, Johnson noted. “We reduced Gulfstream production in 2009 as a result of the change in market conditions. The most significant production cut was in the mid-cabin aircraft.”

Also, default activity raised some concern from industry analysts. Gulfstream’s backlog declined by about $800 million to $18.5 billion. “Default activity in this quarter … was greater than it was in the quarter before,” Johnson said, but added this was not a surprise. A number of factors played into this, Johnson told analysts. One of the biggest involved the first flight of the G650 at the end of 2009. At first flight, Gulfstream collects a progress payment from deposit holders. There were five defaults reported in the first quarter as a result. But Johnson added, “They were instantly backfilled, and we’re still taking orders. Backlog is still just south of 200 aircraft.” “We estimate that defaults have averaged $800-$900 million over the past five quarters,” notes JP Morgan. “The Q1 number makes the improvement in Q4 seem less like the beginning of an improving trend.”

Orders still outpaced defaults in the first quarter, Johnson says. “With continued economic recovery, I expect orders to increasingly outpace defaults as the year progresses.” He expressed confidence that the company will make its production estimates of about 77 large cabin and 14 mid-sized aircraft.