Whats Up At Cirrus?

A sales success story yet the company has endured major cutbacks. Can anybody build airplanes without making buyers nervous?

When a press release arrived announcing layoffs at Cirrus Design last winter, we suspect our reaction was shared by many in the industry: Here we go again, another upstart aircraft company about to slide down the tubes.

Yet Cirrus is unique in one aspect of its short existence as a certified airplane manufacturer: Its fat with sales, with nearly 800 orders on the books. Still, the company is struggling, begging us to ask if anyone can make airplanes without making investors and buyers nervous.

Currently, Cirrus makes two models, the SR20 and the recently certified SR22. The fuselages are made in Grand Forks, North Dakota, the assembly is done in Duluth, Minnesota and painting is completed in Hibbing, Minnesota.

On a recent visit to Cirruss headquarters in Duluth, Minnesota, we asked Cirrus CEO Alan Klapmeier about the companys prospects. Along with his brother Dale, Klapmeier founded the company in the early 1990s.

Not to sound like we told you so, but when the SR20 first appeared, we had our doubts that it was priced right to be profitable. Is there sustainable profit in a $240,000 airplane built the way this one is?

There isn’t today. We expect that as we get to higher production rates there will be. That price does provide a positive contribution to overhead, which is a fancy way of saying we would be worse off if we werent building them.

Just as an observation, we do ourselves a tremendous disservice by spreading this rumor that no one ever makes money in general aviation. Most of our investors have been pilots but a high number who arent pilots havent invested because they went to a friend who is a pilot who told them that no one ever makes money in general aviation.

What about longer term? And do you envision the SR20 costing $350,000 or more, which is where the competition is?

Long term, were going to make a lot of money building SR20s at this price point. As far as price, I think were there. I don’t see moving it up much because I don’t think people will buy it. Or they wont buy it in big enough numbers.

The concept of price elasticity is at work here; there are a certain number of people who will buy at this price but not at a higher price and its a tradeoff against profitability.

I joke with customers picking up new airplanes that theyre very fortunate that somebody is willing to bet on the future of the company to pay for the rest of their airplanes. The grim joke is that if we could get people to pay cost instead of retail, we would be way ahead. But seriously, I think the SR20 price point is where it needs to be.

Is the $500,000 single-engine airplane doomed, then?

In aviation, we have priced ourselves out of the market. You can understand how businesses-especially aviation businesses-get themselves into that trap. Pretty soon you have a $500,000 airplane that wont sell in enough volume to make any money. There’s always a price/volume tradeoff.

Touring the plant, we were told that the company has cut back considerably in workforce. What are the numbers and why?

Last fall, we were at about 650 people and now were down to about 530. The cuts were across the board-production, engineering and technical and support-at Duluth, Grand Forks and Hibbing.

If you were some kind of highly capitalized, non-profit company, you might say keep the people on but we arent. We do expect to hire a bunch of them back. But given the length of time, we realize some will find other jobs.

Given the backlog of orders, Cirrus is a runaway sales success story. Whats so difficult about running up the production numbers?

The hardest part about all this has been raising the money. Its harder than designing the airplane and harder than certifying it. Were always short of cash. Thats the way our life has been.

Weve been in a constant money raising mode, a constant tradeoff between do you get the capital to grow the company or do you have to grow the company to try and figure out how to attract the capital later? Its a chicken and egg situation.

The chicken comes first and the chicken is the money. We were growing the company, getting the production rate up and anticipating funding that didnt materialize. But youre burning through cash to get to profitability and at some point, if you cant get the capital, you have to slow down the growth and thats what we did.

Wheres the money coming from? Is it venture capital?

Not for our recent fund raising. Weve got a lot of individual investors in the company, about 265, and the majority are pilots. In this past round, we tried to do an institutional investment with a New York banking firm.

So we were going to people who didnt understand aviation at a time when the market was experiencing some turmoil. And we just werent able to raise the money.

Why did it reach the point where you had to reduce the work force so drastically?

A number of reasons. The SR22 was certified in November and we were just beginning the production of that. There’s some things we should have done sooner but didnt because of the lack of capital.

As that was starting up in January, we now had SR20s and SR22s coming down the same line. We built a bunch of SR22 parts but through our lack of planning, we still had SR22s that we couldnt finish.

They were taking up the space that SR20s needed so we had a whole bunch of people standing around with nothing to do. You cant keep the people if you cant finish the airplanes.

We made other mistakes, too. Weve been trying to make an ERP (enterprise resource planner) computer work; weve spent we’ll over a million dollars on this. Its supposed to be a single point of coordination that does all of your inventory control, your workflow, your cost accounting, your billing. Its a great idea. The only problem is it doesnt work.

That was a mistake. The good thing is that we know Mooney and Beechcraft have the same problems. We bought into the system and it burned us. Thats our fault. If we hadnt made that choice, we would have gotten farther relative to the layoffs, but that was only one factor. We get a lot of questions from the general media about this, theyll say but wait, youve got all these orders; why are you laying people off?

This explanation works best: Think of building airplanes as just like a recipe. You have to have all the ingredients for the recipe at the same time, and then its easy. And manpower is just one of them. If you don’t have the parts, it doesnt matter how many people you have around, if you don’t have the parts, you cant finish the airplane.

In retrospect, with SR20 orders going unfilled, was it a distraction to certify and begin building the SR22?

No, but it was a controversial decision within the company. The decision could have been done better. The reason it was a smart decision is because the SR22 has a higher profit margin and it was in the business plan from the beginning.

This airplane was designed to have this growth path. The financial plans always had a higher margin and a lower margin product. Its just like the airlines, you have first class and coach, not just first class.

But if youre cash strapped, wasnt it an additional expense you couldnt afford?

Its an incremental cost, really. The cost was not that much-a few million dollars, yes. It did keep the engineering staff from getting down on the floor and solving some of the SR20s production problems, but were addressing that now.

Are there other new products in the wings?

Before answering that, let me say that the companys philosophy is that in a world driven by customer value, you cant sell 40-year-old products profitably, so were committed to continual new product introductions.

Like what? Electronic modifications to start, such as the primary flight display thats going to reduce the intimidation factor of flying these airplanes IFR and make them more appealing.

In my view, that alone increases the market by an order of magnitude. Then we add to that traffic information and de-ice and so forth. we’ll also look at a retractable and a turbine engine for the airframe.

How about a turbocharged model?

We wont do a turbocharged avgas engine. Im convinced that 100LL is going away and there’s not a solution for that right now. Thats a dastardly thing to do to your customers, to sell them a product they wont be able to use in two years because there’s no fuel.

What about the electronic ignition systems coming out from Continental, Lycoming and GAMI, wont these address the fuel octane problem with turbocharging?

I don’t think so. But we plan to look at these and also some kind of deicing system. But nothing is firm yet.

During our tour, we were told production has been increased. Whats the level now?

Were getting one a day off the production line. Were not quite painting one a day. Were between that four and five a week number.

Were always addressing the next bottleneck. First it was wings, then it was fuselages and now its paint.

Obviously, youve made some efficiency gains here. How?

No one thing, just a bunch of changes, some of which Id have to call stupid-obvious. Better planning, better parts flow, better management. A lot of the immediate changes are to make sure the guy on the line is spending his hours putting the parts together, not looking for the parts.

Some of its really simple stuff, like having the benches in the engine build area at the right height, and having the parts feed in efficiently. After that, its the classical manufacturing learning curve; to do the same thing you did last week but in less time.

Speaking of less time, how many man hours to build one of these things?

The original engineering estimate said we ought to be able to get down below 1000 hours; the original finance estimate said 1200 hours and then we raised that up to 2000 hours because nobody would believe it.

We need to be at 2000 man hours. We think we can get below that but we need to get down to 2000 first. Right now, were in the high 2000s.

We expect the number of man hours per airplane to continue to come down. When you order 200 shipsets of parts instead of 10, great things happen to prices and productivity.

What we need to be at to break even is about 30 airplanes a month. Right now were about 21 airplanes or about one per working day. When were close to an airplane-and-half day, we’ll be in good shape.

Ideally, where would you like to be with production?

I think Id like to be about 65 airplanes per day.

Thats almost 17,000 airplanes a year. Wanna put a real number on that?

Realistically? How about 49 or 50 a day? I don’t think there is a realistic number. I wouldnt want to be at 100 a day today but 10 a day is 2400 a year and thats a good number.

But is that sustainable?

Absolutely. I actually think the number is larger than that. Our business plan is based on the industry growing to a sustainable rate of 8000 airplanes a year and that we ought to have in the 20 percent range of that market.

As were raising money, were constantly having to scale that back because people are saying thats not realistic. The financial industry wont believe it.

I don’t think there’s any data you can show that suggests that the industry should be limited to 8000 airplanes or 18,000 or 28,000 airplanes a year. The argument for why the industry is small is because its been small for the past 15 years.

Well, okay…why did the computer industry grow, why did the automobile industry grow? It doesnt make any sense to look at general aviation as growth limited.

If you look at it in front of you instead of behind you, you ask what the demographics have to be for it to grow, whats the population, what are the economics? Whats going on in the reasons people travel? Whats going on in comparable use of disposable income?

There will never be an airplane in every garage. But the difference between 900,000 airplanes-which we will never sell-and 9000 airplanes, all comes down to things we do have control over, such as how we design the products and how we treat the customers and how we tell the FAA the system ought to work. The reason our airplane sells we’ll is that its good customer value.

And you really think you’ll find buyers?

One of the classic arguments I hear is that yeah, but nobody needs an airplane. Yeah, but nobody needs a BMW, either. The Dodge Neon will absolutely provide for everyones transportation needs. It isn’t about basic needs.

Were typically told that not many people buy airplanes because theyre expensive and nobody really needs to travel. Those are just not the issues.

Its true that airplanes are too expensive for what you get. Its too much trouble to put up with versus your need for transportation.

With airplanes, what we really sell is time. How do you get one more business deal done? How do you get to your vacation home for the weekend? How do you get more out of your life? Thats what were selling.

Speaking of sales, your sales director, Tom Shea, basically told us hes told the sales force to go to their rooms. Is it true there’s no active selling going on?

Well, were not doing any advertising and havent for about a year-and-half. We have three sales people and one demonstrator.

The biggest problem we have with sales right now is the size of our backlog. If we could produce more airplanes now, we could sell more. You can imagine the conversation with a customer: Youre gonna love this airplane but you cant get one for two years.

Right now, fortunately, the comeback is I cant get anything else so Ill have to wait. We do think a lot of people buy another airplane, a used airplane, and wait. And we feel good about that.

But the only good thing about having a long backlog is that its of some benefit when you try to raise money; having orders is a plus, especially when people are worrying about a recession.

So will it reach a point where I can place an order for an SR22 in April and have it to fly this summer?

No. We would like to get down to a six-month backlog. We think people are willing to wait six or eight months for an airplane, but not much longer. If you get down to three months, you worry that if something happens to sales, you’ll get stuck.

How much has the parachute contributed to that success?

We took a lot of abuse from the industry over the parachute but I think thats generally gone away. It has been absolutely material in the success of the airplane. Maybe we could have done as we’ll without the parachute. But without it, we wouldnt have been positioned where the market needs to go.

Its an essential element to the philosophy that were going to make it safer to fly but its hugely under appreciated by experienced pilots.

Weve had situations where customers have told us this is the only airplane my wife will let me buy. So the perception of safety is important. The parachute helps and I don’t consider that artificial.

Last, new mini-jets getting so much press these days. From your perspective, is this so much hype or a real thing? Were talking about Eclipse and Safire, mainly.

I find myself in a peculiar position. As Eclipse and Safire are criticized by the industry, I find myself agreeing with the jet makers. The idea of low-cost jets is reasonable and right.

But I don’t think theyll end up with the product they say at the price they say. I think theyll end up with a compromise in performance and payload.

The end result is, I think, Eclipse is going to get to the finish line because theyve shown they can attract a lot of money, the hardest part. But not because they have a better idea.

They make it sound like theyre not going to make mistakes. Well, theyre going to make mistakes, as has everyone else. But if youve got the money, mistakes are just a little less visible.

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