When Gulfstream, the business jet arm of General Dynamics (NYSE:GD), decided to make its first built-from-scratch plane in 40 years -- the G650 -- the stakes were high. But the move has paid off handsomely, catapulting Gulfstream to the top position in the industry and securing a future of high revenues and profits. Bloomberg calls the G650 "Gulfstream's holy grail of private jets." The jet arrived at a time when General Dynamics' been concentrating on growing its aerospace business to offset the declining defense budget. Let's find out how and why the plane is fetching millions of dollars for its maker.
G650 and the euphoria around it
Gulfstream G650, which entered service in December 2012, is the new symbol of wealth and an engineering masterpiece that strikes perfect balance between speed and distance, and luxury and price. Carrying a sticker price of $64.5 million, the jet offers an amazing 7,000 nautical miles (12,964 km) range, maximum speed of Mach 0.925 powered by Rolls-Royce twin engines, and more. In March 2014, the G6 flew from New York to Mumbai (India) in a record-breaking 13 hours and 49 minutes. It can carry a maximum of 18 passengers and can cruise along comfortably even at an altitude of 51,000 feet.
From the inside, the 100-foot long jet is even more breathtaking. What can be termed as ultimate luxury is exactly what the G650 delivers. As the company says, "Every detail of the G650 interior was designed to create an atmosphere that intuitively provides the utmost control and comfort." The jet offers plush interiors, a roomy and well lit cabin, and high cabin pressure in an attempt to reduce jet lag.
Large business houses and high net-worth individuals are going crazy to get their hands on this epic jet. The almost four years' waiting time is giving rise to interesting alternatives. According to Scott Neal, Gulfstream's senior vice president of sales and marketing, buyers who don't want to wait, have the alternative to use G550 or G450 until their G650 is ready. This has turned out to be a very popular option. There are even reports of aircraft flipping, where the ones who have got hold of a G650 are reselling it at a $10 million-$15 million premium to people who can't bear to wait.
In 2013, Gulfstream left all other business jet makers far behind by amassing a revenue of $7.35 billion. The second-place holder, Bombardier, was a good $1 billion short of Gulfstream's top line. Delivery of 42 G650s had a huge role to play in this as the plane carries a large sticker price, garnering big revenues for Gulfstream. And the company has taken care to ensure that a big chunk of the revenue gets carried to the bottom line. It's making the plane with 50% fewer parts than the smaller G550 and G450 at a plant made exclusively for the G650. With these maneuvers, the G650 has proved to be the most profitable product for Gulfstream, and there's still more upside as the jet maker is focused on boosting deliveries.
Jeff Fahrenbruch, a fund manager at Barrow, Hanley, Mewhinney & Strauss, said in a Bloomberg Businessweek report, "The thing that is less appreciated is how much margin upside there could be as G650 production ramps up and matures."
We can get a sense of this from the company's aerospace operating performance in the first half of 2014. During this period, Gulfstream deliveries were up 18% compared with the same period last year with large jet deliveries up by three units. In the six-month period, revenue increased by 289 million or 7.5% over the same period last year but the operating earnings were up by 12.7% or 89 million, thanks to 90 basis points increase in operating margins.
Gulfstream is placed pretty comfortably compared with peers like Embraer or Textron-owned Cessna in terms of operating margin. In 2013, the three companies reported operating margins of 17.44%, 6.40%, and negative 1.72%, respectively. For 2014, management expects Gulfstream's operating margins to be even higher at 18%, while it looks to sell 118 large jets.
Gulfstream has made the offering more attractive by upgrading engines on the aircraft and increasing fuel capacity. The new model, G650ER, will offer even greater travel range of 7,500 nm. From the first quarter of 2015, existing owners of G650s will have the option to upgrade to G650ER if they are willing to shed an additional $2 million.
Such is the sway of the G650 that it will continue to bolster Gulfstream's position in the coming years as it has practically no competition. The jet maker has an almost five-year head start against Bombardier and Dassault Aviation. Global 7000 and Global 8000 from Bombardier that will come with flying ranges of 7,300 nm and 7,900 nm won't enter service before 2016 and 2017. Even Dassault's Falcon 8X will enter service not before two years from now. Gulfstream's VP of communications, Steve Cass believes by then more than 200 G650/ERs will be delivered "that will help to firmly establish the company's dominance of this sector".
The G650 is by far the most tempting luxury jet. The fact that the rich are ready to shed any amount of money to own this marvelous piece of engineering says a lot about the plane. The G650 is not only lifting sales and helping Gulfstream reach pre-recession levels, it's giving the jetmaker an excellent margin boost.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.