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Beech 1900 Airliner

When CAB raised the size limit for commuter aircraft from 12,500 lb (about 19 seats) to 30 passengers in June 1972, many carriers preferred to stay with smaller aircraft (which better suited their needs and routes) in order to avoid the additional operating requirements. As a result, the commuter industry could not agree to endorse a 30-seat commuter aircraft and, lacking a firm domestic market, no U.S. manufacturer developed or produced a new aircraft in the 20- to 30-seat size range.

A later version of the Beech 99, the model 1900 was recognized as the favored tier-3 aircraft. Developed from the Super King Air business twin turboprop, the 19-seat Beech 1900C Airliner was first flown in September 1982 and entered service in early 1984. With its Pratt and Whitney PT6A-65B engines, it has a cruise speed of 268 knots with a certified ceiling of 25,000 feet and a range of 1,555 miles. Since its introduction in 1984, Raytheon Aircraft's Beech 1900C Airliner was known as "the workhorse of the sky." The Beech 1900C consistently earns high marks for its large-airliner styling and passenger comfort. It is passenger friendly, highly reliable, and much appreciated by both maintenance and aircrews alike. A total of 250 1900Cs were delivered between 1984 and 1991 to regional airlines, special mission operators and corporations.

Production then switched entirely to the improved version, dubbed the 1900D, which has a taller cabin. Some commentators suggested that the Beech 1900C had some defects, and that to rectify these shortcomings while improving on the technical aspects, Raytheon went on to manufacture Beech 1900D, the most popular 19-seater aircraft in the world.

The regional airline industry had traditionally used small 19 to 30 seat propeller-driven (both piston and turboprop) aircraft to move their passengers to and from the hub airports served by major airlines. Passengers were not overly fond of these aircraft because of their relatively cramped cabins, loud interior noise levels, and safety record, particularly compared to jet aircraft such as the B-737. The airframe manufacturers noted the inherent problems with small turboprop aircraft (Beech 1900, DH Twin Otter, etc.) and developed larger and quieter turboprop aircraft to meet the growing demand for larger aircraft by the commuter operators.

During the late 1990s, RAC began to experience softening demand for its commuter aircraft due to, among other things, shifting consumer preferences, increased government regulation of nineteen-seat aircraft, increased competition in the used aircraft market, and the introduction of regional jets. These and other factors combined to place downward pressure on the sales prices, lease rates, and asset values of these planes. Thus, in 1997, RAC began for the first time to place used 1900s with customers on operating leases and substantially ceased outright sales of used 1900s for cash. In addition, many of the used commuters that RAC received as returns, repossessions, and trade-ins required significant refurbishment before RAC could re-market them. These refurbishment costs were capitalized as part of the aircraft's book value, which led to "[h]igher book values" that "can and do exceed fair market value." In response, RAC adopted a policy of depreciating the used commuter aircraft on an accelerated basis.

By late 1998, Raytheon was aware of potential risks, uncertainties, and adverse trends in RAC's commuter business. For example, in October 1998, a RAC sales plan noted that the "US market continues to be soft for this size [of] aircraft." In December 1998, an internal Raytheon analyst wrote that "[t]he 19-seat turboprop market is in trouble" and described several factors that were "clearly putting the viability of the 1900D in doubt." Later that month, after being informed that "the market for the 1900D appears to be in decline" and "continuing 1900D financing is probably RAC's major financial exposure," Burnham, who had just become Raytheon's CEO, observed that "clearly, the 1900D is a worry" and asked senior RAC management "how solid is our build/sell forecast?" Burnham further authorized a series of external studies into the future market demand for commuters and an internal financial analysis of the risks associated with these aircraft.

In 2000, a variety of internal and external sources continued to inform Raytheon and RAC executives that the market for 1900s was in substantial decline. These sources further indicated that there were actual material commuter losses at RAC and that the potential losses associated with the 1900 line were in the hundreds of millions of dollars.

By late 2000, Burnham and other senior Raytheon and RAC officers were aware that "[m]arket forces ha[d] created a non-performing asset problem" with the 1900s. Specifically, contemporaneous internal company documents show that, at December 31, 2000, RAC's inventory of used commuters had increased to over 100 airplanes due to an exceptionally high number of commuter returns and repossessions at year-end, and RAC expected significant commuter returns in the years ahead.

During January 2001, in response to a perceived "market shift" concerning the commuters, RAC drafted a new "1900 Business Plan" intended to "steer[] to a 'soft landing' in 4 years" by (i) further reducing the build rate for new 1900Ds to one plane per month (the minimum production rate that the subsidiary could sustain without incurring an operating loss); (ii) moving away from RAC's historic commuter financing and leasing strategies to instead "sell 1900B[s and] 1900Cs for cash" at prices that were "well below" existing book values; and (iii) building up RAC's commuter reserves by at least an additional $240 million through the continued allocation of surplus pension-related income to facilitate such sales. The new "reduced cash sale prices" were approved by senior Raytheon management (including Burnham and senior corporate financial officers) in early January 2001.

By April 2001, Raytheon was aware that RAC had not sold any used commuters for cash under the "soft landing" plan during the first quarter and that recent offers for used 1900Cs were "in the $1.2M range," which was "far below" the initial "cash sale" estimates of $2.2 million approved by management as part of the "soft landing."

By July 2001 Raytheon was increasingly concerned by the growing number of unsold Beech 1900s in its used aircraft inventory. Operators, meanwhile, complained that high lease costs on the 19-seat regional turboprop could force them out of business.

In August 2001, Raytheon convened a "commuter summit" at the company's corporate headquarters to discuss the state of the commuter market and the negative effect this decline was having on RAC's commuter business. At this meeting, an outside consultant informed senior Raytheon and RAC management that "[c]ompetitive market pressures are intense. Critically, they are not anticipated to ease anytime soon.. Turboprop aircraft orders have stagnated at best.. Only a handful of companies still operate 19-seat turboprops.. The prognosis for U.S. 19-seat operators is not very good.." Downward pricing pressure is not anticipated to ease as the number of surplus 20 to 35 seat turboprop aircraft grows, making them more attractive as 19-seat replacements.. With turboprop aircraft demand falling and supply raising, pricing must reflect basic market conditions not internal benchmarks."

Although Raytheon was aware that its on- and off-balance sheet commuter assets were over-valued by hundreds of millions of dollars as of August 31, 2001, it was not until after the terrorist attacks on September 11th that the company began the process of a write down.

The rapid spread of regional jets preferred by passengers forced Raytheon to halt production of the 1900 in 2002. No one had figured out how to operate the 1900 outside the Essential Air Service program.

Having financed the acquisition of most of the 1900's by regional carriers and others, Raytheon faced huge losses. It still owned 511 of the planes valued at $1.6 billion. It wrote the value of those planes down by $693 million in 2001. Since then, it slowly sold the planes in overseas markets, but was still stuck with 218 of them as of 25 June 2006, valued at $435 million.

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Page last modified: 07-07-2011 02:27:44 ZULU