Soaring aviation ‘cluster’ hits turbulence

Aviation has been a key component of Duluth’s economic plan for more than 15 years. And it’s grown steadily, supporting an estimated 1,700 jobs.

But bumps are emerging on the runway. Two of four aviation “cluster” hubs, Cirrus Design and Northwest Airlines, are losing speed.

Private plane manufacturer Cirrus Design, with more than 600 employees, is an economic driver for the region. But growth is leveling off and it may relocate its customer delivery center, taking away jobs and tourism dollars.

Northwest Airlines, employing 405 at its Duluth air frame maintenance center and 491 more at a reservation center in Chisholm, is reducing its flight schedule by 12 percent and laying off 4,900 workers. It’s struggling to maintain solvency amid falling traffic, rising fuel costs and economic uncertainty.

Arrowhead Business Connection, a business recruiter for the region, has identified 2,343 full-time equivalent employees (FTEs) working in aviation-related jobs in Minnesota’s seven-county Arrowhead Region (see chart Page 9B).

If nurtured effectively, the aviation cluster ultimately provides improved products and services, and more jobs.

That means industry, education and governmental players all must work together to reduce costs, develop supplier networks and address workforce issues.

“Cluster growth is in the suppliers,” said Chris Maddy, director of Arrowhead Business Connection, funded by Northspan Group, Inc., a Duluth-based economic development organization for Northeastern Minnesota.

In November, it helped bring in HydroSolutions, a Cirrus Design supplier, and three employees.

Arrowhead also is targeting companies that produce anodized metal parts and perform tube bending, in the campaign to bring in more aviation suppliers, Maddy said.

Local, state and federal governments have provided financial support to Cirrus and its suppliers. Local educational institutions offer pilot and maintenance technician training.

Duluth Mayor Gary Doty’s aviation development plan encourages creation of an aviation-related consortium to help build the industry. But none of the aviation executives have organized.

Rather, the cluster hubs are largely self-contained, each dealing with its own issues. Here is a description of the hubs and their issues, and profiles of some suppliers.

Cirrus Design hub

Cirrus Design is well-known for its elite, single-engine four-seater private planes. At its Duluth operation, the company assembles airplanes from the ground up, extensively tests and delivers them directly to customers. A hub of related supplier firms has steadily grown around the company.

But Cirrus executives are considering relocating the customer delivery center outside of Duluth, citing negative local press coverage of Cirrus crashes and fatalities.

“But no one mentions that we’ve had 25 to 26 million miles of safe transportation in these airplanes,” said William King, vice president of business administration. “And it takes an experienced pilot to fly them properly,” he said.

“Of the six fatal customer crashes, we believe five were under pilot control and were driven into the ground,” said King. “The sixth one was out of control but the pilot chose not to deploy the parachute.”

One of the plane’s special features is its parachute. The one time a pilot in trouble deployed the parachute, it worked, he said.

While the company’s riding high, sales are highly dependent upon affluent spenders with lots of discretionary income who can pay $350,000 for what Cirrus executives call “personal aircraft.” If Cirrus sales level off, so will those of its suppliers.

Cirrus moved to Duluth in 1994 with 35 employees. With 600 employees, it produces two planes per day. Composite components from its Grand Forks, ND production center are trucked in at the rate of 10,000 parts per month.

Cirrus already has delivered 750 planes and plans to produce 500 more within the next year with its improved production processes.

Competitors Gulfstream, Cessna, Piper and Beechcraft all have reduced their workforces.

“We’re more fortunate than most, we have a new product, the SR22, that is in high demand,” said CEO and co-founder Alan Klapmeier. Cirrus has no plans for a layoff, but staffing likely will level-off, he said.

Average production wages are high for Duluth (about $13-$14 per hour), and untrained workers start at $9 hour, King said.

Cirrus doesn’t have a plane backlog: Customers typically wait four months for their plane to be built. That customer base also contributes to Duluth tourism revenue. King said two persons typically pick up each plane and receive training, staying about four nights.

Assuming each person spends an average of $160 per business day, that’s at least $332,800 in annual revenue for the hospitality industry.

Only 10 percent of Cirrus’ suppliers are local, King said. Out-of-area suppliers also travel frequently to Duluth to support products for extended stays.

Klapmeier and co-founding brother Dale own about 10 percent of the company. Another 10 percent is owned by 250 investors, with the majority 60 percent owned by Crescent Capital Partners in Atlanta, an affiliate of the First National Investment Bank of Bahrain.

The Cirrus board of directors includes the Klapmeiers and three Crescent Capital investors.

“This year is expected to be profitable,” Klapmeier said. He anticipates 2003 revenues at $145 million; 2002 revenues were $120 million. “We have very little business debt,” he said. The Crescent takeover brought $80 million to Cirrus for working capital and debt pay-down.

In 1999 Cirrus sought to add space and grow its suppliers in an incubator. Because the initial intent was to incubate other businesses, $3.5 million of the $5.75 million construction costs were funded through a grant from the U.S. Economic Development Administration.

The facility was approved in 2000, and planned for several blocks away. Soil problems enabled Cirrus to relocate it next to its own plant.

The incubator opened last September. The building is completely filled by Cirrus, housing its detail/decal/paint shop, training rooms, a service shop and customer delivery area.

• Northstar Aerospace. Formerly Northstar Machine & Tool Co. Inc., manufacturer Northstar Aerospace moved into a new 20,000 square-foot Airpark facility in November 2002. Founded in 1993, the firm manufactures aircraft seats, parts and assemblies for the aerospace industry and precision-machined components for other industries. With 55 employees, the company has been growing steadily. Its major customer is Cirrus Design.

“We produce about 10,000 parts per month for Cirrus,” said president and CEO John Eagleton. “Plus, we manufacture all their seats.”

The move cost $450,000, and Northstar received a $150,000 Minnesota Department of Trade and Economic Development (DTED) grant through the City of Duluth. The city also provided a five-year, low-interest loan. Other financing came from Republic Bank and the Duluth Economic Development Authority (DEDA).

Eagleton said he wants to expand globally. With $1 million invested in state-of-the-art equipment, Northstar has the capacity to increase production along with Cirrus and new customers, he said. He expects his payroll to hit 60 employees by the end of the year.

• Brigham Upholstery. “We’ve made all of Cirrus’s interiors since aircraft No. 1,” said Dave Hudyma, co-owner of Brigham Upholstery with his father, Mike. The two have owned the firm, in the Duluth Airpark, for 15 years.

While Cirrus accounts for about 50 percent of its revenue, Brigham and its staff of 10 workers perform reupholstery and warranty work for area auto dealerships, as well as for St. Louis County and the City of Duluth.

For its Cirrus work, the firm partners with Northstar Aerospace; Brigham provides cushions and fabric and Northstar performs final assembly and torque inspections.

• HydroSolutions of Duluth, Inc. The Fergus Falls, MN engineering firm recently opened a branch in Duluth to better serve Cirrus Design. HydroSolutions uses waterjet technology to precision-cut metals and plastics.

It employs only three persons, but is looking to grow. They’ve moved into Northstar’s former space on airport property.

Duluth International Airport hub

The airport has had its share of bumps. Last year it lost all American Eagle (affiliate of American Airlines) flights as the carrier cut costs in response to reduced passenger travel.

The airport supports 22 businesses, said Brian Ryks, airport executive director. That includes Cirrus, Air National Guard 148th Fighter Wing, an Army National Guard, and the Northwest aircraft maintenance base.

Other companies supporting the airport include rental car agencies, fixed base operator North Country Aviation, several charter airline companies, and RS&H, a contract engineering firm. The airport has about 17 FTEs and 15 contract employees, Ryks said.

Ryks also is chairman of the Minnesota Council of Airports, representing 125 airports. He’s lobbied state legislators to prevent Gov. Tim Pawlenty from commandeering the State Airports Fund, which has accumulated more than $15 million from aviation taxes and fees. Pawlenty targeted the fund to help fix the state’s projected $4 billion budget deficit. Losing that fund would affect future airport projects, Ryks said.

Northwest Airlines Corp. hub

Based in Eagan, MN, Northwest is the only major carrier serving Duluth International Airport. It offers 10 flights daily to Minneapolis/St. Paul and 11 flights back to Duluth. Those flights are likely to be eliminated as the airline scales back every part of its operation.

Blaming the war with Iraq, Northwest CEO Richard Anderson said on March 21 that the airline will reduce its flight schedule systemwide by 12 percent. It will retire 20 aircraft and lay off 4,900, about 11 percent of its workforce.

Northwest operates a maintenance base for its Airbus fleet in Duluth, employing about 400 workers. U.S. Representative James Oberstar, D-MN, said the maintenance base will lose 158 employees. It also operates a flight reservation center in Chisholm that employs 491 workers. Details about layoffs were not immediately available.

The airline is in contract negotiations with its unions, trying to avoid the bankruptcy hole into which U.S. Airways and United Airlines have fallen. The parent company of another major carrier, American Airlines, warns it faces bankruptcy unless costs are reduced.

Within the past two years, Northwest already reduced staff by about 12,000, and cut salary, benefits and retirement for remaining workers. Anderson told analysts the airline needs to cut an additional $1.5 billion in costs to avoid bankruptcy.

• Taconite Aviation. The firm is typical of charter airline firms bringing passengers into the Duluth airport. Based in Hibbing and Eveleth, Taconite Aviation has 10 FTEs. It offers flight instruction and provides fueling for other small planes, as well as a branch business providing plane maintenance.

Gary Ulman, co-owner and director of operations, has worked at the firm since 1979. “This is one of the slowest years I’ve ever had,” he said. “The reason is mostly the economy — people holding onto their money and uncertain about travel.”

He said rising insurance premiums, about 18 percent over the last two years, also are affecting the charter industry. While Ulman’s insurance costs can be spread out over multiple services, it’s been tougher on smaller operators such as Jack Culley, who closed his small charter service in Superior last year.

Sinex Aviation hub

Sinex Aviation, in Duluth’s Technology Village, creates and installs airline maintenance software systems for several major airline customers. Founded in 1998 by Barry Sinex, the company has about 54 FTEs. New customers may be hard to come by, so it’s looking to diversify into other transportation industries.