This week we discuss the dangers of technology transfers to China, Russia and Japan by Airbus, Boeing, Bombardier and Embraer in our bi-weekly update of our corporate website. By outsourcing work to these countries, aviation’s Big Four are creating new competitors.
Update, 11:45 AM PDT:
Reuters has this interview with Northrop Grumman’s CEO about the decision by DOD Secretary Robert Gates to cancel the contract. The NGC CEO calls the move “chilling.”
The collapse of the $700 billion bailout of the US financial system is bad news for aviation.
The capital markets were already driving up pricing on debt and driving out many lending institutions from the aviation market. Airbus and Boeing downplayed the declining credit markets (our conversations with them being about two weeks ago, before things really began to go south). Each believed that money to finance airplanes was available, albeit more expensive, and that neither would have to step up to provide backstop financing until the second half of next year. Part of this is the large segments of their respective order backlogs that are eligible for export credit financing backed by the European and US governments. In Boeing’s case, the company has said on several occasions that about 83% of its backlog may be financed by the US Export-Import Bank. We don’t have a figure for Airbus, but we believe that most of its backlog is similarly eligible for the European Credit Agency (ECA) financing.
Based on the information we had at the time, we generally agreed. But not now. ExIm or ECA or not, there still have to be viable banks and general market liquidity available for the credit agencies to provide guarantees for the funding.
The situation has changed so dramatically in just the last seven days that we are now concerned there will quickly be a financing crisis for the airlines. In this respect, the airlines may just decide that the longer a Boeing strike the better.
Our colleagues at Commercial Aviation Online, the finance-oriented publication of the Flight Global family, paints a dire picture emerging in aviation finance in our conversations with them. (We write for CAO as well.) But they are still constructing their stories, and we’re obligated to me ambiguous at this stage. Furthermore, it’s a paid-subscription service, so while we’ll be able to synopsize stories when the time comes, we won’t’ be able to fully reproduce them here. But the bottom line is that things are going south faster than anyone believed in aviation finance.
Update, September 30: Bloomberg News has this short item about customers for Embraer having difficulting financing the planes that were ordered. Brazil, like the US, Europe and Canada (for Bombardier), offers export financing support, too.
Update, 11:45 AM PDT: Commercial Aviation Online posted its story. (Paid subscription required.) Here are some excerpts:
With no US bailout package on the table, the aviation finance market remains frozen unable to make sound decisions in an uncertain climate.
“Right now, there is no interbank lending and banks are hoarding cash. Most bankers are putting off any decisions because there are no good decisions right now,” says a London-based banker.
He adds: “It is hard to say anything concrete right now except that if the current crisis continues, we are in big trouble. However, even with a US bailout don’t expect a panacea. What we are seeing now is what happened to the Japanese banks. It will take five to ten years to get out of this mess.”
Due to uncertain market conditions, a number of aviation deals that are currently in the works are likely to be renegotiated.
“No one wants a RFP right now. Everything is being delayed and many deals will have to be revisited,” says another banker.
Update, October 2:
Here’s a new twist. An Australian newspaper reports that Virgin Blue may seek damages from Boeing and the IAM over the strike-induced delays of the 777s the airline wants. We think Boeing’s customer contracts preclude strike-caused delays. The IAM liability, if any, is another matter.
Seattle Times: Dominic Gates has this detailed analysis of the strike and its cost to both sides.
One piece of math in the article that Dom didn’t do is to present the daily cash drain for Boeing. Based on his information that the monthly cash cost is about $1.3 billion, this means the daily cash cost is about $43 million. This compares with the widely reported figure of $100 million to $110 million a day, which was actually deferred or “lost” revenue, but which is also quite a bit higher than it should be because these figures don’t take into account the unaffected businesses within Boeing Commercial Airplanes that continue to produce revenue: Alteon (pilot training), Aviall (maintenance) and Jeppessen (maps and related stuff). We estimated that strike-related BCA revenue loss was more like $75 million to $83 million a day.
An IAM official predicted at the start of the strike that the IAM could bleed Boeing of its $10 billion in cash in a matter of a few months. Not hardly. Certainly $1.3 billion a month in cash loss is not chicken feed, but it’s also only one-third of the widely quoted figures.
Everett Herald: The IAM’s health benefits end Oct. 1. Some inside Boeing told us they believe that this event will help trigger a settlement.
(Special projects precluded us from updating last week, so some of the links below backtrack into then.)
Politics continue to plague the tanker program even though the Bush Administration has punted the decision to the next presidency. Today we play catch-up with selected stories of interest.
Update, September 26:
Inside Defense reports that US Rep. John Murtha (D-PA), chairman of the House Appropriations subcommittee, says a split buy between Northrop and Boeing is the only way to recapitalize the USAF tanker program any time soon.
Murtha generally has been supportive of Boeing’s KC-767 tanker proposal.
He’s added language to the 2009 defense appropriations bill directing the DOD to study the feasibility of a split buy, Inside Defense reports. Murtha, according to the publication, acknowledged that Boeing and DOD don’t like the idea and he didn’t know if Northrop does, “But let me tell you something, we’re not going to have tankers if we don’t do that, I’m convinced,” Inside Defense quotes Murtha as saying.
Murtha predicted that in a re-compete, Northrop is likely to receive the order because its plane is ready to go.
Inside Defense is a paid-subscription service only but readers may register for free and receive three free articles (and then pay a la carte thereafter). This article may be found here, with the registration process the first thing you will see.
Update, September 25:
Be careful what you ask for. US Rep. Norm Dicks (D-Boeing/Washington) announced that he’s inserted language in a new House bill to require the USAF or DOD to review any adverse ruling from the World Trade Organization on the “illegal” subsidies complaints filed by the US Trade Representative and the European Union against Airbus and Boeing. He has said for years that Airbus received “illegal” subsidies and presumes the WTO will back up the USTR complaint. Most objective observers, including us, agree with his biased viewpoint on this one.
But most objective observers, including us, also think the WTO will find Boeing received “illegal” subsidies as well–something Dicks and other Boeing supporters in Congress seem blind to.
The full House has to approve Dicks’ language (likely) and then the Senate has to agree (unlikely).
A decision by the WTO is overdue.
Update, September 24:
Mobile Press-Register: Gates against tanker split buy.
Aviation Week: DOD’s Gates eyed changes to RFP before canceling contract.
JD Crowe at The Mobile Press Register is at it again.
Update, September 23:
Washington Times: [Tanker] Rigged in Boeing’s favor. US Sen. Richard Shelby (R-Northrop/Alabama) writes in an Op-Ed piece that DOD’s decision punting the tanker to the next presidency was nothing more than a sop to Boeing.
JD Crowe at Mobile Press-Register
Business Week: Boeing’s CEO beat the Pentagon, but lost some, too. Boeing CEO Jim McNerney gambled in taking on the Pentagon over the tanker, and won.
Defense Industry Daily: A400M delays creating contract controversies. Airbus’ sole military program isn’t going too well. (We count the KC-330 as a broader EADS program; the A400M is Airbus.)
Washington Post: Defense buyer says Northrop’s bid was $3bn cheaper than Boeing. DOD’s John Young said the smaller KC-767 should have been cheaper to buy than Northrop’s KC-30–but it wasn’t. We say perhaps the US taxpayer was going to benefit after all from all those “illegal” subsidies alleged to be provided to Airbus.
Inside Defense: Flyoff will determine tanker win. The Air Force’s top buyer predicts a flyoff between Boeing and Northrop for the tanker contract. Inside Defense is a paid subscription service but with registration you can get three freebies, including this article.
Los Angeles Times. Northrop entitled to termination fee. The Pentagon says Northrop is due tens of millions of dollars for the canceled tanker contract.
Boeing and the IAM entered the third week of the strike last Saturday and there is no sign of any progress. As of last week, the two sides weren’t even talking about talking.
Update, September 24:
Seattle Post-Intelligencer: Columnist Bill Virgin has an interesting piece speculating what happens to Boeing in the Puget Sound (Seattle) region when the strike is over.
Bloomberg: Boeing CEO cites economic downturn, sees risk to backlog and need for Boeing to finance customers. There is also some reporting on the IAM “standstill.”
We spoke with the IAM and Boeing and each side is waiting for the other to pick up the phone and ask to talk. The mediator is staying in touch with each side, but there’s little for him to do as present.
Boeing insists that the IAM narrow down its “wants” to two or three items from the three pages presented at the last-ditch Florida talks immediately preceding the walk-out. For the IAM, it’s not that simple and without resolving the list of issues, these elements would become part of a contract.
We remain pessemistic about any early settlement.