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On Boeing - Where's the money?

Bruce Krasting's picture




 

There was a period of time when I got stuck working on deal-teams that were trying to finance airlines. In corporate finance you usually work on a deal until it happens and then you move onto something different. Not the case with airline finance. These dogs always need more money. No one wanted to work on the deals (they were always shitty and very hard sells).

The list of my "AAA" clients included: Eastern Airlines, TWA, and Continental Airlines. Two of my clients ceased to exist; Continental went BK again and again.

This was in the 80’s when finance was not as sophisticated as it is today. But I tried to be creative. We hocked everything we could get a UCC filing on. Spare tires and parts (even tools), engines so old they could not be used, landing rights and other things that had no real value. One of my highlights was when I financed the gangways that connected the planes to the gate.

Years later I got smashed in the head again when I got involved with a (very) failed effort to LBO United Airlines.

So add me to the long list of folks who have sworn off ever putting up a dime for the airlines. It’s one of the surest ways to lose money. My advice to anyone thinking of putting money to work in airlines is that before you write a check, hold your breath for three minutes. As (virtually) no one can do this, then no one would lose money in this cesspool. My investment rule works perfectly.

With that as an intro I take you to this article in the FT today:

 

 

The title says it all. No one should be surprised that the EU banks have turned off the spigot. They are all trying to broadly deleverage. They are already full up on dodgy aircraft paper. What I want to add is that the EU banks have been major providers of liquidity to the global air carriers for decades. The reason that I got involved with this mess was that I knew many European banks. They were all in love with high yielding asset backed lending. Airlines and the EU banks were a perfect match. That these banks are now out of the picture is a very big deal indeed.

A Boeing VP, Randy Tinseth, had this to say recently about those EU banks: (Bloomberg Link)

 

“There’s been a lot of concern in the market about the availability of capital, especially the situation with European banks.”

So what’s Boeing going to about the shortage of debt capital for the air carriers? Simple. They are going to take the paper right back on their books. From Commercial Chief Executive Officer, Jim Albaugh:

 


“Our strategy will be that Boeing capital will be much more than a lessor of last resort.”

Oh boy! Look out! Boeing is going to be financing its own sales. (Just like GE does.) I looked at the Boeing Capital home page. This is a list of financial products the nice guys at BA are offering:

 

 

The first two categories are the safest of the lot. All the other stuff is very high risk lending. The last on the list, Subordinated Debt, has proven to be a guaranteed way to lose money.

It’s not that leasing (finance or operating) are without risks in this industry. The article that I quoted from is from November 13th, not a month ago. In that article the same Boeing Execs were crowing about their big success in leasing:

 

Boeing’s strategy to use its capital arm as a tool to gain an edge on strategic competitions was highlighted in July by an agreement with AMR Corp.’s American Airlines, where Boeing committed to providing 100 single-aisle jets to the airline on lease.

 

Well, 17 days later their best customer did a flame out:

 

 

Possibly Boeing Finance will end up doing better at this than I did. I doubt it. If they have any questions on where this strategy leads, they should ask Carl Icahn. He’s been bruised as much as anyone.

BA’s stock is at 14Xs earnings today, not so cheap at all. Possibly investors considering a punt on BA should hold their breath for 3 minutes. That 2.3% dividend everyone likes so much is not nearly enough to cover the risk.

.

 

 

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Thu, 12/08/2011 - 23:07 | 1961625 Elmer Fudd
Elmer Fudd's picture

BK on on side of Boeng, and MHFT on the other, decisions, decisions...  /sarc

Wed, 12/07/2011 - 23:41 | 1957172 Yen Cross
Yen Cross's picture

 Imagine this? A Peter Schiff (XAU ) idea, and a Pilots Union ( Brunch).     Heavy on the Bacon!

Wed, 12/07/2011 - 22:59 | 1957096 Robert-Paulson
Robert-Paulson's picture

Don't ever invest in airlines??  Pffft...

 

BlueStar

A comer. 80 medium-body jets. 300 pilots, flies northeast, Canada, some Florida and Caribbean routes... great slots in major cities..

 

But, I know something......There was a crash last year. And they just got a favorable ruling on a lawsuit.......Even the plaintiffs don't know.

the decision'll clear the way for new planes and route contracts..... There's only a small float out there, so you guys should grab it.

 

Good for a five point pop....At least

 

Thu, 12/08/2011 - 00:13 | 1957217 object_orient
object_orient's picture

I swear I've heard that somewhere before.....

Wed, 12/07/2011 - 21:42 | 1956953 shadowboxer
shadowboxer's picture

...to interpret the EU banks; ...if man was meant to fly god would have given him wings?  Conversely;  ...god must have meant man to be a slave as he has given us EU banks.

 Send the Marines to occupy the FED and End the Squid

Wed, 12/07/2011 - 21:15 | 1956887 Yen Cross
Yen Cross's picture

 On Boeing,   Front landing gear for fan clearance on the umteenth 737 iteration? Am I close?

Wed, 12/07/2011 - 21:33 | 1956934 I think I need ...
I think I need to buy a gun's picture

i remember peter schiff saying in 2007 that all flights in the U.S would be interntional because they would all go bankrupt and in dollar terms fuel would be just too damn expensive....

Wed, 12/07/2011 - 21:34 | 1956939 I think I need ...
I think I need to buy a gun's picture

to add to that he said also Vegas would be finished....

Wed, 12/07/2011 - 21:00 | 1956860 rosethorn
rosethorn's picture

Southwest has held it together for quite a while.  Wonder what's different.

 

Oh, maybe old news but apparently airlines are outsourcing maintenance and repair to Mexico to save on wage costs.

Wed, 12/07/2011 - 19:44 | 1956705 Dr. Horrible
Dr. Horrible's picture

It used to cost $10,000 for a 727 "wet" per hour.  This is with crew.

What are the current costs?

 

Wed, 12/07/2011 - 20:48 | 1956824 SAT 800
SAT 800's picture

Couldn't agree more with Bruce; I got burned on AA thirty years ago; never touched anything connected to an airline since then; they're extremely unstable businesses. Sounds like Boeing might be a short sale candidate.

Wed, 12/07/2011 - 20:41 | 1956815 Citxmech
Citxmech's picture

For a old 727 or the modern equivalent?

Wed, 12/07/2011 - 19:26 | 1956669 minosgal
minosgal's picture

Info tidbit: Sixty to 100 NASA shuttle engineers transferred to Seattle to work on Boeing/military contracts last year, including development of new mid-air refueling protocols for primarily military applications.

Don't know what that's worth, just scuttlebutt from the Space Coast.

Wed, 12/07/2011 - 18:30 | 1956537 ElvisDog
ElvisDog's picture

True story, I was scheduled to fly on an Eastern Airlines flight out of San Juan Puerto Rico the day it went into liquidation in 1990. The "event" happened between my first Eastern flight that day and the second. When we got off the first plane and there was a mob scene in the terminal we knew something was up.

Wed, 12/07/2011 - 17:42 | 1956370 piceridu
piceridu's picture

Ask General Motors how financing its own sales worked out for them. Wait....actually didn't they got bailed out by tax payers? I guess that's the new business model...and Boeing obviously knows this.

Wed, 12/07/2011 - 17:42 | 1956356 Below Zero
Below Zero's picture

Actually since Boeing is one of the few successful manufacturers left in this country it makes sense that they take more risk with leverage. They can dramatically increase sales affecting our balance of exports in a favorable manner and of course they can make a huge impact on unemployment. If they lose it won't matter. They can just repo those Dreamliners. Also since they are too big to fail they can get their losses covered by the taxpayers like GM did.

Thu, 12/08/2011 - 01:51 | 1957457 Seer
Seer's picture

Successful?

Fucking govt twists arms all over the globe in order to coerce contracts.

A successful manufacturer is one that doesn't require govt handouts and provides a sustainable product.  Airlines are the biggest fuel hogs (next to the US military)- they'd be done if not for all the bailouts.

Wed, 12/07/2011 - 18:16 | 1956499 Heyoka Bianco
Heyoka Bianco's picture

I would suspect a repo-ed Dreamliner is even harder to move than a foreclosed home, so what good is that? How does Boeing increase sales when nearly every airline in the world is on their bony knees every night thanking what ever celestial being they pay homage to that they didn't go under today?

The last line is the only thing you got right.

Wed, 12/07/2011 - 17:34 | 1956340 onlooker
onlooker's picture

 

Agian Burce, thanks for the education

Wed, 12/07/2011 - 17:16 | 1956268 CynicLaureate
CynicLaureate's picture

“Actually, I have an 800 number now which I call if I ever get an urge to buy an airline stock. I say, ‘My name is Warren, I'm an air-aholic,' and then they talk me down." --Warren Buffett, Dallas, May 2010.

http://caps.fool.com/Blogs/does-warren-buffett-think-oil/395919

 

Wed, 12/07/2011 - 17:15 | 1956265 mkkby
mkkby's picture

So finally Boeing slow learning execs realize what the automakers have been doing for decades.  Finance your own sales so you can get a big bonus for a great quarter.  Zero percent financing works best.  The customers like free stuff.  If they go bankrupt the used planes go back and they've risked nothing.

Wed, 12/07/2011 - 17:51 | 1956211 dumpster
dumpster's picture

and boeing percipates in rendering flights

brings in the illicet dope on flights

parcipates in money laudering for drug trade ;

where else but a a test flight to escape the prying eyes of the public

the government is in on the fraud .. would you expect any thing else

Wed, 12/07/2011 - 17:05 | 1956199 Shizzmoney
Shizzmoney's picture

Too many cheap flights and airlines. If you want to fly in the future your going to pay much more.

Which really, in the end, is all I fuckin' care about.

If cheap flights end, so does the tourism biz in the USA.  Vegas, New Orleans, Florida, CA will all get crushed.

Wed, 12/07/2011 - 17:04 | 1956198 UncleFurker
UncleFurker's picture

 

Let's not forget the "private" aircraft lease companies favoured by airlines, that are actually backed by the USG!

Export Import Bank or something?

 

And these guys http://www.boc.cn/en/cbservice/cb2/cb22/200806/t20080630_1324052.html

 

 

 

Wed, 12/07/2011 - 17:00 | 1956164 Seasmoke
Seasmoke's picture

i love Pan Am

Wed, 12/07/2011 - 16:08 | 1955884 Magnum
Magnum's picture

Boeing is a very strong company with a well-made product that has strong demand.  Flights are busy despite the rotten TSA, and people all over the world like to fly.  Boeing is one of the good companies in USA, and Boeing will continue to prosper.

Wed, 12/07/2011 - 21:18 | 1956895 dwdollar
dwdollar's picture

Boeing is a TBTF waiting to happen and they know it.

Wed, 12/07/2011 - 16:12 | 1955860 virgilcaine
virgilcaine's picture

Too many cheap flights and airlines. If you want to fly in the future your going to pay much more. The biz model is a dud @ 300 per tkt and Jetfuel @ 50k per flight.

 

So many marginal businesses in operation today from easy finance and rates .

Wed, 12/07/2011 - 16:01 | 1955847 Bicycle Repairman
Bicycle Repairman's picture

Boeing and the airline industry are basically part of the DOD.  Totally subsidized.  Boeing isn't going anywhere.

Wed, 12/07/2011 - 15:53 | 1955812 ItsDanger
ItsDanger's picture

Similar issue with other topics today.  Banks rake in high yields yet dont retain them for the potential rainy day.  The high yields are used to make more money or distribute in bonuses.  Hence when something does go wrong, its a major hit.

Wed, 12/07/2011 - 15:35 | 1955760 Seize Mars
Seize Mars's picture

That's it. I've had it. 

Clearly the space in "Oh My God Look At The Looming Disaster I Have Just Uncovered" pseudo-journalism is starting to get crowded. Time to start shorting the shorters.

The author has just 

1) admitted he has structured deals that were shady

2) admitted he has no clue on how structured products, securitised leases, and so on - actually work

3) admitted he has no clue how airlines work

Enough already. Tell me something I don't know. And for God's sake, don't pump any more penny stocks.

Wed, 12/07/2011 - 16:12 | 1955899 Bruce Krasting
Bruce Krasting's picture

The deals weren't shady. They were shitty, but not shady. The people who bought into these risk knew what they were doing and got paid for it. None of this paper went to widows and orphans. It was junk bond funds and banks.

You're right. I don't know how airlines work. They never have worked. I couldn't figure it out. Shall I list the names of the dead or BK airlines that could also not figure it out?

Wed, 12/07/2011 - 21:08 | 1956869 hannah
hannah's picture

'The people who bought into these risk knew what they were doing and got paid for it.'

 

where in the fuc7 HAVE I HEARD THAT LINE BEFORE....LOL

Wed, 12/07/2011 - 16:47 | 1956062 Seize Mars
Seize Mars's picture

Shitty versus Shady, ha! Ok, fair enough at least you are honest and have enough of a sense of humor to be a little self deprecating. 

You are 100% correct about airline profitability being a mystery. The industry is a poster child for federal central planning. When you look at the city of Detroit, it's easy to see the connection between failed leftist command structures and poverty. When you look at the airline industry, it's not as easy to see because the humans are dispersed throughout the country. 

People got hurt in the attempted LBO of United, real people, decent people. So some connected fuckers got to play games with peoples' lives. i don't like it one bit.

I appreciate your response, you are a stand up guy. Maybe I won't be such a prick next time. 

Thu, 12/08/2011 - 00:20 | 1957233 Bruce Krasting
Bruce Krasting's picture

It's ok to be a prick. I'm thick skinned. I've been posting on ZH for nearly 3 years. I can take anything after that.

When I said we got a UCC on EVERYTHING including the kitchen sink it was because that was what the lenders insisted on. It wasn't my terms, it was theirs. So yes, some of the collateral was functionally worthless. But the lenders where aware of every item of collateral. This crap (spare tires etc.) is called rotables. I have no idea why. Tying up everything was not unusual at all.

The airlines were in and out of BK all the time. Any lender knew that was a probable outcome. That is why they insisted on all the collateral. In a BK if you are a lender AND you control the kitchen sink with a first priority UCC filed/perfected lien you are driving the bus. In asset based lending controlling the assets was the key to not getting killed when a BK happened. You ended up owning the planes, spare engines and yes all the other crap that an airline needs to open the door. That way you controlled the post petition process.

I would say that about half of the airline deals I did went into default or a BK. Very few of the lenders I worked with lost a penny. Some even made more money because of the BK. They got penalties and fees plus all of their lawyers bills paid for.

Hard asset lending is a blood sport. You always have to be prepared for trouble. But it can be very profitable. I was paying 5% front end fees for money. Serious dough.

Wed, 12/07/2011 - 23:07 | 1957115 Mercury
Mercury's picture

Volitile fuel costs, expensive, high maintainance equipment, union labor, heavy federal regulation and a market that will switch carriers for a $5 change in ticket price.  There's a reason why so many airlines in the world are nationalized.  We're almost there ourselves.

Wed, 12/07/2011 - 15:30 | 1955748 ConfederateH
ConfederateH's picture

If any non-banking corporation was TBTF, Boeing is it.  Just like Airbus.  They have simply never leveraged TBTF until now, likely they have received a slot near the top of the Fed fiat spigot chain and realize that old money should be forgotten. Those fresh new Fed fiat trillions coming down the pipe is where the real money is at.

Wed, 12/07/2011 - 15:36 | 1955764 blunderdog
blunderdog's picture

They have simply never leveraged TBTF until now

That's wrong.  Boeing's been bailed out by the Feds at least 4 times since the '80s.  They're a defense contractor--we pay taxes to keep them in business.

Wed, 12/07/2011 - 15:24 | 1955730 FranSix
FranSix's picture

The airline industry is very much like the banking sector when there are major frauds and collapses, except nobody goes to jail for criminal negligence for crashes.  Fraud? Pfft.

Wed, 12/07/2011 - 15:19 | 1955716 non_anon
Wed, 12/07/2011 - 15:19 | 1955713 Stuck on Zero
Stuck on Zero's picture

I don't see why an industry that treats its passengers like scum, cannot quote a ticket price twice with the same fare, fails to innovate, and insists on using an incredibly wasteful "hub system" keeps going bankrupt.  Beats me.

Wed, 12/07/2011 - 21:40 | 1956955 max2205
max2205's picture

No worries TSA will operate all airlines soon and the airport food courts

Wed, 12/07/2011 - 15:23 | 1955726 blunderdog
blunderdog's picture

Because gummit doesn't let them die.  In theory, all the bad airlines are supposed to fail and go out of business, and the remaining survivors will operate profitably.

We probably only need one airline in the US.  If fares are set appropriately, most of the population won't be able to afford to fly.

Wed, 12/07/2011 - 16:00 | 1955842 Thorny Xi
Thorny Xi's picture

Aeroflot, anyone?  Great model, that...

Wed, 12/07/2011 - 16:36 | 1955980 blunderdog
blunderdog's picture

Yeah, well. 

The fact that a business model can be conceived doesn't mean you can make it work.  Flying planes is expensive, subject to many types of supply/delivery disruptions, heavily dependent on consumer discretionary resources, and severely impacted by price-action in crucial commodities.

If you consider the fact that the US consumer is not necessarily *willing* to pay a fare that makes the business profitable, you see it's about the worst idea in the world.

Thu, 12/08/2011 - 02:01 | 1957472 Seer
Seer's picture

And as each day passes the "US consumer" is less and less ABLE to pay fares.

Economies of scale in reverse.

Think of it like the private automobile (POVs), POVs subsidize the trucking industry, in a similar fashion that junk mail subsidizes the first class postal mail.  Reduce econo-class paying fares and things start heating up for the 1st-classers; it's then only a matter of time before the 1st-classers start dwindling (businesses no longer can justify the expense).

Wed, 12/07/2011 - 15:17 | 1955710 Lets Hang Parliament
Lets Hang Parliament's picture

A wonderful quote even more relevant today...

 “A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers,
you’re in the airline business.”
Sir Adam Thomson, former boss of British Caledonian

Thu, 12/08/2011 - 00:23 | 1957243 Bruce Krasting
Bruce Krasting's picture

Tks for this. I will make note of this one and use it some time.

bk

Wed, 12/07/2011 - 15:13 | 1955698 blu
blu's picture

The airlines and the airframe manufacturers are deep into the end-game.

Neither will finish the decade alive.

Except as they convert to DoD strategic TBTF, which Boeing already is, but I'll guess there isn't going to be a lot of money for aircraft purchases either by 2014. So even if they survive, they'll shrink significantly.

And never mind what peak oil is going to do to civil aviation. The only safe bet there will be lighter-than-air craft coupled with solar panels.

Boeing will never go there. We'll be buying airships from Russia and Germany.

Wed, 12/07/2011 - 15:32 | 1955757 Citxmech
Citxmech's picture

In the next 10 years I predict we'll have one nationalized airline in the U.S.

Boeing has time for maybe one more generation of large civil transport aircraft before the market basically evaporates.

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