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Topic: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: WGW2707
Posted 2005-05-24 01:36:35 and read 2934 times.

With the recent announcement of Airbus financing for America West's takeover of US Airways, and a rumor of Airbus financing for United's emergence from Chapter 11, as well as continued bailouts of airlines by GECAS, a subsidiary of General Electric, a maker of jet engines, one has to wonder, is all of this vendor financing really a good idea?

The problem here is that these funding deals, while undeniably bailing out large customers and potentially opening the door to decades of profitable business, in the short run do involve a lot of risk. I would be suprised if the near-term orders resulting from these financing packages completely cover the cost of the financing, and the risk of default with many of these airlines seems rather high. If US Airways and America West do collapse in their merged state, for example, General Electric and Airbus would certainly feel the pain.

In the 1990s US telecommunications boom, Lucent and other equipment vendors provided massive amounts of vendor financing to a new breed of telephone company, a competitive local exchange carrier (or CLEC), only to see the majority of this debt go bad when the CLEC industry collapsed in 2000 and 2001. Much of the vendor financing was offered so that the equipment manufacturer could add additional revenue and achieve quarterly earnings targets. This short-run strategy nearly put Lucent out of business, and badly maimed several of Lucent's competitors. Few companies stayed out of vendor financing, but in the words of Cisco System's CEO John Chambers "Just as you wouldn't buy a router from your bank, it's probably not a good idea to buy money from your equipment supplier."

While obviously in the post-Enron world, such aggressive efforts to make the numbers are less common, there does seem to be a striking parallel between the two events. You have to wonder, is the continued financing of distressed airlines by aircraft and engine manufacturers really a good idea?

I'd be interested in seeing your thoughts on this.

-WGW2707

Topic: RE: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: Lockheed1011
Posted 2005-05-24 03:10:02 and read 2904 times.

I think it is.

It is a win, win situation for all the parties involved(US/HP/Airbus). Besides, Boeing should let this happen and say nothing about it, so they can do the same. If we compare the number of planes that Airbus can sell to the New US compare to what Boeing can sell to DL, AA, NW, CO doing the same strategy. Airbus will sell peanuts next to Boeing. Even though that is the current situation.
Boeing will do better no matter what the outcome is with US/HP.
Good luck to Airbus!  Smile

Topic: RE: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: PlaneSmart
Posted 2005-05-24 04:26:04 and read 2881 times.

Happens all the time. Do you not think banks made funding conditional too? And other suppliers?

There are conditions and trigger events that will allow one or both parties to escape.

To an airline, an aircraft is like a truck, or a taxi, or a road roller, or a tree chipper, or a ship is to other business types. If operated & maintained properly they make money, wear out and are replaced.

Boeing's policy in the 70's and 80's requiring a 747 customer to order another model was probably more onerous.

Topic: RE: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: Mariner
Posted 2005-05-24 05:45:34 and read 2857 times.

Is any of this "vendor financing"?

What Boeing Capital did with Midwest (717's) and Airbus Finance did with Frontier (A318's) is vendor financing, but is that what is happening here?

In the cited instance, (a) $250 million isn't going to buy many aircraft and (b) Airbus has to meet certain stringent performance guaranteees for the order to go through.

And, in any case, if you believe some, US/HP could be a dead company before the aircraft are even built, let alone delivered, so the loan would be dead money for Airbus.

i think if any company, airline or otherwise, can persuade people with money that it is worth investing in the airline/company, on whatever terms that are mutually agreeable, then that is the free market at work.

It can be argued that Chapter 11 does much more damage to the free flow of business.

US Airways - with whatever help - got financing. I may not like it, you may not like it, but no law was broken. On the contrary, it seems to me that capitalism flourished.

Now, if the potential survival of (new) US Airways causes problems for other airlines, especially those heavily invested on the East Coast - that becomes the problem of those other airlines.

What would you do - regulate that an ailing company cannot look for medicinal money?

cheers

mariner

Topic: RE: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: Commavia
Posted 2005-05-24 06:21:44 and read 2849 times.

Quoting WGW2707 (Thread starter):
With the recent announcement of Airbus financing for America West's takeover of US Airways, and a rumor of Airbus financing for United's emergence from Chapter 11, as well as continued bailouts of airlines by GECAS, a subsidiary of General Electric, a maker of jet engines, one has to wonder, is all of this vendor financing really a good idea?

Sorry it's long -- a lot to say!

In general, I think it is a win-win for both parties, and is beneficial in the micro sense. In the macro sense, however, these vending agreements -- particularly with GECAS -- are harming the industry as a whole. In the case of US:

GECAS stands to lose potentially billions in lost lease agreements and residual aircraft value when their airplanes currently leased to US hit the open market. Thus, GECAS made the decision that their potential risk and exposure from having US teetering on the brink of liquidation (where its been for about the last 2-3 years) is not worth it, and it's better to prop up US than take a chance (a very good one, at that) that US will collapse and leave GECAS holding the bag on dozens of planes nobody wants or can afford at the moment. Thus, in the micro sense, GECAS gets a continual stream of lease payments and security for its aircraft value exposure for a relatively small investment of a few hundred, a small price to pay relative to a US collapse, and US on the other hand gets cash with which to live another day. Win-win.

In the macro sense, however, this is becoming increasingly harmful to the industry as a whole. GECAS is artificially increasing the amount of available capital financing in the open market, through agreements like this with US and to a lesser extent UA (with which GECAS also faces enormous financial risk and exposure). Thus, by GECAS creating value that wasn't previously there and propping up airlines (read: US) that would probably have already died by now, they are prolonging the inevitable and ultimately keeping capacity in the marketplace that doesn't need to be there. As sad as it is to say it, and as much as I wish nothing but the opposite, a US collapse could have nothing but an enormous positive impact on the industry as a whole as it would overnight remove approximately 8% of domestic capacity. Loads, yields and revenue would go up on every other flight, on every other airline, instantly. GECAS is preventing this by propping up US artificially.

Airbus, on the other hand -- at least in my mind -- is a totally different example from GECAS. GECAS has a true and genuine, existing financial stake in US and stands to lose potentially billions in a US collapse. Airbus, on the other hand, really doesn't stand to lose too much, at least relative to GECAS, in a US collapse. Their $250M "loan" is really nothing like the GECAS financing, as GECAS is protecting its already very risky investment. Airbus, on the other hand, sees an opportunity to stave off death for an already dying airline, and in the process secure orders for an airplane that thus far has flopped on the international market. By offering essentially what amounts to a bribe (there, I said it, please feel free to yell at me all you want!) they guarantee orders for a new airplane project. I don't equate Airbus and GECAS motivations in the US deal at all.

Topic: RE: HP+US Merger Etc.-is Vendor Financing A Good Idea?
Username: Mariner
Posted 2005-05-24 06:54:27 and read 2841 times.

Quoting Commavia (Reply 4):
By offering essentially what amounts to a bribe (there, I said it, please feel free to yell at me all you want!)

But - you've said it before. I have little doubt you will say it again.

So why should anyone yell at you? It wouldn't make any difference.  Smile

cheers

mariner


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