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.