Thursday, November 05, 2009

The Good the Bad and the Ugly: The Weak Dollar, CIT's Bankrupcy, Aircraft Leasing

1) The economic recovery: Real GDP grew at a 3.5 percent seasonally adjusted annual rate in the third quarter after falling five of the previous six quarters. Jeff Bator in the Wall Street Journal writes, "[A]fter a bullish report on manufacturing suggested the smokestack sector is in a hiring mood., ...U.S. factory goods orders rose in September...0.9%, the Commerce Department said Tuesday, the fifth increase in six months. Orders fell an unrevised 0.8% in August."
World trade bottomed out in April and our national economy's recovery started in June according to my best estimate.

2) The main opportunities and threats to recovery here in Wichita: the weak dollar is helping make American aircraft more competitive vis-à-vis Airbus and Embraer.  In the Wall Street Journal, Mike Spector Vanessa O'Connell and Kate Haywood reported that CIT filed for bankruptcy "in New York, listing assets about $71 billion and nearly $65 billion in liabilities." CIT's bankruptcy shows the fragile financial shape of the aircraft leasing business.  CIT Aerospace is a major aircraft lessor with aircraft worth something in the vicinity of $10 billion.

Seven aircraft leasing companies (GE Capital Aviation Services, AIG's International Lease Finance Corporation, CIT Aerospace, Royal Bank of Scotland Group PLC's RBS Aviation Capital, Bank of China's BOC Aviation, Pacific LifeCorp Inc.'s Aviation Capital Group, and Pembroke Group, a unit of Britain's Standard Chartered PLC) are big customers of the aircraft manufacturers.   Last fall, we were shocked to discover that AIG was Boeing's and Airbus' biggest customer. Daniel Michaels at the Wall Street Journal estimates that approximately 35% of the world's jetliners are owned by these lessors.  Thus these lessors' own $147 billion of the world's $417 billion worth of jets. The larger lessors are all in shaky financial shape.  This means the biggest set of customers for Airbus and Boeing (Spirit's customers) face severe financial constraints to their buying planes.