Who's Boeing's and Airbus's Biggest Customer? Would You Believe AIG?

Our local economy here in Wichita is heavily dependent on the aircraft industry. Spirit's main customer (80% of its business) is Boeing. Airbus has a team of fifty engineers downtown.

Guess my surprise when I read that their biggest customer is AIG. I learned this reading an article by Justin Baer, Francesco Guerrera and Julie MacIntosh in London's Financial Times. I had known that International Lease Finance Corporation (ILFC) was the largest customer for the two companies' commercial aircraft. When they went to the Federal Reserve to ask for a line of credit, I discovered ILFC is a subsidiary of AIG, the insurance giant whose punting in credit default swaps led to its rescue last fall by the Federal Reserve.

The Financial Times writers tell us, "ILFC has ordered 168 new aircraft worth $16.7bn from Boeing and Airbus.
"The aeroplanes are scheduled to be bought during the next 10 years, with 49 of them - worth about $3bn - set to be delivered this year."

Understand that many airlines have credit ratings that are too fragile to allow their borrowing funds to buy planes on their own and consequently they lease them. Given airlines' propensity to lose money, a lessor can be more likely to benefit from the tax shields of depreciation and interest payments than they are. The biggest player in this market is ILFC.

AIG is trying to sell ILFC, presumably to raise capital. No one will buy it without a secure form of short term finance. According to AIG's 10K, the bulk of ILFC's debt is long term. As of the end of 2008, however, $1.7 billion of its $50 billion in assets were financed with commercial paper. In 2008, ILFC had to raise $4.7 billion to pay off maturing debt and repayments.

J. Lynn Lunsford and Daniel Michaels report in the Wall Street Journal, "ILFC's fleet is valued at roughly $50 billion. The company had outstanding debt of $32.5 billion and listed shareholder equity at $7.63 billion at the end of last year."

A particularly scary prospect is if ILFC were forced to dump some of its 955 planes onto the market. We certainly do not need discounted used planes competing with Boeing's and Spirit's backlog.

The Financial Times article:

AIG aircraft unit seeks $5bn Fed credit line

By Justin Baer, Francesco Guerrera and Julie MacIntosh in,New York
Published: April 8 2009 03:00 | Last updated: April 8 2009 03:00

AIG's aircraft-leasing unit is in talks over a $5bn credit line from the Federal Reserve that could be used to facilitate its sale - an unusual move that would raise the stakes in the US government's bail-out of the stricken insurer.
People close to the situation said discussions between International Lease Finance Corp, AIG and the New York Fed were still ongoing and no decision on whether the facility would be provided, and how big it would be, had yet been taken.
ILFC, a profitable company and a top customer to both Boeing and Airbus, is in advanced talks with three private equity consortia but it needs extra liquidity because AIG's collapse has choked off many of its traditional sources of funds. A bitter downturn in demand for air travel has made the task of raising extra funding even more daunting.
People close to the situation said the credit line from the Fed would come from the billions of dollars worth of loans the monetary authorities have already extended to AIG.
But even if ILFC's credit facility comes from existing resources, the Fed's involvement in the sale of an AIG subsidiary could deepen criticism of the authorities' role in the insurer's rescue. The New York Fed declined to comment.
AIG, with the Fed's blessing, has pledged to support ILFC until its separation from the insurer. But the company's efforts to raise several billion dollars through a new credit facility have met with tepid demand from European banks and other traditional sources of aviation finance, people familiar with the matter said.
AIG said ILFC's fundraising efforts were "making normal progress given the tough market conditions", and declined to comment further.
ILFC is in advanced talks with several consortia of potential buyers that include Carlyle Group, Thomas H. Lee Partners and Greenbriar Equity Group. But without reassurances that ILFC's short-term financing needs could be met, it may be unlikely any of the bidders would be willing to take on such a capital-intensive business.
ILFC has ordered 168 new aircraft worth $16.7bn from Boeing and Airbus.
The aeroplanes are scheduled to be bought during the next 10 years, with 49 of them - worth about $3bn - set to be delivered this year.

Copyright The Financial Times Limited 2009

U.S. Exports Up, Current Account Down, And New Jobless Claims Fall!

Today brought some startlingly good news. Our trade deficit fell from over $36 billion a month in January to under $26 billion in February. "Initial claims for state jobless benefits decreased 20,000 to 654,000 in the week ended April 4."

To put that in perspective, we had been running a current account deficit equivalent to 5% of GDP going into the current financial storm. Indeed, our deficit, which was being financed by external borrowing from China among others, is a major contributor to the current financial crisis. Take the February deficit multiply it by twelve months in a year and divide it by fourth quarter GDP and it represents just 2.2% of GDP. Given the month to month fluctuation in exports and imports, it is far fetched to project one month's performance, but we have seen a steady improvement in the trade deficit.

The improvement in February came in part from increased exports. Is this a straw in the wind that the world inventory correction has run its course? Or is this a random monthly fluctuation?

Housing Bubbles & Depressions

Vernon Smith and Steven Gjerstad (Smith a professor at Chapman University and the latter visiting) analyze U.S. housing bubbles and what they wrought in a Wall Street Journal opinion piece. Economist Smith won his Nobel prize for work in behavioral economics. When he started out, economists were able to reproduce bubbles in laboratories. Bubbles seemed so transparent that the economists thought they would never occur in "the real world."

So much for economists being Pollyannas!

Airbus Is Ramping Down Production in Response to Lower Orders

Daniel Michaels reported in yesterday's Wall Street Journal,

"Airbus said Friday that it booked orders for just 16 planes in March, compared with 54 orders in March 2008 and 37 orders the previous year. The company has said it may capture only between 300 and 400 new orders this year, down from 777 orders minus cancellations last year."


How does one lower production in an outsourced world? The care and feeding of supply chains gets tricky. France created the Aerofund to help suppliers deal with the strong Euro and expand. It is now diverting funds from it to stay afloat in the crisis. Airbus's production chief, Tom Williams, told the Journal, "With a limited investment, we'll buy strategic components with very long lead times and carry them ourselves. It gives us more flexibility."

Here in Wichita, we have Sirit and its suppliers to worry about.

Did the Fed Cause the Housing Bubble?

On Marrch, 26th, the Wall street Journal published an interesting symposium:

Did the Fed Cause the Housing Bubble?

My short answer? Yes!

The Employment Report: Have We Hit Bottom?

Measured by the survey of U.S. establishments, jobs fell by approximately two thirds of a million in March (661,000) and the unemployment rate rose to 8.5 percent.

The financial services sector has lost a half million jobs since December, 2006.

And for the Wichita economy,what about the aircraft industry?

The Bureau of Labor Statistics publishes data on employment in transportation equipment other than motor vehicles which is predominantly the aircraft industry. In our sector, jobs fell by 8,400 in March with a total decline of over 75,000 since September.

And the future?

Two weeks ago I said my hunch was we were at the bottom. The employment report is grim, nevertheless, I am now convinced that we are at the recession trough. The vast worldwide inventory correction should have run its course. Many of the indicators (housing starts, factory orders, home sales) have hit bottom and have turned up, if only for a month. The stock market, the earliest of leading indicators is rallying. Unfortunately employment will lag well beyond the cyclical bottom.

An ode to Work?

March 22 2009: Lucy Kellaway writes in the Financial Times, "Last week the Guardian newspaper published a list of the 1,000 best pop songs ever written. There were songs about love, sex, heartbreak, protest, life and death. Yet on the subject of work there was almost nothing: Dolly Parton’s “9 to 5” got a mention, but that was about it."

If folk music was primarily work songs, modern pop music is anything but about work. How so?

A Trillion Here, A Trillion There, and After a While You are Talking Real Money!

A J. Paulson tells me:

"And I can remember when John Kennedy held the budget to $98 billion because
he was unwilling to be the first President to go over the $100 billion limit."

You know what? I can too!

Home loans in the US: the biggest racket since Al Capone?

Willem Buiter, in his Maverecon blog on the FT, has some rather nasty things to save about our fetish of protecting homeowners from foreclosures. Hmmm.

In "Home loans in the US: the biggest racket since Al Capone?" he asks: "What are the costs of foreclosure? Who bears them? Are the private costs smaller than the social costs?"

Professor Buiter is Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.