Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing: ExIm needed so we can do R&D, not finance planes; how about dropping stock buybacks instead?
The Puget Sound Business Journal reports that a Boeing exec says the US Export-Import Bank is necessary to help finance Boeing aircraft so free cash flow can go toward R&D rather than financing customer orders.
Hmm. We think all the billions of dollars going to stock buybacks to pump “shareholder value” (aka the McDonnell Family and Harry Stonecipher) might be better spent on R&D.
Sarcasm aside, we agree with Boeing that the ExIm is needed. Republicans (who claim to be for business) continue to target ExIm funding as corporate welfare. True, ExIm is often characterized as “Boeing’s bank” since most funds support Boeing airplanes. But as we have opined several times before, the European Credit Agencies fund Airbus and if the ExIm is shut down, then Airbus gains a major advantage.
There is unfortunately no limit to greed. Boeing will be the next Fannie Mae and Freddie Mac
Two wrongs make a right? The banks really are corporate welfare at the expense of tax payers.
Are they? they don’t turn a loss I believe; am I wrong?
The problem is that commercial banks don’t want to engage in the long term commitment required to finance industrial production plus the gov’t may want to offer special deals to some customers. Thus is created the mutually beneficial ExIm.
mutually beneficial is good for everyone.
“special deals” is market corruption, subsidies and corporate welfare. And US carriers don’t benefit, only foreign ones so it isn’t beneficial to them. It isn’t even beneficial to the tax payer because of opportunity costs.
As for operating at a loss/profit, that isn’t how things work. This is an investment model where capital is deployed (the loans) and gets a return. But crucially you have to look at the risks. For example it is really easy to get big profits for a few years that look good, and then have some losses. Larger risks should give larger returns with larger volatility. You have to take it all together – ie risk adjusted returns.
If this was truly profitable after taking into risks, then financial markets would be quite happy to provide it. On the other hand if they charge below risk related interest then it is yet another subsidy.
1) Special deals are a result of the fact that national interest is not the same as commercial interest.
2) if the ExIm bank returns more money than it costs, including inflation and such – it pays for itself and doesn’t cost tax-payer money.
3) The financial markets have many options to spend their money on (though not as much as they used to have, read http://www.richardaboulafia.com/shownote.asp?id=381) – with faster ROI’s and better margins.
Basically, the ExIm bank is there bacause not all considerations in finance should be commercial. What’s the value of local employment to a global bank, what’s the value of a friendly nation to a hedge fund? The government does value these and thus comes to a different risk/reward analysis.
Boeing is just maximising shareholder value. I thought that was a good thing? 🙂
Would it be repayable R&D funding?
No keesje, it is not ‘repayable’. The ExIm bank loans money to international airline customers to buy airplanes from Boeing and other US products from other US companies, just as the ECA does in the EU for Airbus.
Boeing then uses the profits from those sales to fund R&D and other things within the company.
Boeing is not getting a loan from the ExIm Bank, the customer is. So Boeing is not responsible for repayment of the loan.
This is no different than you buying a new car and financing the total cost of your new car. You then make periodic payments until the car loan, interest, taxes, and any other fees the loan covered is paid off. Only then is the car legally yours. The company who built your car is not getting a loan, you the customer are. The company gets fully paid immediately and can use the profits from that sale as they see fit.
You are not really correct and using a wrong analogy.
If the ExIm bank ceases to fund sales then Boeing will have to do it itself. The consequences will be a) a reduced cash flow (the customer is not paying al at once), impacted cash available for R&D (minor as the major part of the cash is for operation and activities such as shareholders dividend or shares buyback) and b) taking the financial risks of lending money to somewhat dodgy buyers (Lion air and the likes…)
Scott Hamilton makes an excellent point.
Stock repurchases total more than $20B since the merger. If investments in the 787 had worked as well as for previous models, Boeing would be coming down the learning curve, hundreds of airplanes would already have been delivered on time, and profits from the 787 program would be flowing to shareholders. We would have blunted the A350 and gained market share, not to mention positioning the commercial product line for future models.
Executives made a choice to repurchase shares – a short term action with long-term consequences.
What you say here sounds mostly correct, but as Scott points out, Airbus also gets help from the ECA (see Airasia) on top of the “reimbursable loan.”
So, if this financial service was not longer available to Boeing, well, Airbus will still get financing help from the ECA, so in fact, a disadvantage to B.
Why is the US governement not providing RLI to Boeing? This would be a lower risk for US tax payers and a better help to Boeing?
Since the Boeing company is a publicly traded company (corporation), I bet there will be plenty of lawmakers in congress that would oppose this idea to death.
“We think all the billions of dollars going to stock buybacks to pump “shareholder value” (aka the McDonnell Family and Harry Stonecipher) might be better spent on R&D.”
Actually, Scott, that is a simplistic view of all the considerations that the BOD have to make concerning the earnings of the corporation not to mention your obvious problem with the McDonnell Family and Harry Stonecipher. While I personally am not a big fan of stock buybacks, in the case of Boeing, it has been a big help to ALL employees since the company contributions to the retirement funds until recently have been in the form of Boeing stock. In addition those participating in the 401K savings program selecting company stock have benefited also. All the stock holders of the company have benefited not just those you choose to vilify.
In looking at the annual reports from the last decade there doesn’t seem to be a shortage of R&D funds nor was lack of R&D a cause of the 787 problems. You may question the timing of development for new aircraft but I haven’t heard that a shortage of money (R&D) was the reason for any delay. In fact cash flow has been able to cover most needs. I do agree with you that the ExIm needs to continue as long as the EU does the same for Airbus.
Admittedly we had not thought of the nexus between stock buybacks and the pension, so good point there.
As for shorting R&D, check out Richard Aboulafia’s commentaries over the years on this score.
There is some misunderstanding on European way of “financing” aircraft
There are 3 parties on the play … one is Aibus, another is any kind of bank at the customer choice… the “Help” comes from the european governments in the form of an insurance for the bank to receive the money the cost of this insurance depends only on the credit rating of the customer and the political stability of the country he is registered in … any way Aibus receive the paiement on delivery time.
I guess Boeing works in a similar manner … by the way if Delta believes that the system gives its foreign competitors an unacceptable advantages, I do suggest this company must buy Airbus aircraft with the help of Europe so they will get the same advantages !!!
So, give us your explanation of Boeing’s brilliant outsourcing of the 787 R&D?
It wasn’t to cut Boeing’s R&D investment for the 787 program?
How did that program work out for Boeing?
Well we all know all 787 problems can be traced back to outsourced R&D and production. Local American workers designed/ build the good parts and saved the rest. Irony off..
In my opinion government funding of commercial aircraft purchases (or government guarantee of such funding) only makes sense when the buyer itself is a government entity, such as a national company (Air India …) whereby the lender’s risk becomes a sovereign risk. Usually, non-government financial institutions are of course extremely reluctant to take this kind of risks.
Scott’s assertion that a one-sided ban on the US Export-Import Bank involvement in commercial aircraft finance would help Airbus is true only as far as such sovereign deals are concerned since, in strictly commercial deals, extremely competitive alternatives exist.
No change in export finance practices should therefore be implemented one-sidedly. If the US proposed new restrictive international rules, the initiative might find strong support. This would be the proper approach, though unfortunately political platforms usually prefer simpler wordings.