VideoIn the annals of great rivalries, the long-running feud between the world's two dominant aircraft manufacturers, Boeing and Airbus, is the Ali vs Frazier of the corporate world. As 2003 comes to a close, Airbus is basking in the publicity that comes with surpassing Boeing in annual commercial aircraft sales for the first time in its 33-year history. Though garnering somewhat less attention, Airbus is also cock-a-hoop about another victory—the European manufacturer's consistently conservative approach to financing has been vindicated, as Boeing Capital Corporation (BCC), the once expansionist Boeing lending arm, has had its wings clipped.
At Toulouse, France-based Airbus, where the vendor financing portfolio had been reduced from a peak of nearly $6 billion (€5 billion) in the late 1990s to a relatively modest $3.6 billion, Benoit Debains, senior vice president of finance, contends that Boeing's strategy to expand BCC rapidly was doomed from the start. "The timing of their strategy is completely wrong," he says. "They grow their portfolio when the financial market is open, therefore competing with their own banks and leasing customers. And they have entered the current credit crunch fully loaded."
Faced with mounting losses, Boeing conceded defeat in November, announcing that it was reversing strategy for its financing unit. On the heels of the news, BCC president James Palmer, 54, took early retirement, being replaced by Walt Skowronski, Boeing's treasurer—the fourth person to hold that job in as many years. Heralding a "new era" for BCC in a press release, Boeing's then CFO, Michael Sears, confirmed that BCC's status was being downgraded. Whereas BCC presidents used to report directly to Boeing CEO Philip Condit, now they would report to the CFO. (Underlining what a miserable year it has been for Boeing, Michael Sears was fired by Condit in late November for, among other things, allegedly acquiring confidential information about an Airbus bid for a Pentagon contract. Soon after that, the CEO himself was forced to carry the can for the escalating Pentagon contract scandal. Boeing's board forced Condit aside and brought back former president and COO Harry Stonecipher as CEO.)
More importantly for BCC, its activities in the future will be limited to helping customers find financing and lending only if necessary via Boeing business units. The days of aggressive growth for BCC are over.
So what went wrong? Boeing's financial report for the first nine months of 2003 stated the problem clearly: BCC's $12.5 billion lending portfolio was concentrated among a small number of troubled commercial airline customers. Indeed, $4.7 billion was accounted for by just five—and two of those are in bankruptcy protection.
For Boeing, with 2002 revenues of $54 billion, the unit had become a headache. BCC recorded a net loss of $17 million in the six months ending with June 30th 2003, compared with profits of $49 million in 2002 and $152 million in 2001, according to the ratings agency Moody's. As far as Boeing is concerned, BCC had become a diversion of management time and attention.
Brutal Lessons
The trouble at BCC highlights the starkly different approaches to sales financing at Boeing and Airbus. While both companies have always considered financing for their customers to be a key component of their business, Airbus viewed its financing role as "lender of last resort," not the profit center Boeing wanted BCC to aim to be.
"Airbus and Boeing have pursued radically different financing strategies," explains Sash Tusa, European aerospace and defence analyst at Goldman Sachs. "One of the major issues is that the European aerospace and defense industry in general, and the Airbus partners in particular, were stung badly by the civil aviation downturn in the early 1990s and learned some brutal lessons on financing."
The largest operating unit of the publicly listed European Aeronautic Defence & Space Company (EADS), the group competes with Boeing for defence and space contracts too, and is controlled by a European consortium that includes Aerospatiale Matra of France, CASA of Spain, DASA of Germany, and BAe Systems of the United Kingdom. In 1992, BAe took a $1 billion (€1.4 billion) charge against bad vendor financing. "BAe Systems vendor-financed all of its output at the time ... they were just kidding themselves that they were selling aircraft," Tusa says.
Bad experiences such as BAe's helped galvanise both Airbus and its constituent partners to set up complementary financing units (now merged)—in Dublin, because of its favourable tax laws. Throughout the 1990s, Debains recounts, these companies sought ways to offload the financial exposure they acquired to win deals, especially the burgeoning U.S. business financed by "tax lease" financing, which used third-party companies, for example Disney, to lease aircraft to airlines to exploit a tax loophole.
These deals could be of brain-scrambling complexity. Debains talks about one of the early deals, a tax-lease financing for 20 A300-600 planes for American Airlines, a component of which was a "triple-dip" structure exploiting tax laws in the United States, Ireland, and Japan.
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