Monday, July 25, 2011

Another Slant On The AMR-Boeing-Airbus Deal

Holman Jenkins, Jr., wrote an informative column in this past weekend's edition of the Wall Street Journal.

There's considerably more behind AMR's mega-order than was reported by either CNBC or Bloomberg, at least when I was watching.

Specifically, Jenkins portrays the deal as not so much AMR making a bold bid to acquire new jets and lessen the average age of its fleet, than Boeing and Airbus to fend off coming competition from new entrants into their industry from Canada, Brazil, China and Japan.

I recall Boeing dismissing the re-engining of the 737 a year or so ago. Well, that's exactly what the 737s they are selling to AMR will be. According to Jenkins, Boeing's salespeople sold a jet which the board hasn't even approved for development as yet.

Then Jenkins explored the financing end of the deal, in which a large part of each vendor's order is seller-financed, essentially giving AMR leases rather than forcing them to further weaken their balance sheet.

So let's review what appears to have really occurred.

Boeing and Airbus want to foreclose competition from new entrants into the large commercial jet segment from vendors such as Embraer and Bombardier. So they rushed out retooled existing jets to sell,with lavish financing and pricing that, in Boeing's case, can't even yet be costed on the still non-existent 737 variant.

So Boeing and Airbus are taking the financial risks for the deal. And, as Jenkins notes, essentially stuffing the airline industry with several hundreds of new jets whose sale will soon reduce the value of other jets on order but not yet delivered. Thus, global consumption of new airliners is being pumped by existing plane manufacturers.

Someone has to fund these planes. And, like it or not, the flying public will be using/consuming more expensive, newer jets. And other airlines may now rush to replace more of their fleets, too, creating more demand.

One would like to believe this will all stimulate production in a healthy manner, leading to more or longer-lasting jobs, various national economic growth, etc.

But will it, when the massive deal is more aptly seen as two entrenched manufacturers underpricing their new wares and pushing such expensive equipment onto their customers, and the customers of those airlines?

Jenkins thinks it's a new bubble, and I'm inclined to agree with him.

What financing institutions are at the bottom of this new mess? Who's holding the paper on these questionably-needed new jets?

Will the federal government in the US, and the EU in Europe, soon be bailing out Boeing and Airbus for this deal? As well as the associated financing entities?

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