Philip Greenspun’s Weblog

When the economy gets a cold the aviation industry gets pneumonia.  Here are a couple of news stories…

Cirrus is slowing down production until January 2009, furloughing many production workers (story).  This follows layoffs of 205 people earlier this year.  After Cessna, Cirrus should be the strongest piston airplane manufacturer.  They make the world’s best selling piston-engine airplane, the SR22.  Following their acquisition in 2001 by First Islamic Investment Bank they’ve had ample access to capital from the Arab Gulf states.

Eclipse is demonstrating the worst that can happen when you buy an aircraft from a new company.  They have filed for Chapter 11 reorganization, but only plan to operate in Chapter 11 for a couple of months until all of their assets can be sold to an affiliated European/Russian company.  People who paid $1.5 million for jets that never quite worked now have no warranty.  If they want to get the planes certified for flight into known icing, they’ll have to pay for the work themselves.  Folks who put down deposits of $100,000 and more have lost everything.  (full story)  What about investors?  According to a February 18, 2008 article in the Albuquerque Journal, the company had raised more than $1 billion in capital.  The stockholders presumably have suffered a 100% loss.

2008 has not been kind to new airplane companies.  Adam Aircraft, founded in 1998, went bankrupt (Chapter 7 liquidation) in April.  They had a weird-looking piston twin featured in the movie Miami Vice and also a jet for which they had made a lot of claims.  (wikipedia)  Customers who were unfortunate enough to take delivery of the $1.25M piston twin are grounded due to lack of support (story).

I only hope that Icon Aircraft (WSJ story; company Web site requires somewhat destructive Flash upgrade) survives long enough that we can fly their little amphibian.

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Today we learned that the Federal Reserve is going to buy $800 billion of loans from banks (story).  Where is this money coming from?  The Fed is going to have to give banks $800 billion in cash in exchange for the right to collect whatever money gets paid over the years on car loans, student loans, and mortgages.  It sounds like taxpayer cash is going out the door right now, yet there was no corresponding story about Congress raising $800 billion in taxes.  There was no corresponding story about Congress authorizing $800 billion in spending.  We didn’t hear about the U.S. government selling $800 billion in new bonds.

So… where is this money coming from?  Are we printing it, borrowing it, taxing it, or “other”?

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I’ve been calling my programmer friends at work.  I call their desk number and get the company operator.  “We don’t have a Joe Foobar in the directory.”  Then I would try the guy at home.  “I was laid off in October,” is the typical response, “and nobody is hiring right now.”

By contrast, business is brisk at East Coast Aero Club.  Tech layoffs often give engineers the courage to pursue their long-suppressed dream of becoming a commercial pilot.  The 30 airplanes and helicopters in the ECAC fleet are up in the air more or less continuously, which puts pressure on the maintenance staff to keep up with 100-hour inspections and overhauls.  Just when I was convinced that there wasn’t a single new job being created in New England, Mark Holzwarth, the owner, emailed me:  “We are looking for a experienced general aviation A+P mechanic to help maintain the fleet.  Resumes should be sent to mark@ecas.com.”

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Citigroup took on a lot of risk earlier in this decade.  As with any high-risk strategy, one potential outcome is temporarily high returns.  That’s what happened with Citigroup and a large slate of managers congratulated themselves with salaries ranging from $5-50 million per year (data on 2005 executive compensation; article on current CEO’s $216 million in earnings over the last year).

Now the returns aren’t looking so good.  The executives have paid off mortgages on their Park Avenue townhouses and their Nantucket beach houses.  What about the average American taxpayer?  Under the government’s latest scheme, he or she is going to cough up $20 billion immediately and potentially be stuck with another $306 billion in losses on crummy loans and securities held by Citigroup (nytimes story).

It would be tough to come up with a better example of socializing loss after the management of Citigroup privatized and pocketed gains.

Perhaps it is time for a new approach.  Wall Street executives exposed taxpayers to more than one trillion dollars in losses in order to help themselves to salaries in the $20-100 million per year range.  It would have been a lot cheaper if we had a policy where the CEO of any sufficiently large investment bank was paid $100 million per year direct from the U.S. Treasury.  In return for this guaranteed payout, he or she would forgo any numbers-based compensation from the bank and therefore would have no incentives to take big risks whose consequences would ultimately fall on the taxpayers’ shoulders.

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I’ve noticed a huge increase in sleeping pill ads on nytimes.com and other general-interest Web sites.  The financial crisis is apparently keeping people awake all night.  Perhaps there is an investment opportunity here…

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Costco was packed today.  There is nothing like a good depression to boost sales at a wholesale store.  While enjoying my $1.50 hotdog and soda, I shared a table with a college girl.  “My student loan company went bankrupt,” she noted, “so I’m looking for other funding.”  What about a semester job?  “I’m working at a Dunkin Donuts near school,” she replied, “but business is slow.  We’ll probably have to close if things continue like this.”

Just a few months ago it would have been tough to imagine that the economy could slump enough to keep people away from their Boston Cream Donuts.  Perhaps finally Americans will slim down.

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A month ago the Dow was at 9500. I asked a friend who is in the money business “How much lower can it go?” He said “7500. People who need cash, for whatever reason, have no way to get it except by selling public equities.”

Yesterday the Dow sank to 7500, so I called my friend asking for his next prediction.

“6000. Still a liquidity crisis.”

The aggregate market capitalization of the S&P 500 was about $10 trillion in years past. Presumably it is falling towards $5 trillion. We may be getting to the point that the people from whom we’ve bought stuff lately, e.g., the Chinese, the Japanese, the oil-exporting countries, may be able to come over here and buy a 100 percent interest in the 500 largest U.S. companies. Why would they want them if the U.S. economy continues to suck wind? (And it probably will if you believe that my economic recovery plan is necessary and compare it to what politicians are actually doing.)  Most of those companies are multi-national and do a lot of business outside of the U.S.

Meantime, we can take heart that similar economic challenges were tackled back in 1945: important historical video.

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Here are a couple of photos from a recent Saturday flight over El Paso, Texas.  Note the empty parking lot in the conventional shopping mall and the full parking lot at Walmart.

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Folks:  I’ve drafted an economic recovery plan for the U.S. and would appreciate comments/corrections.

Thanks.

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I would appreciate comments and suggestions on a new Web site:  hanscomcharter.com.  I won’t say too much about this except that it is for people who want to charter private jets out of Hanscom Field in Bedford, Massachusetts.

[p.s.  Yes, I know that this is a pretty ill-time business venture.  We ordered the jets a year ago when the world looked very different.]

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