Separating the Commercial and Defense Businesses and Tough Oversight May Help Secure the Interests of the American People
By Stephen Bryen
The Web Magazine Seeking Alpha reports the following:
“Reuters reports Boeing has told the government it needs significant support to meet its liquidity needs, and is seeking billions in loan-guarantees and other assistance.
“The company thinks of this as more an industry bailout, noting 70% of its revenue typically flows through to suppliers.
“The stock at one point today had plunged all the way to $101, but managed to close down just 4.2% to $124.14“
Boeing is now asking the government to step in with $60 billion in “government aid” including loan guarantees.
What should the Trump administration do?
In France, because the aerospace industry is being devastated by the COVID-19 crisis, the Macron administration is considering nationalizing its aerospace companies, including its big star, Airbus. That’s because under current conditions it is nearly impossible to sell airplanes, manufacturing plants are closed, and airline traffic is nearly at a standstill.
Nationalization only happened in the United States for national security reasons. The most famous example of that is the case of Youngstown Sheet and Tube. In 1951 with the Korean War rapidly becoming a major emergency, there was a union strike in the steel mills. When attempts to get the workers to come back to the factories failed, President Truman ordered all of America’s steel mills nationalized. While the steel mills and unions obeyed the nationalization order, they all did so under protest. Youngstown Sheet and Tube went to court which wound up as a landmark case before the United States Supreme Court. Justice Hugo Black, speaking for the court. found that there was no statute that expressly conferred upon President Truman the power to seize the mills. The court vote was 6 to 3.
While the Truman administration lost the case, they made their point –the mills operated during the Korean War. However, it is fairly certain that the President does not have the power to nationalize Boeing or any other company.
But a bailout is another matter. We have had a number of them in this country. GM, GMAC and Chrysler were all bailed out by the government. The government ultimately lost $11.3 billion on GM and another $1.3 billion by Chrysler. But that is far from the whole story: there have been hundreds of bailouts, especially for financial institutions.
The government was not always the loser in these bailouts. Many of the recent loans were repaid in part or in full and in some cases the government made money. Bailouts of one kind or another go back as far as 1791, and overall have cost the government trillions of dollars.
There have also been cases where the government forced consolidations in certain industries for both economic and national security reasons.
The most famous example is the consolidation starting in 1993 of U.S. defense industries demanded and facilitated by the Pentagon, led by then-Secretary of Defense Les Aspin and his deputy Bill Perry.
The consolidation was, in fact subsidized by the government, but how it was done was different than a classical bailout or payout in the case of seeking consolidation. (There were about 20 prime contractors in defense in 1993; at the end of the consolidation only 6 “super sized” defense companies remained.)
The deal was underwritten by putting in place a new type of procurement for major defense systems, called cost-plus contracting. Under this modality, the price of goods and the profit are agreed up front. But the contractor, in figuring the price, is allowed to include all allowable costs –and for the purpose of the consolidation the cost of buying and integrating a smaller defense company required for the deal meant that those costs were allowed by the Pentagon. That made the 1993 consolidation a very expensive one for the taxpayer, and there was no recovery of any of the money.
The Defense Department claimed that the benefit for the United States would be that defense goods would ultimately be cheaper. That never happened: in fact while layers of corporate overhead may have been removed by the consolidation, prices for defense goods kept going up –and still are. While there are a host of reasons why this happened, the fact remains that the Pentagon promised something it never had any intention of delivering.
Boeing produces commercial aircraft and military aircraft, missiles, satellites and other important defense equipment. While most (but not all) of the current trouble Boeing is in relates to its commercial aircraft division, both segments are part of a single company. When Boeing’s commercial division was fat and happy a decade ago, there were many voices that Boeing should cut loose its military division and concentrate entirely on commercial planes. But many aircraft Boeing makes, including refueling tankers and maritime patrol aircraft (the P-8 based on the 737-800 commercial jet) are commercial planes adapted to military missions. In the end Boeing did some consolidation on the military side of its business and left it at that.
The President has a number of options should he decide to bail out Boeing.
Some argue that the current share and equity holders ought to surrender some part of their shares/debt claims if the government is going to plow $60 billion into the company. Others suggest the government should take some form of ownership position in the company in exchange for a big slug of taxpayer’s cash.
Overall the U.S. government –including even the Pentagon– can’t be happy with Boeing’s overall performance, notwithstanding the current COVID-19 crisis. Boeing’s shares were dropping like a rock well before the coronavirus mess. Its management was in disarray and had lost the confidence of its workers, its clients and the public. The 737 Max disaster still is unfolding and is not settled. Few people have any real confidence that all the problems of the Max have been isolated or addressed, and some airlines are stuck with airplanes they can’t use and which instills fear and dread in their customers.
The case for Boeing is its economic and military importance. As the famous song Love and Marriage put it, “you can’t have one without the other.” Or can you?
One option the government can consider is requiring that the military business be separated, stock listed separately, or completely privatized. One presumes that the military part of the company is still doing fairly well. Moreover, the U.S. Air Force is still accepting defective air refueling tankers from Boeing, even though they are full of FOD (foreign object debris material buried inside the air frames by sloppy workers) and a key component, the refueling boom, does not work properly. While not explained, it is likely that the Air Force desperately needs the tankers and also decided to throw a bone to Boeing and allow them to fix their mistakes as a gesture to the hard times the company is enduring.
The military side of Boeing could also be put up for sale. While the company depends on “green aircraft” from Boeing (being the only commercial aircraft company that has survived the brutal competition in the United States, a competition that saw the end of both Lockheed’s commercial jet business and the acquisition by Boeing of McDonnell Douglas), an independent military arm could buy airplanes from anywhere and on whatever terms the government deems acceptable. Separation would safeguard the national security interest of the American people.
On the commercial side, the U.S. government should demand oversight of Boeing’s operations, from management on down to factory floor workers. That oversight should be tough, unrelenting and demanding. Its members should be critics of the company, not go-along supporters and biased friends. $60 billion is a big ticket, and the taxpayer should not have to face more bailouts down the line, or shoddy workmanship, or bad management.