21 March 2011

Diamond lining up for handouts

Diamond Aircraft, with a large plant located in London Ontario, is lining up for money from the federal and provincial goverments and has indicated that the company's future will be very uncertain without the bailout loans. The Financial Post described the company as "in rough shape".

It seems that piston sales have been pretty slow though the ongoing recession and the company has been unable to move its D-Jet single engined jet development project forward, due to lack of investment money, despite a firm 230 orders for the $1.89M per copy aircraft.

To get the D-Jet into production the company has located $20M in private investment, plus a committment of an additional $35M from the Government of Ontario. The Ontario government investment is contingent on Diamond also getting an additional $35M from the federal government. A decision by Industry Canada on that was still pending in late March, due to the government conducting "due diligence on the loan".

If both the federal and provincial loans are provided then, combined with funds already provided, the total provincial and federal government investment would be $100M.

Diamond Presdent and CEO, Peter Mauer indicated "If we don’t get the funding from the federal government, it puts us in a difficult situation. If the D-JET, for example, in a worse case scenario, were not to continue it would have a negative impact on the rest of the company’s operations. [The company debts are] at a level that would be very difficult to satisfy out of piston sales,” he said. “I’ll let you do the extrapolation."

Further reading:

* Financial Post - Planemaker Diamond in rough shape
* AvWeb - Diamond's Future Contingent On Loan?


Michael Shaw said...

I guess aviation is not the place to invest. I wonder why Government would consider such investments, even as a loan. As much as we all want Diamond to succeed I'm not sure sure we want our governments on the hook.


david said...

I agree with Michael. It shouldn't be the government's place to invest in this kind of thing. If the government wants to be seen as a fair referee, it can't be a player, too.

Adam Hunt said...

That is very true, the federal government especially could become both an aircraft manufacturer and the agency that regulates aircraft manufacturers. There seems to be one government lately that seems to be keen on buying up aircraft companies, though....

Anonymous said...

Governments can and do make investments without somehow being unfair referees. I didn't take David's comment to mean Transport Canada both regulates manufacturing of aircraft and is a manufacture too. But it is not unusual to see government investing in private sector businesses that it also regulates. Recently both US and Canadian governments invested in GM, but I don't think this somehow allowed GM to avoid regulation of automobile safety standards in either country.


Adam Hunt said...

Obviously it has been done, but you have to wonder if TC would be inclined to impose an AD on newly built aircraft that was warrented but might cost the company enough money that they would have to go back to the government for another "investment" or face bankruptcy.

david said...

Actually, Mike, the GM boondoggle is exactly the kind of thing I'm talking about -- as Adam suggested with Diamond, do you think the government would have been enthusiastic to pass any law that hurt GM while it was waiting for its money?

In the past, many national governments owned their flag carriers (like Air Canada and British Airways), and passed laws that blatantly helped their airlines and hurt everyone else's.

I do prefer ublic services like police, healthcare, and highways, to be run by the government. I don't think that the government has any business owning gas stations, airlines, car makers, or aircraft manufacturers, however.

Michael Shaw said...

There is a long list of government owned businesses around the world. And sure they favour their own companies in business relationships. That is often one point behind government ownership?

Governments also favour businesses owned by their own citizens over those owned by foreigners. Yes even that bastion of free enterprise, the USA does that. (e.g., the Cirrus sale review by US Gov.) But do they really lower safety standards in those instances?

Did Canada, the UK and France...actually lower safety regulations for their publicly owned airlines? Did Transport Canada have a lower standard of safety for the airports it owned vs the ones it did not own? Did pilots flying for Air Canada fly by a less safe set of regulations than those flying for Canadain or Wardair? I think not.

Clearly Governments favour their own businesses whether public or privately owned, but there is less evidence, if any at all, that public companies face lower safety standards and regulations than locally owned private enterprises at least in the developed World.

Why do governments own businesses? The arguments are often based on foreign ownership concerns such as sovereignty, public good arguments and in new flegling industries. There is little proof in western democracies that governments lower safety rules, or have a higher set for private vs public companies, or local vs foreign companies.

David I am surprised you mentioned highways as legitimate public goods. I'm not sure what criteria you used to list those industries that are OK in the public domain and those that aren't? Clearly highways and hospitals can be delivered by private interests (hyw 407 and the Shouldice Clinic). They don't meet the usual standard of a public good, that we all need and want it, but anyone can consume it without being identified, such as defense, and to some extent policing.

I am not disagreeing with your basic premise David, I am really saying that at least in Canada and the UK there was no lessening of safety for public enterprise. That seemed to be Adam's interpretation of your concern about "fair refereeing." I took your statement to mean that you were equally concerned about the economic issues of private vs pubic ownership of companies. Maybe I listen to too much Fox news?

david said...

"I took your statement to mean that you were equally concerned about the economic issues of private vs pubic ownership of companies."

That is correct, Mike, though I still doubt that it's a good idea to put government in a conflict of interest for safety regulation unnecessarily. It's important to preserve not only fairness, but also the appearance of fairness.

BTW, I would never be foolish enough to call the US a "bastion of free enterprise" -- the US government is not only generally anti-free-trade, but it subsidizes private companies (including aerospace) at a level that would put France or Germany to shame, calling it "defense spending" (even though much of it has little to do with defense).

Adam Hunt said...

Aside from the issue of the govt being an airplane builder and the regulator at the same time, there is also the issue of picking winners. We know the govt gives a lot of money to Bombardier and now maybe Diamond, but what about other Canadian airplane builders, like Found Aircraft? How can they compete with companies that get cheap or interest-free loans when they can't get any free market investment?

Then there is the related issue that GATT has pronounced these sorts of things are illegal subsidies in the past and prevent fair international competition. GATT rulings have gone against Boeing and Airbus and also Bombardier and Embraer for exactly these sorts of "loans".

Adam Hunt said...

Diamond has just announced that they have laid off 213 London-based employees, mostly working on the D-Jet program.

The CEO, Peter Mauer said "We are hopeful that the government will give this matter urgent attention and provide the requested assistance".

Diamond Cuts Staff Pending D-Jet Funding, by Mary Grady

Call me cynical, but I am wondering if this move is connected to the election in progress and the concept that no one says "no" during an election campaign?

Adam Hunt said...

Now it is coming down to threats!

Diamond May Lose Key Workers, by Russ Niles

Adam Hunt said...

More on this story. Diamond CEO Peter Maurer wrote an article for the London Free Press last week indicating that government support is critical for his company or it will probably not survive.

*Diamond Appeals For Loan Support by Russ Niles

*Diamond isn’t just about jobs
by Peter Maurer, Diamond Aircraft president (21 KB PDF)

david said...

If it can't survive off government life support, then the kindest thing might be to pull the plug right now.

Adam Hunt said...

Reading Maurer's article seems to leave everyone with that same feeling.

Adam Hunt said...

Wow! The newly elected Conservative government has made their decision on this issue and turned Diamond down!

From AvWeb:

Industry Minister Tony Clement told the Free Press that the government had already invested $20 million in the company through a research and development fund, and felt to add another $35 million for operating expenses was not in the taxpayer interest. "We are stewards of taxpayers dollars and we have risked, quite rightly, $20 million in taxpayer dollars to date, and it is not judicious to up that by another $35 million," Clement told the Free Press. "We hope the company Diamond continues to be part of the scene in London. We do not wish for its demise."

Adam Hunt said...

More from the London Free Press

"Joseph D'Cruz of the University of Toronto's Rotman School of Management said the federal government was right not to give Diamond the loan - money the company says is needed to secure other Ontario government and private financing...Could this jet go ahead without government assistance? The answer is a definite 'no,' because it's not viable without the federal government."

Adam Hunt said...

It is interesting to read the readers reaction comments published in this Monday's AvWeb in response to the lack of federal help for Diamond. The comments run from government help is essential to "No, no, no. General Motors should not have gotten a bail-out, either — nor should taxpayers' money be used for sports stadiums. If you can't survive in aviation manufacturing, maybe you need to be in another business."

Adam Hunt said...

Diamond president Peter Maurer is now saying that he considered the government funding a "long shot" and that he is working on funding with other organizations, including potentially Chinese sources.

This really sounds very different than the things he was saying during the election campaign.

D-Jet Financing Alternatives Explored by Russ Niles

Adam Hunt said...

Looks like the whole request for govt handouts or else we will close the plant was a ruse:

Diamond Secures D-JET Financing By Russ Niles,