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Hawker Beechcraft today is filing for Chapter 11 bankruptcy protection. Given the sentimental attachment many of us have for these names, it's worth reflecting on what this means.
Fingers will be pointed. Management, the unions, and economic conditions will be assigned their share of the blame. In this case, many financial reporters are giving a special shout-out to the two private equity (PE) investment firms that bought Hawker in 2007, near the end of the last big buyout wave.
PE firms have been criticized in recent years for a practice of which Hawker seems to be an example. These firms traditionally make money by buying troubled companies and trying to turn them around. However, recently, some tried a new tactic to recoup their investment. In situations like that of Hawker, they start with a troubled company, which almost by definition has some debt. They acquire it using a leveraged buyout, in which they borrow most of the money to buy the company and then load those loans onto the company's books as further debt. Then, in a relatively new wrinkle, they cause that company to borrow still more money and pay it directly to its PE firm owners as dividends, rather than investing it in the business. In this way, they recover their investment quickly but saddle the company with an often crippling debt load. Hawker is said to be carrying something like $3 billion in debt, basically from a combination of these three sources. It is going bankrupt because it can no longer make the payments on this debt.
You can always blame market conditions or bad products for the failure of a company, and it's true that if enough people bang down the door for its product, a firm can survive anything. But it's tougher to do that when its owners use it as a bag of assets to leverage for quick cash rather than a business to be built or rebuilt. Hawker's owners may have been pleased to see it prosper, but they were willing to stack the odds against it to the point where they almost seemed indifferent to its survival.
There's nothing evil about this. People invest in companies, whether they own 100% or a tiny share, to make money. The health of companies exists for the benefit of its owners, not the other way around. If, like the Producers, you discover how to make more money with a flop than with a hit, than the company should be allowed to flop. Of course, that money you "make" may just be wealth transferred from your gullible investors and the company's unfortunate employees, suppliers, creditors and customers, but that isn't your problem, is it?
It is now widely reported that post-bankruptcy ownership of Hawker will pass to "several hedge funds." Their handling of the company will make the private equity shops' look nurturing by comparison.
"Hawker" and "Beech" are two of the great corporate names in aviation history. But what's in a name? Those of you interested in the corporate side of aviation history will appreciate that Hawker was originally Sopwith, reconstituted under a new name by Sir Tommy after his chief test pilot and co-investor in hopes of ducking creditors after his firm's first bankruptcy in 1920. You could say things have come full circle. Beech spun his company off from Curtiss-Wright, having originally founded Travel Air. The current Hawker Beechcraft has not much connection with the companies that originally bore any of these names. They are really just brands resurrected by Raytheon after it had acquired Beech and the bizjet division of Hawker Siddeley, and someone will acquire the right to use the brands again. Heck, if the company survives in some form, maybe they can call it the Travel Air Sopwith company. Their next bizjet could be the Sopwith Cuckoo II.
This event may, of course, result in a break in the continuity of production of the Bonanza, which has been in continuous production for 65 years. That record will stand for a while, but I wonder what the next-highest contender is.
August
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