The Obama Administration – Are They Outsourcing Our Aviation Infrastructure?

The Obama Administration has made outsourcing one of its central themes.  The Administration has accused Mitt Romney of outsourcing jobs overseas.  In 2008 the President promised to stem the flow of outsourced jobs overseas.  The President has promised to rewrite the tax code to eliminate loopholes that permit corporations to avoid paying US taxes on certain income generated overseas.

A number of articles have pointed out that the President’s record out outsourcing has been less than stellar.  For example, the Administration’s second largest fund raiser, John Rogers, is known as a major outsourcer.  The President’s Job Council is reputed to be packed with outsourcers.  The Washington Post points out that his detractors on outsourcing are coming from the left as well as the right.

But the latest outsourcing ignominy revolves around the sales of AIG’s leasing company, ILFC, to a Chinese consortium.

AIG received billions in bail-out investment from the U.S. Government as part of the Troubled Asset Relief Program (TARP).  According to the Treasury Department, the total investment in AIG was $182.3 billion (this figure includes both direct investment and certain loans as well).  The US government has recovered $205.0 billion, which make this a substantially positive investment for the federal government (Treasury claims that an AIG-related profit of $22.7 billion has been split between the Federal Reserve and the Treasury Department).  As part of this, the government was the a majority shareholder of AIG for a time.  As part of the restructuring of AIG, the government forced AIG to spin-off its non-core assets through sales to third parties.  The last of these sales was announced on ****, when AIG announced that it would sell ILFC.  The US government continued to be the largest shareholder of AIG through this transaction – their 16% share in the company easily gave the government a continued controlling interest in AIG.

Last Friday, AIG confirmed that it was in talks to sell ILFC to the Chinese group, and on Sunday they confirmed that they had reached agreement on the sale.  Two days later, after having guided AIG through the disposition of its non-core assets, the Administration announced that they would be selling the last of their interest in AIG.

The fact is that we live in a global economy, and it is better to learn to thrive in a global economy than to erect protectionist barriers that insulate your economy from the rest of the world.  So “outsourcing” ILFC to the Chinese is not an intrinsically bad thing; but it seems as though the Administration acted rather hypocritically, when they agreed to sell ILFC to a non-US group, especially when they let it happen at fire-sale prices.

Fire sale prices?  Well, the new investors will reportedly pay $5.4 billion for a 90% share of AIG.  If we ignore the control premium, we still arrive at a paid-in apparent value of about $6 billion.  However, the net asset value of ILFC is $39.4 billion (counting the book value of the aircraft assets alone).  And in 2011 ILFC realized net revenues of $4.5 billion (which is 75% of the full value sales price).  Articles have suggested that China gains some significant strategic value for ILFC’s order book, as well.  So clearly the buyers gotten a great deal.

On Tuesday, the Administration announced that they were selling their remaining stock in AIG, now that the spin-off of the non-core assets appears to be complete.

Who wins in this deal?  Certainly the Chinese group that is buying ILFC for 15% of its net asset value is a a winner.  Pundits are predicting that the new owners may use ILFC’s existing aircraft orders to China’s advantage.

There is nothing wrong with a buyer getting a good deal, but when the US government is the controlling shareholder of the selling company, and they appear to be managing a sale that may be more about foreign policy goals than about gaining value for the remaining AIG shareholders, then this starts to make you wonder about just how serious the government is about maintaining in the US the infrastructure that allows US companies to generate jobs.  If the government is going to embrace globalization, then the government needs to stop spewing its empty rhetoric about corporations that “outsource” jobs to other nations.  Otherwise it is engaging in hypocrisy.

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About Jason Dickstein
Mr. Dickstein is the President of the Washington Aviation Group, a Washington, DC-based aviation law firm. He represents several aviation trade associations, including the Aviation Suppliers Association, the Aircraft Electronics Association, the Aircraft Fleet Recycling Association and the Modification and Replacement Parts Association.

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