NextGen Derivative Financing: You Down With PPP?

Following up on a previous post: Recent stories in the press/web have announced a financing scheme to pay for the proposed NextGen aviation system, with a Public-Private Partnership (PPP) using federal seed money as a funds multiplier (gosh thanks, Enron!) to buy NextGen gizmos for every airline — satisfaction guaranteed.

NextGen is an industry wet-dream ISO somebody willing to pay for it.

The gizmo makers can't convince the airlines to pay for it, they can't convince the military to pay for it, and they can't convince Congress to pay for it. They can't sell it as economic stimulus, they can't sell it as infrastructure investment, and they can't sell it as a pre-need bailout.

When you can't pay for something the old fashioned way, but you're highly self-motivated to sell the product and ship it, warts and bugs features and all, you look for new ways to pay for it. If it's not right - well, what brand-new, leading edge invention is ever right in version 1.0? You don't want to by the first-year Tesla; you want to buy the fifth-year Prius. But industry wants everybody to throw out all the Prii and replace them all with Tesla 1.0's.

What's the Problem? Who's Problem is it?

Usually we spend money to solve problems. A problem is a discontinuity between expectations (subjective) and perceived reality (subjective). Problems, then, are a rather squishy phenomenon, subject to interpretation and bias. When I see problem-solving that I don't understand, I wonder: what problem are they solving? Whose problem is it?

What problem is NextGen Public-Private Partnership (PPP, or P³) financing solving? Here's my answer, yours may vary:

NextGen is industry's marketing package to sell, update, and maintain an unspecified technical project to people who cannot evaluate its merits; it is cynical rent-seeking at its essence.

The NextGen hype-bubble is getting long in the tooth. They've sold the sizzle to people unable to evaluate the claims, and they can't find anybody capable of evaluating the issue who is willing to spend their own money on it.

The problem is figuring out how to get industry the money it has been expecting out of the NextGen swindle.

The problem that NextGen Public-Private-Partnership (PPP) financing solves is moving money out of the public coffers and into the military-industrial complex under the guise of delivering NextGen aviation. The problem belongs to industry. The PPP financing solution benefits industry.

NextGen Marketing

It's been very easy for marketing to hype NextGen as all things to all people. When somebody says, I don't like ________, they say "NextGen will solve that!" When somebody asks, How come I can't do this, they say "NextGen can do that!"

Marketing tells NewYorkers it's going to eliminate delays at JFK, LGA, and EWR. Marketing tells the airlines they'll save money. Marketing tells the government they'll pay for NextGen by throwing everything else away. Marketing tells pilots they'll be in charge of their own destiny. That's all hype.

If you're industry, it's okay to sell and ship a buggy product - there's often more to be made in debugging adaptation and upgrades than there is in the original product; the trick is to get the client (Uncle Sam) to lock themselves in to the product line you're selling, because once they're committed to it there's no way they can reverse themselves, and then you own the market and you might even own the client.

What's the NextGen Guarantee "OrWhat" ?

Cynics may be making clucking sounds and asking Guaranteed? Guarantees don't mean anything without an established OrWhat. The OrWhat completes the syllogism, it defines the compensation. In other words, your satisfaction is guaranteed - or what?

• Guaranteed Lowest Prices OR Double the Difference
• Guaranteed Satisfaction OR complete refund
• Guaranteed OnTime OR free upgrade

What's the OrWhat in this NextGen financing scheme? What's the deal if NextGen isn't as profitable as the gizmo-makers promise? What, what, what?

Follow the Money

Use of the Public-Private Partnership was authorized in HR 658, FAA Reauthorization and Reform Act of 2011. The PPP was not included in the original legislation, but was added by Rep. John Mica as Amendment One.

They couldn't sell NextGen with any of the several initial approaches that they tried, so they've moved into more nuanced arrangements. Remarkably, as soon as FAA Reauthorization with Mica's Amendment One passed the House, a financial boutique shop announced the establishment of the NextGenFund (logo shown).

The NextGenFund (which is a private, for-profit enterprise) will use $150 Million in federal loan guarantees to generate $1.5 Billion in NextGen purchases (this used to be called betting on the come, then it was called leverage, and now it's called a Public Private Partnership).

The federal government will guarantee the loans made by the speculators private sector. The speculators will advance money to the airlines to buy NextGen technology from industry (goal-1) at a specified interest rate (goal-2). The airlines will attempt to use the NextGen gizmos to make money (goal-3). The airlines will take that money as profits, and they'll use part of it to pay off the loans.

What if the airlines don't profit as much as the marketing hype promised? What if they don't make anything additional? What if nextGen implementation is delayed? In any of those disappointing eventualities, airline satisfaction is guaranteed, and they don't have to pay for the gizmos.

Who does pays industry for the gizmos? Who pays the profit to the speculators? That's when federal loan guarantee kicks in, and the taxpayers pay for it (goal-4).

Cui Bono?

The tone of the press coverage is notably "oh good, now we have away to pay for NextGen" and they don't seem to critically ask, "Should we spend a forture on this new technology?", "Will it deliver benefits that justify the cost?", "Who will pay for this, and who will benefit?"

What a sweet deal. Marketing overhypes a vapor-ware product that doesn't exist yet, sells it to a public that can't evaluate the promise, and if the system fails to meet airline expectations then the taxpayers have to pay for it - which was what they wanted in the first place. All of the benefits accrue to the gizmo-makers, the speculators, and the airlines. All of the costs and risks go to the taxpayers.

What are the odds this goes wrong?

NextGen promises a brand new aviation system, completely replacing the existing (tested, safe, world's best) system. There is no definition of the scope of NextGen; there is no documentation of what is (and more importantly, what isn't) included in NextGen. It's been sold as all things to all people.

Russ Chew isn't saying this is going to be easy -- but just in case, if it goes over budget, off schedule, or if it fails to deliver the marketing hype -- then the federal government will pay for it. What are the odds?

Restating the NextGenFund.com PPP Guarantee in Standard Format

Guaranteed

On Schedule On Budget Expectations Exceeded Significant Savings

OR

Uncle Sam The taxpayers will buy it for you.

The Usual Suspects

Industry has packed the Public-Private Partnership with former government officials, a menagerie of Used-To-Be's with impressive titles. What is surprising is that when you look into the aftermath of their official tenures, there isn't any evidence of their lasting postive contribution.

• What did Russ Chew leave better than he found it?
• What did Marion Blakey leave better than she found it?

(Editor's Note: Point out that Republican Mica's Legislation has only passed the House. Curious that the Used-To-Be's (Chew, Blakey) were all Republican appointees. Hmm.)

Someday when you have time to watch a 14-slide presentation, check this out. Resist the urge to make sure you still have your wallet.




My compliments to the marketing team that released this PPP financing news just before all the media focus shifted over to the government shutdown. Nicely played.

Guaranteed NextGen Results . . . or it's Free!

At times this blog touches on arcane aspects of transportation policy. Previous entries have dealt with the NextGen aviation system, presented by the marketing departments solution providers of various industrial vendors as the Next Best Thing that will move aviation into the future.



Posts have included Runways as Constraints and a New York NextGen metaphor. We talked about solving the ATC Delay Problem, reframing the topic as the Airline Scheduled Delay Problem and suggesting,

The airlines and the airports have been overbooking the runways just like the airlines overbook seats on their planes. They do it because it's cost-effective; the profits go to the airlines and airports, and the costs go to the traveling public and the economy. When too many show up, they bump some back to the next hour, and so on, and so on.

In this analysis of NextGen we looked at a comparison of Costs and Benefits provided by Robert May, who is a NextGen shill advocate:

I'd like to point out that the costs exceed the benefits through at least the year 2027, in this chart prepared by somebody trying to put the best face possible on NextGen.

Just because the costs exceed the benefits doesn't mean NextGen isn't profitable; the industry will find great profit when if they can sell these gizmos. The people who pay for the gizmos, and the economy overall, will be at a net loss.

Everything I know about Nextgen and Delays

Great technology. Expensive. Not a replacement. Won't fix delays. Runways are the constraint. Airlines and airports intentionally overbook runways.

Gosh, that was easy. 152 characters, less than a text message. I don't dislike NextGen; I do have a problem with industry misleading the American public. Here's a set of recommendations for actually eliminating most airline / airport delays.

Selling the Dream

There are several challenges facing any salesman who needs to sell NextGen solutions. NextGen won't be backwards-compatible with existing, proven aviation equipment. It's as if the 1990s cellphone companies were selling phones that could call other cellphones but couldn't call landline phones. The benefits are subtle and limited; the costs are very high. Given this dog of a situation, salesmen respond with rhetoric and try to sell the sizzle, not the steak.

Whenever they can, the salesmen describe the existing system as outdated 1960's technology. As a taxpayer and passenger, I don't mind that we're using a reliable, time-tested, evolved system that's been paid for. Industry's sales pitch requires describing the status quo as hopelessly outdated.

As a species we've only been flying for a little over 100 years. To describe anything in aviation as "same old same old" is ludicrous. We've been using roads for millenia and I don't see anybody saying, "Roads? That's so 1410!"

Paying for the Dream

How does industry and their hired hands convince somebody, anybody to pay for it? How does industry move from pitching gizmos to selling the dream?

Scorched Earth

The first approach was to cost-justify the NextGen expense by claiming that it would replace all ground-based navigation systems and all ground-based radars. We could throw out all the old stuff, stop maintaining the buildings, and we wouldn't need maintenance people.

That was a good marketing pitch, and the spreadsheets ended up with usable numbers, but the reality was quite different: the Defense Department insists on maintaining the ground-based radars, the existing aircraft fleet requires a ground-based navigation system, and - by the way - the Chinese are capable of disabling satellites, NextGen is vulnerable to fifty-year solar events, and in most applications the (legacy, old, outdated) ground-based systems have lower weather minimums that NextGen. The scorched-earth value proposition didn't kick.

Economic Stimulus

The second approach to getting somebody to buy NextGen was positioning this big-ticket purchase as a new wave economic stimulus and an infrastructure investment, much in the way that we're rebuilding bridges and highways. This proposition didn't sell either.

Bailout

The third approach to getting somebody to buy NextGen was positioning it as the savior of the American airline industry; our economy needs the airlines, they're Too Big To Fail, let's bail them out and keep them operating by having the government buy the gizmos for the airlines, and for the business jets, and screw those little puddlejumpers. Instead of "first come, first served" let's talk about "best equipped, best served" - now, that's a tagline for a gizmo sale!

This was an attempt to gloss over the fact that except for a few early adopters, most airlines have decided they're not going to spend their money on NextGen; they'll accept it if somebody else buys it for them, but they're not rushing to invest in it themselves. This approach didn't succeed either, and the fact that airlines won't buy NextGen with their own money is generally understood now.

Complex Derivative Financing

Industry's newest approach to selling NextGen, which is beginning to look like a white elephant with a tattoo saying "Solution in Search of A Sucker", is to use complex derivative financing to pay for the gizmos, because the inscrutability of derivatives is socially acceptable and we're running out of ways to sell this stuff - which, again, nobody will buy with their own money.

Industry is no longer developing innovative solutions; they're now searching for innovative financing techniques to get somebody to commit to buying these gizmos. From today's Wall Street Journal, "New Way to Upgrade Air Control", (also: Bloomberg)

On Monday, ITT and Nexa Capital Partners LLC are expected to announce proposals to use about $150 million in federal loan guarantees as seed money to establish a larger, self-sustaining fund to pay for installing upgraded equipment on potentially thousands of U.S. airliners.

The goal is to help carriers fund their piece of a delay-plagued effort by the Federal Aviation Administration to create a satellite-based traffic control network.

Expected to cost more than $40 billion overall, the next-generation solution has been stymied by a persistent reluctance by airlines to invest billions of dollars to upgrade airborne devices. Now, after years of delays and futile industry lobbying for direct federal aid, ITT and its partner believe they have found the key to overcoming airline resistance.

ITT Chairman Steven Loranger has championed the loan-guarantee fund despite initial disinterest—and sometimes even hostility—from various industry players. The most unusual aspect is that airlines would gradually repay the cost of equipping planes only after they start reaping fuel and schedule benefits.

Nexa Capital's managing partner, Russell Chew, a former senior FAA and JetBlue official, said in an interview that the proposed fund is unique because it is pegged to the FAA's ability to deliver on promised benefits. If the rollout of NextGen falters due to a lack of agency or congressional support, airlines essentially would be off the hook for repaying the loans.

It might work. There's a sucker born every minute. More coming.