GM Spirals the Drain (Part 2)

[Darius871]

And who's to say DIP is absolutely out of the question just because something's capital-intensive?

[TCO]

Originally posted by KrazyHorse
Funny, I thought that airlines needed to continue making payments to airports as well as on the leases on their aircraft.

How would you do an analysis to settle which industry is more capital intensive. Note, that I fully accept that part of the analysis is deciding what you mean, is in scoping the definitions to be relevant.

Are you arguing that airlines are more capital intensive than car companies? Or just noting an isolated fact?

I think it is certainly easier to found an all new airline than a car company. Airlines pop up all the time. Car companies less frequently. (Barriers to entry are not solely capital, but involve skill in being an OEM, design, etc.) Another comparison, easier to start a new airline or a new airplane OEM? Airline, hands down. This was discussed at a conference I was at and they gave the incredible poor history of new aircraft OEM ventures. Only one success in last few decades, Embraer.

Little bit of quick analysis:

2007(B) ford continental ford norm continental norm
revenue $172.5 $14.2 100% 100%
assets $273.2 $12.1 158% 85%
PPE $36.2 $6.6 21% 46%
capex $13.7 $0.4 8% 3%
depr $6.0 ($0.6) 3% -4%

source: Yahoo

[TCO]

Originally posted by Darius871
And who's to say DIP is absolutely out of the question just because something's capital-intensive?

No one. And Ford is not capital-intensive like an oil rig. Or like a peice of land. There is capability within the sales, marketing, design, operations functions, that would likely still have value in a going concern. A slimmer one, mind you.

[KrazyHorse]

Are you arguing that airlines are more capital intensive than car companies? Or just noting an isolated fact?

I am making fun of the assertion that airlines do not need continual outflow of cash in order to keep operating.

[KrazyHorse]

specifically this:

airlines can continue running as long as they have airliners. Not so much with car companies. They must sell current stock to pay for future stock. If no one buys current stock then they're stuck.

[Vanguard]

Originally posted by DinoDoc
Can someone explain to me why Chapter 11 bankruptcy isn't considered an option?

Because of its extremely high costs. GM is all about volume. When it sells a lot of cars, it makes money. When it does not sell a lot of cars it loses money.

A Chapter 11 re-organization would reduce costs considerably, but to do this it would have to turn GM into a much smaller car company.

So what you end up with is:

Now:

GM sells 9 million cars. It spends $200 billion to get $180 billion in revenue.


After Chapter 11:

GM sells 2 million cars. It spends $60 billion to get $40 billion in revenue.

That change does not have much to recommend it.

[TCO]

Originally posted by KrazyHorse
specifically this:

airlines can continue running as long as they have airliners. Not so much with car companies. They must sell current stock to pay for future stock. If no one buys current stock then they're stuck.

Yeah, that sounds shallow.

The issue is more one of fixed costs (or not easily variable costs). The more you have capital sunk, the easier it is to KEEP operating (assuming it's not all debt financed). Of course, you see service companies laying people off also, so fixed costs have some variability.

I do see companies with a lot of variability (defense stocks, exploratory pharma, electronics) tending to have large cash holdings, also having more equity and less debt. Presumably, they have to do this to survive squeezes, since their earnings may be more variable than widget-makers.

Actually, the first case in my finance class was called "guess the industry". They gave you 10 stocks and a bunch of financial info. You could make inferences of what types of numbers would go with what type of player. It was really quite a logic problem, since there were ten of them and most of the differentiators were not clean (showing one company only), but more different methods of cutting the group.

[TCO]

Originally posted by Vanguard


Because of its extremely high costs. GM is all about volume. When it sells a lot of cars, it makes money. When it does not sell a lot of cars it loses money.

A Chapter 11 re-organization would reduce costs considerably, but to do this it would have to turn GM into a much smaller car company.

So what you end up with is:

Now:

GM sells 9 million cars. It spends $200 billion to get $180 billion in revenue.


After Chapter 11:

GM sells 2 million cars. It spends $60 billion to get $40 billion in revenue.

That change does not have much to recommend it.

You are a fvcking moron. Chapter 11 will size the company to where it makes economic sense. If a larger going concern is justified, debtors will keep that. If a smaller going concern, debtors will keep that. If there is not demand for a larger company, than we don't want government to keep one going. And you absolutely need the Chapter 11 to get out from under the unions.

[TCO]

[KrazyHorse]

You are a fvcking moron

One post. Correct diagnosis.

[KrazyHorse]

I think it is certainly easier to found an all new airline than a car company. Airlines pop up all the time. Car companies less frequently. (Barriers to entry are not solely capital, but involve skill in being an OEM, design, etc.) Another comparison, easier to start a new airline or a new airplane OEM? Airline, hands down. This was discussed at a conference I was at and they gave the incredible poor history of new aircraft OEM ventures. Only one success in last few decades, Embraer.

Problems in starting a new car company have more to do with brand loyalty (much more trust involved with owning a car for 5+ years than in taking a 3 hour flight) as well as distribution network (car companies have huge dealership networks while airlines piggyback off of already-established airports) than it does with capital intensity, I think. And airlines are more scaleable than car companies. Can gradually increase flights. Car companies don't make sense until they're fairly large.

[KrazyHorse]

Embraer jets suck. I have never once been on time while flying on an Embraer. Plus they are the only direct competition to Bombardier in much of the NA regional jets market so I have to have hometown hatred for the Brazilians.

[DanS]

Starting a car company is becoming relatively easy, now that most of the parts suppliers are no longer captive companies.

Also, I think you can make a small car company profitable.

Lastly, Detroit falling on its ass gives room for new American car companies to thrive.

[Vanguard]

Originally posted by TCO


You are a fvcking moron. Chapter 11 will size the company to where it makes economic sense. If a larger going concern is justified, debtors will keep that. If a smaller going concern, debtors will keep that. If there is not demand for a larger company, than we don't want government to keep one going. And you absolutely need the Chapter 11 to get out from under the unions.

Chapter 11 can't do this. That's the whole point, dimwit.

The only way to reorganize GM to a profitable size would be to wipe out all the creditors.

But why would the creditors prefer doing this to liquidating the company?

GM doesn't get any better by being smaller. It gets worse.

[KrazyHorse]

Starting a car company is becoming relatively easy, now that most of the parts suppliers are no longer captive companies.

I don't think parts suppliers the biggest problem in starting a car company. The factors I mentioned were distributors and brand loyalty.