AIN Blog: Kestrel Aircraft Finds Money in Wisconsin

 - January 21, 2012, 3:19 PM

Kestrel Aircraft CEO Alan Klapmeier pushed the recall button on January 16 and cashed in to the tune of potentially $118 million. The company is abandoning its plans to set up production of its single-engine turboprop K-350 in Maine in favor of Superior, Wis.

The migration is being financed with a generous low-interest loan and tax-credit package, almost all of it from the State of Wisconsin. There, incumbent Governor Scott Walker, in office barely a year, faces a nasty recall election and is desperate to show how his policies have created new jobs.  

Wisconsin used to be a place where we made things—cars, trucks, engines, tractors, motorcycles, large industrial and mining equipment, bratwurst, beer, and paper among them. But over the last decade, the state has shed 25 percent of its manufacturing jobs, or about 150,000, and now ranks 47th in the rate of new business creation. Six of the state’s top 10 employers are public-sector entities. Its leading private-sector employers are Wal-Mart, building supply house Menards and two hospital chains. There’s not a manufacturer in the lot.

So for Walker, the Kestrel deal, with the promise of some 600 manufacturing jobs—someday, maybe—is political manna from heaven. For Klapmeier, who, since joining Kestrel in 2010, has spent most of his time fundraising, the finaincing from Wisconsin is essential.

Over the summer Klapmeier expressed his growing frustration with the progress of economic development talks in Maine and with the continued scarcity of private investment capital. “Capital formation in this country is broken,” he told me flat-out in July.

To be sure, Kestrel still needs to raise additional funds to certify and place its aircraft into production. But the Wisconsin deal provides the company with a few more millions in working capital, makes it look more attractive to potential investors and buys it time to secure additional investment while it builds a pretty building and fabricates a new test aircraft.

If Kestrel succeeds, the taxpayers will be on the hook to honor more $100 million in tax credits. If it fails, the exposure is less than $10 million worth of loans and land.

Coincidentally, while Alan Klapmeier was cobbling his deal together in Wisconsin, his brother Dale, who runs Cirrus Aircraft in nearby Duluth, Minn., was renegotiating that company’s $13 million loan and lease deal with Grand Forks, N.D., where it employs 90 at a components plant. Cirrus has produced more than 5,000 of its popular piston singles. By most measures Cirrus is considered a success, but it didn’t make its Grand Forks lease and loan payments for the last half of 2011.  

Aviation has always required patient capital. Increasingly, the entities with both money and patience are governments.

Bombardier’s Learjet 85 program just received $16 million in bond proceeds from the State of Kansas and $2 million more from local governments. This was on top of $27 million it got from the state in 2010 and $2 million from the local airports authority. In the early 2000s, the World Trade Organization (WTO) ruled that both Bombardier and its Brazilan competitor, Embraer, received illegal subsidies for their aircraft programs from their respective governments. 

Boeing recieved $5 billion for the 787 from state and local governments in Washington, South Carolina and Kansas. European Union complained to the WTO that over the last two decades the U.S. federal, state and local governments gave Boeing nearly $24 billion in cash and incentives. Boeing counter-claimed and last summer the WTO issued its final ruling that the EU had illegally subsidized the entire line of Airbus aircraft.

Last year Caiga, an entity owned by the Chinese government, bought Cirrus for $210 million. Another Chinese entity, AVIC, now owns Alabama-based Teledyne Continental, the company that makes Cirrus engines.

Piper Aircraft is owned by the Ministry of Finance—of Brunei. Bell Helicopter built its 429 with more than C$115 million from Canadian governments. The list is much longer and I could go on, but you get the idea.  

Want to build an airplane? Find a willing politician in a city, state or country that needs jobs.