Financial Questions

Financial Aspects. Meeting with Mary A. Carroll, Corporate Banker, Harris Trust

Financial Aspects. Meeting with Mary A. Carroll, Corporate Banker, Harris Trust.

02/25/47

Tuesday night, 2/25/47, the entire group met with Mary A. Carroll, Corporate Banker, Harris Trust. The goal of this meeting was to find a prototype funding for our aircraft - project. This presentation was consisted of three main parts: historical and economical significance of this breakthrough aircraft-project, the preliminary design report, and following questions from Mrs. Carroll. Presentation was prepared by Carl Shanstra (market team) and Gladys Mangaliag (technical team).

Mary A. Carrolls,
Corporate Banker Harris Trust.

Ms. Carroll's working notes from the meeting on February 23rd.
Items in square brackets are the comments from Paul Barrett:

1. Corporate reputation is first issue

Assets:

cash
contracts in force
accounts receivable
cancellation fees [government contracts]

Plant: recent or old style?

capable of conversion to 1950s production technology?
[single level, semi automated I assume she means]

Engineering reputation

critical but not so important as cash & plant as banks will be most interested in security for loans

Current income sources

appears to be chiefly prop engine production--problem!
Market: how will airframe manufacturers which buy power plants from C-W [Curtiss-Wright] react if C-W competes with them? C-W seems to be only firm in field which makes both planes and engines. Why?

A. Will planemakers drop C-W if it competes
B. Will stock-holders object to ditching short-term profitable stuff [engines] for cutting-edge venture?

How strong is top management commitment to project?

We'll probably have to fight it out with common stock holders

2. Project issues:

Single product or multiple?

If single product, problems:

High speed jet will be usable on only a few routes. Best route for planemakers is to become only or chief supplier for an airline (standardization of parts, familiarity of designs, people relationships). Example United is all-Douglas in 1950s, TWA almost all Lockheed.)

But regulation makes all airlines fly short as well as long hauls, use small as well as large airports.

Therefore lines which buy C-W jet will buy other new planes for shorter routes, other companies will have an "in" with them when other companies develop jets

--- Which they will all the faster if C-W plane works

Fuel economy of jets is very bad. How to overcome this image?
Safety

Extremely important for new model: crash even of a proto-type could turn off potential passengers & so airlines [she's right: remember Kallend's Comet story?]
Runway length and safety: can they dvelop reverse thrust, some other reliable braking?
Jet is huge air traffic control problem in 1947: if it cruises at 500 mph and other craft at 300, how can controllers keep them safely apart? Example of fast and slow cars on expressway.

Who are the real customers?

US or Foreign (subsidized) lines or both?
Civil or military?
Internationals only or big-4 in general ["big 4" = American United, TWA, Eastern]
Passenger, freight, mail, military: not reasonable in 1947 to assume complete convertibility: even is technologically ok, will passengers want to ride a freight plane etc.? Will military let airlines have a plane it likes?

Multiple product route:

Can engine be sold to other planemakers or to military, so help fund project?
Ditto landing gear, any new guidance systems, control ideas, brakes, navigation systems,

Stress this: do not monopolize own product because

A. This limits its market and
B. Selling the stuff developed first can under-write the rest of the project, or helps to.

Own engine? Seems not likely as C-W seems to have no jet designs [she looked in Janes]. But a British design, perfect and spin off?

3. Financing

Must have specific cost projections based on existing data:

Plant modification
Labor costs (Union? When dopes contract expire? Can C-W afford a strike? How serious would a 3-6 month stoppage be in terms of beating competition--competition will be into jets as soon as they see this works)
What are revenues from all other sources (other than spin-offs)? Can they be applied to carrying costs of this project?
How do stock-holders view long term R&D [research &development]? Most would be impatient.

Realistic idea of development time for new technology: likely 5 years. Need a 5-year business model

What costs each year?
When does project start to generate revenue--if only from spin-offs? This more important to stock-holders than to financiers but if stock-holders are restive banks will run away.

* Month-by-month cash flow analysis: will project run out of working cash before sales (of anythign) come in?
* Realistic idea of chance of over-run [cost overrun]

What is break-even point? How to base such an estimate for an entirely new technology? Do not assum prop data would work. If they use this sort of data, why do they assume it works?
What mix of funding sources? A big company like C-W could probably use all 5

1. Internal cash: the more C-W commits, the more likely investors will back;
2. Government contracts if a military version or if engine has military potential;
3. Stock: preferred, common--explain [common stock holders can vote & mess things up. Preferred stock as a better deal for the buyers but they can't vote]
4. Bonds, securities: marketability depends on what C-W can put up as collateral;
5. ong term line of credit: probably best--draw down as needed, don't use it all if spinoffs profit

4. Market Development:

Sell to government: what connections? What does military want?
Sell via PR [advertising &c] to potential passengers--mainly businessmen then but fast, quiet plane could attract more tourists.

Ideally people come to think of C-W the way they think of Boeing today or Douglas in 1950--trust it, think it;s better, look for airlines that use it
Both harder and easier to sell as jet is new

Sell to airlines:

Massive re-training for pilots, flight attendants, mechanics--everyone
Probably means re-designing airport terminal (jet blast) Does airline pay for terminals [yes, in this respect--at least in part]?
Means junking near-new piston craft: convince airlines plane is so good it's worth this as well.

--Few businesses will junk any equipment that works. C-W must make jet the only alternative for long- range travel, & so being first, win most jet business, become identified with jet as Boeing did real life.

Summary:

What is it, exactly?
Exactly what will it cost to make?
How will it pay back its cost?
How is production cost self-financing?