Cirrus Plans An IPO

When CubCrafters announced the novel idea of raising capital through a public stock offering last year, I think the general reaction was, well, that’s creative. Now along comes Cirrus with its own IPO plans, this time on the Hong Kong exchange, and it’s tempting to think we’ve got a full-blown trend afoot here.

But if reality is allowed to intrude, probably not. However good or bad small airplane companies going public is, there are limitations on the idea mostly related to finding enough investors who are willing to forgo a 30 percent return on a hedge fund in favor of rather less on the risky business of building small airplanes.  That said, if such investments are to sustain, they are probably a boutique market consisting of airplane buyers and aviation junkies not looking to retire on the proceeds. Nonetheless, CubCrafters in May said demand for shares—initially priced at $5 with a $400 minimum buy, has been strong enough to bump the price to $5.45. Not a bad showing to start.

CubCrafters—and I’m sure Cirrus—faces the same difficulty all small manufacturers do and not just aircraft builders: how to raise capital for expansion. Most have done it with a combination of net profits and outside investment, but the sums involved can be staggering and the return both uncertain and long term.

Some years ago, a marketing guy leaked me some data on aircraft development costs done by a company that specializes in collecting such information. The amount of money burned in these projects is just eyewatering. The Cessna SkyCatcher, for example, consumed $83 million, the aborted Mooney M10 trainer $87 million, the Cirrus SR22 $90 million, the Adam A500 $226 million. And, of course, the all-time champion for incinerated capital was the Eclipse jet, at more than $3 billion invested. Given that only one of those projects came to profitable fruition, you can see that it takes delusional optimism to throw money at airplane projects. But hey, somebody’s gotta do it.

In CubCrafters' case, they share an acute problem with Cirrus: They have more demand than they can rapidly fill and need to expand production capacity. Six months or a year backlog is a good problem to have, two years isn’t. The company also wants to expand and improve its service network.

Cirrus has the same backlog problem. A friend who just ordered a million-dollar SR22 told me he expects to see it no sooner than 2025. A guy could lose interest in that amount of time and I suspect some buyers have.

Cirrus’ announcement was perplexing to me. It has no timeline or detail other than the capital will be used in the same way CubCrafters will, with factory expansion, new model development and human resources. The IPO will be traded on the Hong Kong exchange, which signals a couple of things. One, the company is probably looking for capital from Asia and perhaps Africa, since U.S. investors can’t directly buy shares on the HKEX but can purchase ETFs (Exchange Traded Funds) through third parties. Although the HKEX has more stringent disclosure and reporting requirements, it’s free of SEC oversight. HKEX ranks seventh in size, behind the Shenzhen and EuroNext exchanges.

There’s another good reason for Cirrus to sell on the Hong Kong exchange and might as well be upfront about it: It’s the geopolitical taint. Cirrus may be in Duluth, but it’s also a Chinese company and not just a Chinese company but a company owned by the Chinese government. I don’t know how much of the reported $300 million Cirrus would like to raise could come from the U.S., but it’s a better bet to get it from Asia, I would guess. For good or for bad, Chinese interests seem to be viewed with ever more disdain on this side of the Pacific.  

Cirrus is the crown jewel of the China Aviation Industry General Aircraft (CAIGA), which is itself a subsidiary of the government-owned Aviation Industry Corporation of China or AVIC. AVIC also owns the former Continental Motors, now Continental Aerospace Technologies. I’m not sure why they didn’t put Continental in CAIGA, not that it matters much. (AVIC is listed on the Shenzhen exchange, as is Diamond Aircraft’s parent, Wanfeng Auto Wheel Co.)

So where is Cirrus going to spend all that money, if indeed they’re trying to raise $300 million? There’s no prospectus yet so your guess is as good as mine. My guess is mostly upgrades and expansion in Duluth and maybe some investment in China. It seems unlikely to me they’re angling to ship the whole thing from Duluth to China. This would make no sense. While Cirrus has continued to expand worldwide, especially in Europe, Cirrus sells to primarily a North American market because that’s where the aviation-oriented wealth is.

For years, we have been hearing that the Chinese general aviation market has vast untapped potential that would be realized when the country opened up its airspace to broad civilian use. Hasn’t happened, at least at large scale. If anything, China seems to have become more of a security state that’s incompatible with the freedom general aviation offers. The rest of Asia may represent some demand, but nothing like North America. I could see expanding the Cirrus manufacturing factory at Zhuhai, but it’s hard to see how that facility would match Duluth’s volume for a long time, if ever. Even building and shipping components around the world might not make much sense. But then neither did spending $3 billion to birth the Eclipse or $97 million to still birth the PiperJet. We are, after all, talking about aviation logic.

What no one ever seems to talk about as U.S.-China relations continue to sour is what happens when war breaks out in the Taiwan Strait. Increasingly, I think this is inevitable because China has a score to settle and the U.S. may be unable to defuse it diplomatically. The U.S. is at a distinct disadvantage because the military isn't structured for a long, high-intensity war and our industrial base has been hollowed out by offshoring to, where else, China. The Chinese know this, too. Then what happens to Cirrus, to Continental and its subsidiaries and to Diamond in Ontario? Does business go on as usual? Or are these companies' assets nationalized by the governments where they reside? Garmin has some exposure here, too, because it recently opened up its fourth manufacturing plant in Taiwan. No less than the Oracle of Omaha, Warren Buffett, recently divested his shares in TSMC, the giant Taiwanese chip maker. And he was blunt about it: “I don’t like its location, and I’ve reevaluated that.” He moved his money to Japan.

I don’t wish to be an alarmist about this, nor do I wish to stick my head in the sand. The world could be on a precipice, and it could have immediate implications for aviation interests.