From: gary@ke4zv.uucp (Gary Coffman)
Subject: Re: Shuttle a research tool (was: Re: Let's be more specific)
Reply-To: gary@ke4zv.UUCP (Gary Coffman)
Organization: Destructive Testing Systems
Date: Tue, 12 Jan 1993 15:45:21 GMT

In article <1inapqINN50n@mirror.digex.com> prb@access.digex.com (Pat) writes:
>In article <1993Jan8.183031.12692@ke4zv.uucp> gary@ke4zv.UUCP (Gary Coffman) writes:
>>
>>Let's see, NASA should sell Shuttle and it's support facilities at cost,
>>lease them back from the buyer at a profit to the leasing agency, and
>>then they'll save big bucks. What's wrong with this picture? Airlines
>>use lease back arrangements because of the *tax* advantages the arrangement
>>offers. The leasing company profit is less than the taxes saved so everybody
>>but the average taxpayer wins. NASA doesn't pay taxes, they spend them.
>>
>
>Um, gary unless you buy airplanes for fun,  there are few tax advantages.
>Corporations get depreciation, just like leasing agencies.  Individuals
>lease cars because the lessor gets an advantage the individual doesnt. 

Owned assets have to be depreciated by the rule of 78s, or some other
long term schedule. Meanwhile, lease costs can be written off directly
as operating expenses in the year they are incurred. It is quite often 
much better from a tax viewpoint to lease rather than own. It's dependent
on your cashflow prospects for the next several years, of course, as to
which strategy saves you the most money.

>Airlines often lease aircraft, because they wish to reduce risk.  They
>dont want to tie up precious capital into equipment they may not
>wish to keep.  It's leverage.

That depends on the lease agreement. Give back leases often have large
penalty clauses. It's often simpler to sell unneeded property than it
is to convince the leasing company to take it back without penalty.
Of course you can always default on the lease and let them repossess,
but that tends to play hell with your credit rating. Lease agreements
also normally require the lessor to assume all risks to the leased
equipment via mandatory insurance or bond. So your risks aren't materially
reduced by leasing. You lease if you need an immediate tax break, or
if you don't have the cash for a purchase and your credit rating is so
bad you can't negotiate a loan. Otherwise you buy or *rent* depending
on the duration you expect to need the equipment. Rental is usually
a bad idea for assets you intend to use for an extended period.

Of course if you can get a *sweetheart* deal, leasing can be great.
Some companies lease from another subsidary of the same parent
corporation. This is a great tax dodge since you get a double
deduction, expense writeoff *and* depreciation. Plus, since the
money just goes from one pocket to another, you can pay outrageous
lease fees.

>The government leases likes private industry, because it spreads costs
>from one year to several.  The idea behind leasing is that also the
>lessor may have lower costs then the organic entity.  

Leasing does allow an *apparent* reduction in the deficit because
future lease payments aren't carried as *debt* on the books. But
the capital to retire that lease has to be provided just as surely
as money has to be budgeted to retire a bank note. This is mere
accounting slight of hand. Large leasing agencies can often strike
better volume deals with a manufacturer than small individual companies,
but the US government isn't a small company.

>FOr instance, I lease electric power(ok, buy)  rather then make it myself.
>The government buys airline tickets for employees, because the market
>is much more efficient then their own system.  Sure, the DOD has a big
>aircraft fleet, and most every agency has a couple jets,  but
>these are for executive transport or emergency stuff.

The operative word here is "buy". You buy electricity, the government
buys airline tickets. They're purchasing a *service*, or an expendible
commodity, not an asset. This is a totally different thing. It's always
smart to get serivces from the low cost provider, providing that provider
can provide them in a timely and satisfactory manner. (Boy, could I use
"provider" one more time in a paragraph? I just did! :-))

>The idea behind having a leasing company take over shuttle ops, is maybe
>(BIG IFF) they can have more effeciency then NASA.  I dont really
>think so,  but from a political point of view, by eliminating the
>political base inside nasa, it does open up more activities
>in space.

Well, I think a private operation can be more efficient than the 
government at running shuttle ops. Rockwell already does much of
it under contract, so they already have most of the necessary
expertise. Operating on their own, they would eliminate much of
the paperwork required of a government agency and it's contractors, 
and they could streamline operations to only the people who touch 
the hardware and a normal industrial supervisory staff. That could
potentially halve the standing army.

>>Ok, let's try it another way. NASA sells Shuttle and it's support facilities
>>at cost to Rockwell. NASA then buys a *ticket* when it needs a launch on
>>Rockwell Spacelines, about 8 times a year. Rockwell Spacelines sells them
>>the tickets at about 1.5 times current Shuttle flight costs, got to recoup
>>the investment and turn a profit. The poor taxpayer takes it in the neck.
>>
>AH,  but wha tif NASA, starts telling other people, we will pay
>big money for launch services and starts procuring them.  suddenly
>Northwest DC-1 starts offering tickets at0.9 times shuttle costs.
>Allens point is that a market will be more effecient then NASA, 
>and IF we can be capitlaist abou;this,  then maybe we will win. 

Yep. Once the government starts buying *tickets*, they'll go with
the cheapest airline. Costs may increase in the short term if they
sell the system at cost, but competition will soon emerge. However,
in that case, Rockwell takes it in the neck. I think they're smart
enough to recognize this, so I expect they wouldn't be willing to
buy Shuttle at cost. 

>>One more time. NASA sells Shuttle and support facilities at scrap prices
>>and writes off development costs as a bad investment. This is what Allen
>>wants. Rockwell Spacelines buys the scrap and begins operating it. Sells
>>NASA, NASDA, Hughes, and anyone else who wants one a ticket. Using commercial
>>operating practices, Rockwell Spacelines makes money, NASA et al get reduced
>>launch costs, and everyone but the poor abused taxpayer wins. (he always
>>loses anyway)
>>
>Well, considering the taxpayer is bleeding 4 billion dollars out the ass
>every year, we cant lose any more.

This is the only way privatization of Shuttle can work. It's got to
be sold as depreciated hardware with development and aquisition costs
sunk. In this case, Rockwell can cut costs sharply and still operate
at a profit. It makes potential competitors have to work much harder
to match their prices. That's good for NASA because they want lower
costs. And it's good for the space enthusiast because he wants lower
costs. It won't be so good for Pegasus, Atlas, and Delta, but MacDD
might come out of it with a tidy profit if DC pans out.

>>Destructive Testing Systems |    we break it.     | uunet!rsiatl!ke4zv!gary
>
>
>And what if NASA auctions off it's facilities,  and leases them so we
>recover the market fraction???  Hell that's how your company got started.
>You bought surplus scrap Eastern equipment  and re-oriented the business.
>By your analysis, eastern should have been doing this and made a fortune.
>why didn't they?  because they couldn't.  some organizations are incapable
>of reform.

Well, I didn't lease the equipment back to them. They were bankrupt.
I reoriented the equipment to a completely different enterprise.
Eastern was in the airline business with maintenance as a necessary
evil. They weren't in the testing business. It's just serendipity
that some of their maintenance equipment turned out to be suited
to a testing firm, especially when purchased for pennies on the dollar.
The revenues from my firm wouldn't begin to cover Eastern's costs.
And they couldn't reorient their maintenance equipment to another
business area while they still needed it for operations. It's not
the same thing at all.

Gary
-- 
Gary Coffman KE4ZV          |    You make it,     | gatech!wa4mei!ke4zv!gary
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