Wednesday, April 22, 2009

Conde Nast Rips Carlyle Group's Management of Vought Aircraft in 787 Dreamliner Nightmare

The Carlyle Group's reputation as a skilled operator took a hit in the May edition of Conde Nast Portfolio. The magazine excoriated Vought Aircraft Industries as a major culprit in the two year (and growing) delay of the 787 Dreamliner. It noted:

But Boeing didn’t realize that the Carlyle Group, which had acquired Vought in 2000, was starving it of resources while making a few cosmetic improvements to attract potential buyers—a once-common private equity tactic. By early 2006, Vought was facing a severe “liquidity crisis” and nearly went bankrupt, chief executive Elmer Doty told analysts. It couldn’t afford the new plants, employee training, and fuselage design and assembly and had to “reconstitute” its engineering department. “We are among the riskiest, if not the riskiest” of the Dreamliner suppliers, Doty acknowledged.

Liquidity crisis in early 2006? How could that be? The Carlyle Group was floating high in the private equity bubble. The private equity underwriter grew from $3.3 billion under management in 2000 to $41.9 billion in 2006 and $58.5 billion in 2007. Surely some of that money was available to deliver a quality product to Boeing.

What about the $66.7 million from the state of South Carolina? Palmetto State money kept Vought from adding jobs in Texas per a $35 million grant. Where did all that taxpayer cash go? SEC filings show Vought paid the Carlyle Group an annual $2.1 million management fee.

The Boeing 787 Dreamliner will fly two years late, in part due to the failure of Carlyle affiliate, Vought Aircraft Industries.

Note: Carlyle Group co-founder David Rubenstein recently said government will increasingly look to private equity for solutions. Vought's multiple failures on the 787 project are instructive. It's not the first time Carlyle botched a job. Affiliate LifeCare Hospitals lost 24 patients after Hurricane Katrina. But that's another sordid story!