Kestrel Aircraft deal comes with risk to taxpayersKestrel Aircraft’s relocation from Maine to Superior could be a major boon for the city, but the deal also comes with risk to taxpayers that could leave the city of Superior, Douglas County and the state of Wisconsin on the hook for millions of dollars should Kestrel fail.
Kestrel Aircraft’s relocation from Maine to Superior could be a major boon for the city, creating a required minimum of 600 full-time jobs by 2016 that must pay at least $20 an hour — or about $41,600 a year — until 2023.
That’s certainly possible, but the deal also comes with risk to taxpayers that could leave the city of Superior, Douglas County and the state of Wisconsin on the hook for millions of dollars should Kestrel fail, according to records reviewed by the News Tribune.
Alan Klapmeier, who rose to prominence in the aircraft industry after co-founding Cirrus Design, announced on Monday that his new start-up airline, Kestrel, would build two manufacturing plants in Superior with the assistance of government money.
Industry analysts told the News Tribune that if Kestrel crosses its initial hurdles, it probably will find a niche and be successful in an already-crowded marketplace. They also said that getting there is no guarantee.
Among the numerous potential barriers to success: The company’s timetable to bring its plane to market and be able to repay government loans on schedule largely hinges on something out Kestrel’s hands — certification by the Federal Aviation Administration.
“Certification is a horrible bureaucratic monstrosity,” said Jim Campbell, CEO of the Aero-News Network, which covers the aircraft industry. “It’s incredibly arduous and phenomenally expensive.”
Even if Kestrel’s planes are approved for sale by the FAA by the date the company anticipates, — the end of 2014 to early 2015 — Kestrel is required to start paying back its loans to the city of Superior in 2015.
If that’s not possible, financing records provided to the News Tribune show the city of Superior can’t demand its $2.7 million loan money back but could only break the contract with Kestrel and take legal action.
Neither Superior Mayor Bruce Hagen or Planning and Port Director Jason Serck returned requests seeking comment for this story.
The state of Wisconsin will lend Kestrel $4 million, though dates for when the company must begin repaying the loan haven’t been worked out, said Tom Thieding, a spokesman for the Wisconsin Economic Development Corp., which is administering the loans.
Thieding said that if Kestrel should be unable to repay the loans, the state’s standard method to get its money back is to take a business to court.
“We would go through the normal recovery process,” he said.
More money needed
In total, government entities will provide $118 million in loans, grants and tax breaks and credits to bring the small-plane manufacturer to Superior and help it get off the ground. Because of the way the agreements are structured, that should translate to $28 million to $35 million that Kestrel can immediately access to manufacture its planes.
But that won’t be enough. Adrian Norris, who is on Kestrel’s board of directors, said the company also will need to raise about $25 million in private capital in addition to the $30 million the company has already raised.
Norris said the fundraising to reach the $25 million goal hasn’t started yet, but he said the company has already had interest from outside investors.
“We’re very confident we’ll reach that,” he said.
The need for additional private capital isn’t mentioned in the December 2011 business plan Kestrel submitted to the city of Superior when it was selling the city on the potential of bringing up to 665 jobs by 2018.
In its 33-page-plus document, the company said it has a commitment from an unnamed “major insurance company” to fund up to $35 million if the company gets approval for a federal program called New Market Tax Credits.
In total, Kestrel anticipates getting $90 million worth of tax credits, which can translate into about $20 million to $25 million the company can directly use.
Kestrel’s Norris said the company will get the credits through the Wisconsin Housing and Economic Development Authority, or WHEDA, which already has offered about $40 million of the credits to the company from previous awards. The rest will come through future allocations, which he said he’s been told by WHEDA have already been requested.
“But we won’t know the result for a few more weeks,” Norris said.
OPTIMISM IN A CROWDED MARKET
If it’s able to take its planes to market, Kestrel will be entering an already-crowded marketplace that has been bruised by recession and is competing for a small number of potential buyers.
At least five other companies, including industry giant Cessna, make single-engine turbo-propeller planes similar to the Kestrel. Those planes sell from $1.9 million to $4.3 million, about the same price as the Kestrel, which is anticipating a $3 million price.
While the turbo-propeller market generated about a billion dollars in sales in 2010, that’s a drop of about 18 percent since 2006, according to numbers provided by the General Aviation Manufacturers Association. In total, 251 single-engine propeller planes were sold in 2010, according to GAMA, with Cessna leading the way with 95 sold.
Kestrel expects to cut into the market substantially and quickly. In the business plan Kestrel provided to the city, the company said it “conservatively” expected to sell 60 planes a year after it’s certified by the FAA, which would give it about 30 percent of the turboprop market.
While that may seem like a lot in a relatively short amount of time, numerous industry analysts said that’s not an unrealistic projection, because the Kestrel will offer higher speeds, greater fuel efficiency, more cargo space and payload capabilities and longer travel distance than similar planes.
“If they can bring it to market, we suspect it will do very well,” said Brian Foley, president of the general aviation market research firm Brian Foley Associates. “For the amount of performance and capability of the airplane for the price, it will be the one to catch.”
Aircraft industry analyst Rolland Vincent agreed, and said that while the industry is in the midst of a historic slump, he expects it to rebound about the time the Kestrel launches for sale.
“In our view, aviation is a growth market,” he said. “This airplane, if it launches, should be well-timed for the uptick.”
Campbell of Aero-News Network said there are rumors of other competitors coming up with planes to match Kestrel’s speed and fuel efficiency, but nothing is close to development.
He also said he believes Kestrel will be a success, primarily because the person behind it, Klapmeier, already has a proven track record in the industry by building Cirrus.
That’s why he also believes Kestrel will be able to find the private funding necessary.
“It’s tough to find money for any aviation investment at all right now,” Campbell said. “It comes down to a two-step procedure: looking at the credibility of the product, and the credibility of the team putting it together.”
“Alan is someone who has done this before,” he said. “He’s somebody that’s still got a lot of respect in the industry.”