Citigroup will not take new aircraft

January 27, 2009 12:04:06 PM PST
Citigroup Inc., which has received $45 billion in federal bailout money, said it will not take delivery of a corporate jet it previously planned to purchase. The canceled deal comes a day after a New York Post report said the bank planned to take possession of the plane, and amid a chorus of concerns from politicians who are worried about how banks that have received federal funds are spending the money.

"Citi has no intent to take delivery of any new aircraft," the New York-based bank said in a statement Tuesday.

In a statement late Monday, Citi said it had placed a deposit in 2005 to acquire a new corporate jet. The New York-based bank noted that any cancellation of the deal would likely lead to millions of dollars in penalties.

A deposit on the jet will be lost, but is recoverable once the jet is sold, according to a person familiar with situation. Citi was in the process of purchasing a Dassault Falcon 7X for $50 million, the person said.

Aside from not taking control of a new jet, Citi is also planning to cut the number of corporate jets in its existing fleet to two from five, said the person, who asked not to be identified because those details haven't been made public.

On Monday, the New York Post reported that Citi was set to take possession of a new corporate jet it decided to acquire two years ago. The Post report said Citi was still planning to receive the jet even after it received billions of dollars in support from the government amid the ongoing credit crisis and recession.

Corporate jets have become a hot-button topic amid the ongoing credit crisis as the cost of owning and operating them has come into question, especially for companies receiving financial support from the government.

Sen. Carl Levin, D-Mich., released a statement Monday after the New York Post report, saying financial firms receiving federal money should not be purchasing new planes.

In November, executives of automakers Ford Motor Co., General Motors Corp. and Chrysler LLC were roundly criticized for flying on corporate jets to Washington to ask Congress for federal bailout money.

Citi has been among the hardest hit banks by rising loan defaults and souring investments, and been one of the biggest receivers of government support.

The bank has received $45 billion in capital from the government as part of the U.S. Treasury Department's plan to directly invest in banks. The government is also providing guarantees on hundreds of billions of dollars of Citi investments in mortgages and other troubled investments.

Amid the struggles, Citi has been working to streamline its operations and shed assets in an effort to regain profitability. The bank has posted five consecutive quarterly losses, including a fourth-quarter loss of $8.29 billion.

Earlier this month, Citi reached a deal to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley. Citi has also announced plans split its operations into two units, separating its traditional banking businesses from its riskier operations.

It might take a while for Citi to recover its deposit on the canceled jet deal, as the market for corporate aircraft has softened with the economy.

Before the jet market cooled last year, speculators sometimes placed orders with no intention of taking delivery of the plane. They would sell their position in line.

"There was such a backlog - three or three-and-a-half year waits - people could buy positions and flip them for a profit," said Robert F. Agnew, president and chief executive of aviation consulting firm Morton Beyer & Agnew. "Selling a slot today is probably very difficult."

Agnew said buyers typically pay a few percentage points of the purchase price when placing the order, then a series of payments as production begins and other milestones are reached. They might pay about 35 percent of the cost before taking delivery, then pay the balance when taking the plane, he said. At that rate, Citi could have already spent $17.5 million on a plane it will no longer receive.

Agnew did note that upfront costs can be much lower where a strong relationship exists between buyer and seller, but said he was not familiar with Citigroup's arrangement with Dassault.

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AP Business Writer David Koenig in Dallas contributed to this report.

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