It's an illustration of why banks and bank debt are so important in our economy! This capital-intensive sort of business doesn't happen by an entrepreneur writing a $1 billion check from funds he has on hand.
Edit: I think I need to dial down the subtly of my humour.
The interesting part is that once they lend the $1 billion, and it's spent on aircraft (etc) and ends up in the bank accounts of Boeing and its contractors and its employees and the raw materials companies... then there's $1.1 billion in the original bank's accounts and $1 billion in all the Boeing accounts and there you go, they've turned $1.1 billion into $2.1 billion. And Boeing-etc's banks' can loan out up to about $909 million with it, and so on and so forth. Which may be what you're thinking of.
Now, the bank can borrow some or all of that $1.1 billion. And sometimes they can borrow that from the Fed. But the Fed isn't too big on that, and in non-2008esque-crisis situations tries to discourage it.
'The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord. Basel II requires that the total capital ratio must be no lower than 8%.'
http://en.wikipedia.org/wiki/Capital_requirement
With $1 billion in deposits a bank may lend upto $12 billion under Basel II assuming a risk weight of 1.0
With $1 billion in assets and $12 billion in liabilities the capital ratio is 8%.
Where does the bank get this extra $11 billion? They borrow it from the Federal Reserve, unless they are lending it to another of their accounts in which case they just credit the account.
You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember, all I'm offering is the truth – nothing more.
Say someone deposits $100 cash (federal reserve notes) into Bank A. Let's say the reserve ratio is 20%. It takes $80 and loans it to someone, who deposits in the same bank. It then takes $64 of that and loans it to someone who deposits in the same bank. It then takes $51 of that and loans it to someone who takes out cash and holds it.
The bank has the following assets: $20 + $16 + $13 in reserve, plus loans of $80 + $64 + $51 = $244.
It has the following liabilities: $100 + $80 + $64 = $244.
Now, if those loans don't get repaid, the bank might not remain solvent, but that has nothing to do with fractional reserve banking. Any entity that is solvent on the books can be rendered insolvent by loans going bad.
The Basel regulations are, as the term "risk-weighted assets" which you quoted implies, about the riskiness of assets of the bank.
NB: Loans made by a bank are assets of the bank, and they are risky, that is why Basel regulations are relevant. The corresponding liabilities of the bank are the money that is created in the debtor's accounts when the loan is made. But those liabilities are not part of the Basel computations, because Basel is about risky things. Risks do not come from liabilities, because liabilities are known, certain quantities. Risk only comes from assets.
When a risky asset has to be written off (e.g. loan goes bad), then the asset side of the bank's balance decreases. This is offset by an equal decrease on the liability side of the bank's balance. To be precise, the bank's capital is reduced (yes, capital is a liability).
This makes sense because capital represents the "liability" that the bank has towards its owners. When the bank makes bad decisions, the owners are supposed to pay for it in properly implemented capitalism.
When capital goes below zero, the bank goes bankrupt. Therefore, the ostensible goal of the Basel regulations is to ensure that capital never goes below zero (or, at least, that a lot has to go wrong before that happens).
This is why a risk-weighted sum of the bank's asset (the things that can go bad) is compared to capital (the only liability that can be legitimately decreased).
This is a required ratio between accounts of clients of the bank and money that the bank itself has in its account at the Fed (or as cash in its vaults). As such, it does not even have anything to do with loans in the first place.
The only way it has anything to do with loans is that as a loan of e.g. $1000 million is created, the bank creates a new account or marks up an existing account to the extent of $1000 million.
The minimum reserve requirement then increases by 10% of the newly created money, i.e. by $100 million. If the bank does not already have a sufficient amount of central bank money in its accounts, it must obtain this money within the next two weeks or so.
This is what happens in practice: Banks create loans based on creditworthiness of potential borrowers. An institutionally separate department of the bank then ensures sufficient central bank money to satisfy regulations.
tl;dr: Your number of $1.1 billion is completely wrong. The number $100 million would be somewhat less wrong, but is still not correct. In reality, banks do not need any money to make loans. They do need to satisfy minimum reserve requirements, but if necessary, they can obtain the required money after the loan is made.
The main "problem" with capitalistic business is in expectations. People need to realize that every day comes with risk. And only through that risk do we see reward. But the little guy working the line, he just wants a paycheck with no risk. Unfortunately there would be very little reward if that were so.
The little guys working the lines usually don't have safety nets and credentials—inherited money, money from previously founded business, mentors, a reputation, or even supportive relatives—so their fear of failure is somewhat justified.
The days of retiring with a gold watch and pension were gone long before I ever hit the market decades ago unfortunately.
It bugs me that it's often the poor that want free markets and cheer most for it, and shun co-op stores. The system is betraying them, they should just get away from it and focus on positive systems like co-op self-sustaining communities.
This is a bit of pseudo-economics that's popular in the business community nowadays. Risk can be priced, in that it costs money to shift risk to someone else and you can charge a premium for taking on risk yourself. But statements like "only through that risk do we see reward" are just mumbo-jumbo.
Of course, you can construe any activity to have some risk. After all, there's always the possibility that your currency collapses, or something. However, ignoring that sort of possibility, risk is not necessary to make money in a capitalist system.
Or to pose another example, starting a restaurant is probably riskier than starting a B2B software company, but also probably much less financially rewarding.
Aren't you just pushing the "problem" back one step? The entrepreneur writing a $1 billion check from funds he has on hand is now the banker, not the airline guy. Of course, I guess these days you can keep pushing that back until you hit the federal reserve (or other central bank).
The key to understanding the fractional reserve system is that banks take title to your money when you deposit it, and you get in return an asset (the account) which is essentially a promise to pay you that money on demand.
A bank can't just "create" $900 million by making a $1 billion loan when it only has $100 million on hand. Rather, depending on the reserve ratios, $1 billion in notional assets can exist backed by only $100 million in central bank money. That's because those notional assets are not in fact money, but IOU's that people are willing to treat as functionally equivalent to money.
A better intro than the link you posted is this one: http://neweconomicperspectives.org/2011/09/mmp-blog-15-clear...
The crux is that there are really (at least) two types of money: Central bank money, and money used by "the public". They live in two different "monetary circuits", and while those circuits are not entirely unrelated, they are completely isolated from each other; money cannot go from one circuit to the other.
Ignoring cash for simplicity (and it is little volume anyway), central bank money is only the electronic currency on accounts at the central bank, and it only moves between banks and other financial institutions.
Money used by the public is cash in circulation as well as money on checking accounts and so on.
Banks cannot create central bank money, but they can and do create money in the other "monetary circuit". It is true that the amount of money in the public monetary circuit must be less than the amount of central bank money times a factor (the inverse of the reserve ratio).
However, in practice, this limit works the other way around: When the amount of money in public use grows "too large", central bank money is automatically created by the central bank (this has nothing to do with quantitative easing; it is part of the normal market operations that the central bank always performs to achieve its interest rate target). Because of this, the reserve ratio does not limit the creation of money by banks.
But the bank still needs to have the $1.1 billion on hand first, so that it can have that $100 million after the billion-dollar check goes out.
This is a straightforward conclusion of how monetary aggregates such as M1 are defined: Among other things, M1 includes money in checking and similar accounts. The creation of the loan involves, among other things, adding $1000 million to some checking account, without reducing the amount of money anywhere else.
Hence, $1000 million is created net.
This contradicts the story that most people are familiar with, but it is a more accurate description of reality than that other story.
Fraudulent activity by the banks should be the corporate equivalent of a capital crime.
Every major banker should be held personally accountable to the actions of the banks they lead.
Most definitely not.
You do need to rent or buy space (and ideally slots) at a bunch of airports. You can also lease planes.
A budget of "tens of millions" would be eaten by a small airport alone (estimates for extending and overhauling Plymouth's airport to link to international traffic and handle up to 115-seaters are 30m GBP)
And then the other day I saw someone point out that there are now hub-to-hubs on United Express regional jets.
When I stood there under the Eiffel Tower, I felt like I never had a grand thought in my life. To think that massive undertaking started in someone's head is just humbling.
So I feel you. I feel so small.
http://en.wikipedia.org/wiki/Aircraft_lease#Wet_lease
e.g. EasyJet started with 2 wet leased 737-200s:
Pivoting in the airline business is difficult, changing from planes to boats is cumbersome; scaling is the only option.
(And my planes scaled from toy size to 1:1)
Major commercial air travel is a commodity business. Where opportunity lies is perhaps in offering air travel solutions that bypass the hassle of airports. Shuttles between SF, LA or Houston and Dallas for example. These are heavily trafficked routes with mostly business travelers who would love to avoid long security lines and drive right up to a plane at a small airport.
The airlines were, for a long time, subsidized by air post. Fuel prices are still much lower than they could be.
These things are barely directly profitable, but they contribute immensely to the global economy. That's the interesting tradeoff in post-capitalism.
Disclosure: Former Boeing Employee.
Some R&D examples I've seen is the movement of advanced electronics and structural materials from military craft to commercial craft. Boeing and AirBus both benefitted tremendously by their military contracts.
If you look at things like the Boeing/Northrop Grumman Tanker contract, then it is hard to fathom that any of the $35B for 180 planes (that's 190M for each plane) wouldn't lead to significant development that could be shared with Boeing's commercial sector.
The Boeing 737NG line is probably their most profitable product overall. That is from Boeing Commercial Aircraft.
Some financials for your reference [1] http://boeing.mediaroom.com/index.php?s=20295&item=128736
It does give you economies of scale in the sense that any larger company gains purchasing power and for that matter visibility (and political power) by employing more people.
So at some level when you're spending millions of dollars instead of tens of dollars you're still not planning on losing it, but recognize that if you do it will be a problem. And you are working through a checklist and getting stuff done and correcting for unexpected events. Some folks find that really invigorating, others find it completely paralyzing.
Of course the airlines have issues with barriers to exit too, which come with their own problems.
The interesting thing to me is how a vendor is trying to create demand by encouraging the creation of customers. And it's not a new world tech company that's doing this.
The total startup capital, if I remember was around $3 million and then they raised double that a year later on the stock market.
They are not profitable yet but they are pretty competitive with the old/only airline in the country.
I forgot to mention that they enjoy no competition in my town (basically they revived the town small airport) but not much on the rest of the country (being sabotaged by the national airline)
If the headline figures I've seen are correct, their IPO sold nearly half the company for approx ~$15 million (or about three month's revenue according to their Q2 figures) in working capital.
They have 6 aircraft on order with Airbus which will cost them something in the region of $300 million over the next few years (which they'll probably fund with a sale/leaseback arrangement with an aircraft leasing company because another IPO wouldn't even scratch the surface...)
Those figures give you an indication of why it's easy to get the economics of a startup airline wrong. Imagine Silicon Valley working on those numbers!
The airline industry as a whole is not. It's lost about $60 billion since deregulation in 1978.
This kind of makes it difficult for the airlines to make anything, especially on the down years that don't match projections, when they end up paying out over 100% (and end up having to borrow money, or get bail outs).
That's the power of the modern age :-)
Renting in the main city airports is very expensive but the ones further out aren't so bad.
To organically grow, you'd need to find desirable and under served routes between smallish airports, build a loyal following, then maybe you take a risk, borrow money and attempt to move mainstream. Not impossible but it seems like you'd need just tons of money.
Is there much room for value add and innovation? The most obvious area I can think of off the top of my head would be an airline that did all their own security and skipped tsa but I don't know if that's allowed and I think the work would be akin to building your own airports.