At issue is a little known agreement between the US and the EU dating back to the 1980s determining which airlines can access export credit guarantees – in essence a cheaper form of financing than commercial bank loans.
While originally designed to encourage plane makers Boeing and Airbus to create manufacturing jobs – by supporting sales to airlines in countries where political risk meant commercial bank loans were unavailable – its scope has widened in recent years, and western airlines are claiming the market has become distorted.
Central to this has been the so-called ‘home country rule’ – a verbal understanding between the US Ex-Im Bank (the US government’s official export credit agency) and its UK, French and German counterparts – that prevents support for purchases of Boeing and Airbus aircraft by companies based in any of the four countries concerned, as well as Spain.
US and European airlines have recently been crying foul, arguing the cheaper financing available to their (principally) foreign competitors has been exacerbated by the recent downturn in the business cycle and enabled the latter to build-up their fleets more efficiently. Complicating matters further has been the growth in the number of open skies agreements giving foreign airlines ever greater access to US and European markets.
So seriously is this issue being taken that in August James May, President and CEO of the Air Transport Association (ATA), wrote to US Treasury Secretary Tim Geithner, noting that over the decade 2000-09, the US Ex-Im Bank provided guarantees backing $45.7bn in financing for more than 800 large civil aircraft – more than the mainline fleets of every individual US airline. In financial year 2009 alone it made $8.6bn available to support sales of 143 aircraft to 17 foreign airlines and five leasing companies.
The level of US Ex-Im Bank support has been roughly matched by credit supplied by the export credit agencies (ECAs) of the UK, France and Germany – all nations where Boeing’s competitor Airbus has a presence. UK credit agency ECDG alone announced financing for Airbus aircraft amounting to £6.32bn from 2000-08, or over $9.6bn at the then exchange rate.
Unintended consequences
The ATA estimates that subsidised aircraft financing by the Ex-Im Bank has added approximately 17 percent to the capacity of Ex-Im financed carriers on US international routes compared to the level these carriers would fly in the absence of such guarantees. As a result, foreign carriers with Ex-Im subsidised financing have taken market share from US airlines, reduced employment at US carriers by more than 6,000 jobs and caused income losses of over $500m annually, it claims.
As Mr May puts it: “The damage caused by subsidised financing is exacerbated during declines in the business cycle because ECA credits and guarantees immunise borrowers from market conditions.’’
He added that during the recent downturn, US airlines cut capacity by eight percent and were forced to lay off thousands of employees; yet large aircraft production remained at record highs and the large aircraft market grew by over 10 percent.
In addition he noted that in 2009, when Delta Airlines and Dubai-based Emirates Air were each seeking financing for three Boeing 777 aircraft, Emirates, through Ex-Im Bank support, was able to obtain its financing at an interest rate of 3.47 percent, compared with 8.11 percent for Delta.
Figures show the top five largest airline beneficiaries of US Ex-Im guarantees from 2000-09 were: Air India ($3.94bn), Ryanair ($3.81bn), Emirates Airlines ($2.87bn), Korean Air ($2.51bn) and Thai Air Asia ($1.68bn).
China Airlines ($1.50bn) was ranked seventh. The top 20 beneficiaries received a total of $30.0bn of guarantees; total US Ex-Im came to $44.4bn, while total European Ex-Im was $44.0bn.
The data, compiled from information available in the annual reports of US Ex-Im, assumes European export credit financing was approximately equal to US Ex-Im financing over the same period.
Meanwhile, in its document “Request for Level Playing Field in Aircraft Financing,” the Group of Airbus Home Country Airlines estimated the annual financing advantage provided by export credit guaranteed financing at $4.2m per annum on the purchase of an Airbus A380 financed over 12 years.
Responding to more general criticism about airline subsidies, Emirates, which has raised $22bn to date for aircraft financing purposes, counters it has always obtained funds on a commercial asset-backed basis and that no financing has been obtained from Investment Corporation of Dubai (ICD) or the Government of Dubai, at concessional rates.
“Export Credit Agencies are a legitimate and internationally accepted support mechanism to boost manufacturing sectors and exporters in Europe and the US,” Emirates said in a statement. “Emirates, like many other airlines, uses ECAs as part of its broad financing structure. EU/US export credit agencies have supported just over 20 percent Emirates aircraft financing to date and are likely to remain in this range in the future.”
Yet just as Boeing and Airbus unsurprisingly seek to protect their existing turf, so they face a commercial threat in the single-aisle jets market, with Canada’s Bombardier hoping to promote its CSeries plane as a modern, more fuel efficient alternative to the ancient Boeing 737 and Airbus A320.
While there are more restrictions in place for large planes, when it comes to government backed loan guarantees to aid aircraft sales, there is greater flexibility for smaller sized regional jets.
Bombardier last year sought to have the CSeries designated as a regional jet. Boeing and Airbus in turn have claimed it encroaches on the large aircraft category. And for good reason as the Montreal-based firm is not bound by the same rules as Boeing and Airbus, giving it an unfair edge since CSeries planes could in theory be offered to a US carrier or an airline based in a country that’s home to Airbus production.
As debate rages in this particular segment of the market there is little doubt the CSeries will pose a commercial threat.
Decision time in Europe
Meanwhile, British Airways CEO Willy Walsh used a recent speech at the European Aviation Club in Brussels to hammer home the export credit finance point, claiming, like his American counterparts, that his airline’s ability – and those of some other European airlines – to fund the acquisition of new aircraft is handicapped by the more generous financing rates available to carriers from other countries, both inside and outside of the EU.
“We believe these guarantees are not operating in the way they were intended – and therefore urge the EU to amend the rules to remove the competitive distortions that have developed.”
Mr Walsh, who is also the current chair of the Association of European Airlines, said it was especially worrying to see Europe “funding the expansion of Emirates,” which is growing so rapidly some say it could change long haul aviation in the way Ryanair and other no-frills carriers have transformed short haul flying.
“It’s about time Europe makes up its mind what it wants from its airline industry,” he said. “The liberalisation of the market has brought about huge efficiency benefits, a stream of product innovations, lower prices and consumer choice. Yet all along the line these benefits are being eroded by heavy-handed and inappropriate regulation in some areas, and a reluctance to tackle structural deficiencies in others.”
US and European airlines finally seem to be waking up to addressing the issue after 24 carriers, including Air France, EasyJet, Lufthansa, Virgin Atlantic, American Airlines, Delta Air Lines, United Airlines, JetBlue and Southwest Airlines, recently forged an alliance and called for a 20 percent cap on aircraft deliveries financed with ECA-backed loans, higher export credit premiums and fees to neutralise any interest rate advantage they yield, lower maximum loan-to-value ratios and restrictions on ECA-backed loans to airlines or lessors based in high-risk countries. Boeing for its part has gone on record as supporting the 20 percent cap as ‘reasonable.’
European carriers, at least, also have EU Regulation 868 as a potential fall back, given it allows for the imposition of protective duties on foreign carriers using subsidies or other forms of “non-commercial advantage” to undercut prices.
The big question though is whether US and European governments have the stomach to change the status quo – the lucrative Gulf market being a case in point. Here, Airbus has total orders of 191 planes from Emirates, 133 from Qatar Airways and 59 from Etihad Airways.
Longer term though, it will become more difficult for European carriers to have enough customers to maintain existing flight schedules to destinations such as Hong Kong, as the balance of power gradually shifts and stopover traffic increases in the Gulf at the expense of traditional cities such as London, Paris and Milan.
