bulfly
20th Oct 2010, 13:26
The New York Times
October 18, 2010
Aviation World at Odds Over Plane Loans
By JAD MOUAWAD and NICOLA CLARK
Back in the mid-1980s, Boeing and Airbus avoided a trade war by making a gentlemen’s agreement not to seek government financing to sell planes in each other’s home markets. The deal symbolized an aviation world dominated by the United States and Europe.
That world is a lot different now.
No longer can Airbus and Boeing count on being the biggest manufacturers of large airplanes. Manufacturers in Canada and Brazil are seeking to gain a foothold in this lucrative market. And not too far in the future, China, Japan and Russia will be competing as well.
At the same time, airlines from Asia and the Middle East that did not exist three decades ago, or were small players, are now vying for a much bigger piece of the global aviation market.
The old rules, some airlines and plane manufacturers contend, are not working anymore.
This week, negotiators from the European Union and countries including the United States, Japan and Brazil will meet in Ottawa to grapple with the politically charged issue. Their goal is to draw up a new agreement by the end of the year on the rules for financing the airplane business — and specifically, how much government assistance is permitted.
The various interests are in conflict, and it is unclear if the talks will be successful. “The home market restriction has become unsustainable,” said Scott Scherer, vice president for strategic regulatory policy at Boeing’s financing unit. “It’s the big elephant in the room.”
The discussions, which are taking place under the auspices of the Organization for Economic Cooperation and Development, are complicated by the fact that what might be in the interest of the airlines may not necessarily work for aircraft manufacturers.
The so-called home market rule applies to only four European countries — France, Germany, Britain and Spain — where Airbus planes are produced, and to the United States, where Boeing is based. As a result, for example, Ryanair, which is based in Dublin and is one of Europe’s biggest low-cost carriers, has tapped into export-credit financing to buy most of its fleet of 200 Boeing planes. Its London-based rival, EasyJet, cannot make a similar deal.
The loudest objections to the current rules have come from European airlines, which say that cheaper, government-backed loans have helped fuel the growth of their rivals in Asia and the Middle East and given them an unfair advantage.
The charge is mostly aimed at Emirates Airlines in Dubai, whose rapid expansion in recent years has rattled airlines in Britain, France and Germany. The airline threatens to take their international passengers away from European hubs and fly them instead through its gleaming new terminals in Dubai.
Boeing and Airbus also worry about new competition. At the moment, their biggest concern is the emergence of a new jet from Bombardier of Canada, the C-Series. This single-aisle plane, due to enter service in 2013, will be able to seat about 130 passengers, posing a direct challenge for the first time to the best-selling Boeing 737 and Airbus A320.
The current rules set separate financing standards for large airplanes and regional jets with 100 or fewer seats. But the C-Series, with its larger capacity and range, has now blurred that line, Boeing and Airbus say. This, they argue, puts them at a competitive disadvantage for sales in the single-aisle category, the most profitable segment of the market.
Bombardier said it would welcome a new arrangement where airlines could obtain financing, regardless of where they were based. “We do not support the so-called home market rule,” Marc Meloche, the senior director for structured finance at Bombardier Aerospace, said. “All customers should have access to all financing sources, based on market principles."
Besides the Canadian factor, the other major catalyst for the talks has been the economic downturn, which essentially shut down commercial credit markets and left official export agencies, especially the Export-Import Bank of the United States, as outsize purveyors of financing.
In 2009, about 35 percent of Boeing and Airbus sales were financed by credit agencies, according to the manufacturers, up from about 20 percent before the economic downturn.
In the United States, the Export-Import bank guaranteed $8.6 billion in commercial aviation loans in its fiscal year ending September 2009, nearly double what it typically helped finance each year since 2002. This year, export credit agencies in the United States and Europe are expected to guarantee more than $15 billion in civil aviation loans, about the same as in 2009.
Export agencies, set up to help finance exports to countries with weaker credit, usually require quicker repayment than commercial loans and impose more restrictions on the airlines. But in today’s depressed market, industry experts say, the agencies’ loans are on average about three to five percentage points lower than commercial loans. This can be a significant factor for planes whose list price ranges from $60 million for a single-aisle plane to about $350 million for the largest plane today, the Airbus A380.
The export credit agencies “did a great job in 2009, when banks were unable to fulfill their role,” said Christian McCormick, chief executive of Natixis Transport Finance in Paris. “They have created something of an addiction by the airlines to this product that is completely out of the market.”
Because of the home market restrictions, American and European airlines could not get government backing for new planes. But airlines did, including Emirates Airlines, Korean Airlines and Cathay Pacific.
European airlines were already hurting from the rapid rise of some of these carriers, particularly Emirates and Etihad Airlines in the Persian Gulf, saying they pay lower fuel prices, airport fees and corporate taxes. Opposition to the government loans has become the latest tactic the airlines are now using to curtail these carriers’ growth.
In a joint letter dated Oct. 11, airlines from Europe and the United States proposed limiting to 20 percent of new plane deliveries the export-credit backing that an airline can receive each year. The letter was signed by nine European airlines, including Air France, British Airways and Lufthansa, and the Air Transport Association, which represents airlines in the United States.
They also want export credit to be provided on less favorable terms than commercial bank loans.
The airlines may get some of what they want. A draft agreement that began circulating among governments this month would increase the price of export agency financing to airlines, according to one person involved in the negotiations, but not include the cap on lending.
“This is becoming a big political fight,” said Adam Pilarski, an economist and senior vice president at Avitas, a consultancy in Chantilly, Va. “Incumbent airlines are beginning to feel that if they do not do something, somebody may take their place.”
“Nobody complains about airlines from Uganda having this advantage,” Mr. Pilarski said.
The complaints have raised hackles in Dubai, where Emirates dismisses claims that it has received any competitive advantage from state-subsidized loans, saying it has financed only 20 percent of its fleet through export credits.
“We have grown without subsidy through the success of our commercially driven business model — and see no reason to apologize for what we have achieved,” Tim Clark, the president of Emirates Airline, said in a statement.
Some aircraft financiers, however, were skeptical of Emirates’ claims. One European banker, who would speak only anonymously because his bank provides loans to the airline, estimated that nearly 50 percent of the Emirates jet purchases had been subsidized by Western export credit agencies.
Emirates raised eyebrows again this summer with two more huge jet orders — including plans to buy an additional 32 Airbus A380 jets valued at $11 billion at list prices, bringing its total orders for the twin-deck superjumbo to 90. In July, Emirates placed another huge order, for 30 Boeing 777s.
October 18, 2010
Aviation World at Odds Over Plane Loans
By JAD MOUAWAD and NICOLA CLARK
Back in the mid-1980s, Boeing and Airbus avoided a trade war by making a gentlemen’s agreement not to seek government financing to sell planes in each other’s home markets. The deal symbolized an aviation world dominated by the United States and Europe.
That world is a lot different now.
No longer can Airbus and Boeing count on being the biggest manufacturers of large airplanes. Manufacturers in Canada and Brazil are seeking to gain a foothold in this lucrative market. And not too far in the future, China, Japan and Russia will be competing as well.
At the same time, airlines from Asia and the Middle East that did not exist three decades ago, or were small players, are now vying for a much bigger piece of the global aviation market.
The old rules, some airlines and plane manufacturers contend, are not working anymore.
This week, negotiators from the European Union and countries including the United States, Japan and Brazil will meet in Ottawa to grapple with the politically charged issue. Their goal is to draw up a new agreement by the end of the year on the rules for financing the airplane business — and specifically, how much government assistance is permitted.
The various interests are in conflict, and it is unclear if the talks will be successful. “The home market restriction has become unsustainable,” said Scott Scherer, vice president for strategic regulatory policy at Boeing’s financing unit. “It’s the big elephant in the room.”
The discussions, which are taking place under the auspices of the Organization for Economic Cooperation and Development, are complicated by the fact that what might be in the interest of the airlines may not necessarily work for aircraft manufacturers.
The so-called home market rule applies to only four European countries — France, Germany, Britain and Spain — where Airbus planes are produced, and to the United States, where Boeing is based. As a result, for example, Ryanair, which is based in Dublin and is one of Europe’s biggest low-cost carriers, has tapped into export-credit financing to buy most of its fleet of 200 Boeing planes. Its London-based rival, EasyJet, cannot make a similar deal.
The loudest objections to the current rules have come from European airlines, which say that cheaper, government-backed loans have helped fuel the growth of their rivals in Asia and the Middle East and given them an unfair advantage.
The charge is mostly aimed at Emirates Airlines in Dubai, whose rapid expansion in recent years has rattled airlines in Britain, France and Germany. The airline threatens to take their international passengers away from European hubs and fly them instead through its gleaming new terminals in Dubai.
Boeing and Airbus also worry about new competition. At the moment, their biggest concern is the emergence of a new jet from Bombardier of Canada, the C-Series. This single-aisle plane, due to enter service in 2013, will be able to seat about 130 passengers, posing a direct challenge for the first time to the best-selling Boeing 737 and Airbus A320.
The current rules set separate financing standards for large airplanes and regional jets with 100 or fewer seats. But the C-Series, with its larger capacity and range, has now blurred that line, Boeing and Airbus say. This, they argue, puts them at a competitive disadvantage for sales in the single-aisle category, the most profitable segment of the market.
Bombardier said it would welcome a new arrangement where airlines could obtain financing, regardless of where they were based. “We do not support the so-called home market rule,” Marc Meloche, the senior director for structured finance at Bombardier Aerospace, said. “All customers should have access to all financing sources, based on market principles."
Besides the Canadian factor, the other major catalyst for the talks has been the economic downturn, which essentially shut down commercial credit markets and left official export agencies, especially the Export-Import Bank of the United States, as outsize purveyors of financing.
In 2009, about 35 percent of Boeing and Airbus sales were financed by credit agencies, according to the manufacturers, up from about 20 percent before the economic downturn.
In the United States, the Export-Import bank guaranteed $8.6 billion in commercial aviation loans in its fiscal year ending September 2009, nearly double what it typically helped finance each year since 2002. This year, export credit agencies in the United States and Europe are expected to guarantee more than $15 billion in civil aviation loans, about the same as in 2009.
Export agencies, set up to help finance exports to countries with weaker credit, usually require quicker repayment than commercial loans and impose more restrictions on the airlines. But in today’s depressed market, industry experts say, the agencies’ loans are on average about three to five percentage points lower than commercial loans. This can be a significant factor for planes whose list price ranges from $60 million for a single-aisle plane to about $350 million for the largest plane today, the Airbus A380.
The export credit agencies “did a great job in 2009, when banks were unable to fulfill their role,” said Christian McCormick, chief executive of Natixis Transport Finance in Paris. “They have created something of an addiction by the airlines to this product that is completely out of the market.”
Because of the home market restrictions, American and European airlines could not get government backing for new planes. But airlines did, including Emirates Airlines, Korean Airlines and Cathay Pacific.
European airlines were already hurting from the rapid rise of some of these carriers, particularly Emirates and Etihad Airlines in the Persian Gulf, saying they pay lower fuel prices, airport fees and corporate taxes. Opposition to the government loans has become the latest tactic the airlines are now using to curtail these carriers’ growth.
In a joint letter dated Oct. 11, airlines from Europe and the United States proposed limiting to 20 percent of new plane deliveries the export-credit backing that an airline can receive each year. The letter was signed by nine European airlines, including Air France, British Airways and Lufthansa, and the Air Transport Association, which represents airlines in the United States.
They also want export credit to be provided on less favorable terms than commercial bank loans.
The airlines may get some of what they want. A draft agreement that began circulating among governments this month would increase the price of export agency financing to airlines, according to one person involved in the negotiations, but not include the cap on lending.
“This is becoming a big political fight,” said Adam Pilarski, an economist and senior vice president at Avitas, a consultancy in Chantilly, Va. “Incumbent airlines are beginning to feel that if they do not do something, somebody may take their place.”
“Nobody complains about airlines from Uganda having this advantage,” Mr. Pilarski said.
The complaints have raised hackles in Dubai, where Emirates dismisses claims that it has received any competitive advantage from state-subsidized loans, saying it has financed only 20 percent of its fleet through export credits.
“We have grown without subsidy through the success of our commercially driven business model — and see no reason to apologize for what we have achieved,” Tim Clark, the president of Emirates Airline, said in a statement.
Some aircraft financiers, however, were skeptical of Emirates’ claims. One European banker, who would speak only anonymously because his bank provides loans to the airline, estimated that nearly 50 percent of the Emirates jet purchases had been subsidized by Western export credit agencies.
Emirates raised eyebrows again this summer with two more huge jet orders — including plans to buy an additional 32 Airbus A380 jets valued at $11 billion at list prices, bringing its total orders for the twin-deck superjumbo to 90. In July, Emirates placed another huge order, for 30 Boeing 777s.