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Aviation History
1958
1958 - 0669.PDF
FLIGHT, 16 May 1958 CIVILAVIATION . . . 685 Financing Britain's Airliners TECHNICAL QUALITY ALONE DOES NOT SELL NEW TRANSPORTS By J. M. RAMSDEN A MERICA, the citadel of hire-purchase, is a nation built on/\ credit. The American attitude to money is fundamentally •*- •*- different from the British: money is something you canbuy, like any other commodity, and it can be bought cheaply. You can walk down Madison Avenue and see how money ismerchandized, in the full American meaning of the word. Some of the big banks have eye-catching window-displays, like prettygirls ice-skating, to lure custom. The window-shopper is "cordially invited" to step inside to discuss his "personal problems." In contrast is the solid, reserved respectability of the City ofLondon. The old lady of Threadneedle Street has never been lavish with her sterling; but today, in the fight to preserve thepound's value in an inflationary world, she is tighter with her money than she has ever been before. This contrast is felt by British civil aircraft manufacturerswherever they compete with Americans for business in the markets of the world. It is felt also by other exporters, but particularlyso by those trying to sell to the world's airlines. There is no other class of industrial consumer whose volume of business (andtherefore demand for new equipment) is increasing so fast, yet whose profitability (one per cent of revenues in 1957) is so small. The Need for Equipment Whatever the reason for their low profits, and no matter howself-inflicted they may be, the airlines still need new equipment. Their problem is how to pay for it. The manufacturer who canoffer the easiest terms of payment is therefore the one who gets the business nowadays. Technical competition is being accen-tuated, if not outweighed, by financial competition. The airlines want credit—long-term credit—at cheap interest rates, andAmerica can give them these things. The terms which Boeing, Convair, Douglas and Lockheed arenow offering are quite remarkable. A few years ago the airlines put down a substantial pre-payment, made progress paymentsduring manufacture, and paid the balance on delivery. The raising of capital was usually the customer's responsibility, as in anyother normal business deal. Now such financing arrangements are rare indeed. Gradually, as airline money has become tighter,and as the first fine careless rapture of equipment-buying has passed, the manufacturers have had to devise easier financingarrangements to get the business. Today contracts may be signed with American manufacturers which require no downpayments(perhaps, as a sign of good faith, a small deposit); no progress payments; and credit terms extending from seven to ten yearsfrom the signing of the contract s and at 4 per cent interest.Sometimes, in their eagerness to sell, American firms offer extra come-ons like: (1) Hire-charter for a year or two to seeif the customer likes the aeroplanes. If he does, the hire fees will be regarded as part of the capital payment. (2) Offers tobuy back the new equipment at market price after use. (3) Offers to finance, or at any rate underwrite, the purchase from the manu-facturer's own resources (e.g., the contract between General Dynamics Corp. and Capital Airlines for nine Convair 880s, plusan option on six). (4) Part-exchange of new equipment for old. The last-named inducement, which of course appeals greatlyto an industry becoming more and more concerned about the re-sale value of existing fleets, is a comparatively recent innova-tion. Pioneered by Lockheed, it is a sales-promoting ploy par excellence. Trade-in offers for old equipment, though routine inthe American motor-car industry, is new in the airliner business. The trading-in of airliners is a bitter challenge to British manu-facturers, who cannot even afford to match the "normal" financial competition, let alone to indulge in gimmick-deals of this kind. How indeed can the Americans afford it? It is tempting toanswer that this is their problem, or to suggest (as was done in a recent extraordinary outburst in Parliament) that Americanairliner business tactics are "unfair" or "cut-throat"—if not actually part of some sinister plot, perhaps backed by the State Depart-ment, to put British aircraft manufacturers out of business. Nothing could be further from the truth, or more unworthy.The truth is that British manufacturers are being beaten not technically, but in a straight financial contest with a combatantwho can say this to a customer: — "We don't want a downpayment. We don't want progresspayments, at least not from you. We can arrange through the U.S. Export-Import Bank for the necessary credit to be advancedto you by one or more of the American commercial banks. This credit can be extended over the useful competitive life of your THE recent decision by a Commonwealth airline, T.E.A.L., to allow itsbetter technical judgment of a British aircraft be swayed in favour of American equipment highlighted a big problem: how can British manu-facturers match the financing offered by their American competitors? new aeroplanes, and it will be advanced at a rate of four per cent.You start paying when your new aeroplanes start earning. . . ." If this fails, the inducements previously listed arc then suggested. It should not be supposed that British firms and the City banksare not straining their commercial resources and risks to the utmost to meet this competition. Air Finance, Ltd., the financialconsortium of leading British aircraft firms and City banks formed in 1953 to ensure that Britain's technical lead was sold, have done£40 millions' worth of business to date. Their loans are largely guaranteed (up to 90 per cent) by the Board of Trade, throughthe Export Credits Guarantee Department. But Air Finance can- not get round two obstacles: (1) The fact that the E.C.G.D.cannot (under the Berne agreement) cover credit beyond five years; and (2) high interest charges.The high British bank-rate is the more serious obstacle to the successful exporting of British airliners. It stands at 6 percent (7 per cent until a few weeks ago). Commercial banks usually add between one and two per cent to this, so that the best ratewhich can be offered may amount to 7 or 8 per cent. It requires no knowledge of accountancy to see what this kindof interest—double that which the Americans can offer—can do to an airline's costs. Whether airlines regard interest as a directoperating cost or not, it is in fact an aircraft standing charge— like depreciation and insurance. If it is too high it will wipe outprofits. B.O.A.C, for example, in their recently completed finan- cial year, had an operating deficit of about £0.75 million; yettheir total deficit was £2.75 million—£2 million being interest on capital. Even if the Corporation had managed to break evenon its operations, it would still have lost £2 millions. Likewise B.E.A.'s interest charges are very high: they have gone up about140 per cent since 1950, and will probably go up by the same amount over the next seven or eight years. Interest is not, surprisingly enough, included in S.B.A.C. orA.T.A. aircraft operating cost methods. So even if a British air- liner does appear to be cheaper to operate according to theseformula? than an American competitor, this apparent advantage can be reversed by interest charges. Indeed an airline with highinterest commitments can easily find the increased earning power of its new equipment vitiated by interest on the capital borrowedto pay for that new equipment. Trading in Old for New A final word about the practice of trading-in old airliners fornew. American firms can presumably afford to do this because the cost of buying back old fleets is probably less than the costof slowing down gigantic production machines. One can only guess the cost of running a production machine such as that nowbuilding Electras or 707s; perhaps it is £1 million a week. What- ever the amount, the Britannia, Comet 4 or Vanguard productionmachines, by contrast, can only be one-quarter as costly to run. Furthermore, the risk of having to scrap as a dead-loss bought-back piston fleets is not as great in America as in Britain. There is always the mighty M.A.T.S. to be maintained at full strength,with spares and new (or refurbished) aircraft. There are also the large civil "irregular" carriers whose business is expanding(see last week's Flight), and who do not yet aspire to turbines. It is also quite likely that the cost of trading-in is actually passedback to the customer—though he need not know this—in the price of the new aircraft.It is difficult enough for British manufacturers to break into a market for 20 years dominated technically by America, especiallywhen the technical lead formerly enjoyed by the British is now diminished. It becomes even more difficult—and the recentcri de coeur in de Havilland's annual report emphasized this— when such overwhelming financial competition is superimposed. These are hard and gloomy facts, and they cannot be sweptunder the carpet with complacent expectations that everything will turn out right in the end. There is hope that the specialGovernment committee now studying the problem will, before too much more business is lost, recognize that the aircraft industryof this country must—in an age of diminished military contracts live largely on civil exports; and that aircraft exports embody,as does nothing else, the engineering and technical expertize by which Britain must earn its living in the world.
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