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Aviation History
2001
2001 - 0126.PDF
AIRCRAFT FINANCE to die airlines for which they will provide export credit cover. They have supported developing carriers like Croatian Airlines, Qatar Airways and Chinese airlines. They also extended sup port to Cathay Pacific at the end of December, which in finance circles is considered to be a first-tier carrier and, as such, could tap the com mercial markets for funds with ease. However, the ECAs support airlines across the board. In die USA, US Eximbank mainly provides support for Boeing products if there is no other viable option from die commercial banking sec tor. Typically, each agency guarantees finance deals of up to 85% of the aircraft's total value, with the other 15% coming from commercial banking loans or from die airline's own equity. LASU was agreed as part of die OECD pro tocol and restricts airlines in France, Germany, the UK and the USA from taking advantage of export credit support. Known as the Home Country ruling, the USA and Europe are likely to discuss diis in the context of updating LASU. AIRLINE APPEAL Disagreement and debate over the past two years has centred on the way the US Eximbank and the ECAs have adapted financings to make them more appealing to airline users. LASU allows for 12-year financing, but for many air lines this is too short a term. Consequently, both sides have completed transactions involv ing the use of mismatched loans to extend die length of the finance term and make it more attractive. The US Eximbank has a structure in place which also gives longer financial benefits to aircraft financings. "The fact that LASU is limited to 12 years deters some airlines," says Morin. The US Eximbank has also eased financing for three airlines in die Asia-Pacific region this year by offering the option under the "Jet Fuel Index Interest Rate" scheme. If an airline suffers from hikes in jet fuel prices, it can take advan tage of paying lower financing costs under die US Eximbank-supported deal. It then makes up the balance when jet fuel prices go down. Direct comparisons between the support provided by the USA and the Europeans is difficult because there are so many variables. The only common factor the US Eximbank and ECAs share is the support - as part of their larger mandates - of their aerospace industries through exports. Supporting aircraft sales under LASU guide lines is expensive for Europeans. LASU offers a fixed rate for up to three years in advance of deliveries. Aircraft purchasers lockinto this rate and play wait-and-see. If, at the time of delivery, this rate is cheaper than the commercial bank borrowing rate for long-term debt, the buyer will probably take the cheaper option. That is precisely why top-tier carriers like Cathay Pacific are taking advantage of it. However, from March this fixed-rate option will cease to be available to airlines and leasing companies when they sign dieir purchase agree ments, says Chris Leeds, head of the ECGD's aerospace team in London. "We are not just doing this to please the Americans," he says. In contrast, the US Eximbank does not bookmuch of its business through this fixed-rate approach. One of the greatest mismatches in the field of aircraft finance is that government policy may cater for the provision of aerospace sales sup port, but it lags behind rapid market changes. Throughout the 1990s there was talk on both sides of the Atlantic that LASU should be rede fined to take account of the changing needs of the market. Leeds explains that when LASU was first in place, Airbus did not have the top airline and leasing companies on its order books. The fixed-rate finance option was a good marketing tool for airlines with weaker credit profiles. The provision of export credit support can be part of a larger international trade relations issue - the grey area where politics and eco nomics merge. A leading European aircraft finance lawyer says that he was once astounded when he saw documentation of an industry order being related to "other" exports which were all part of a larger international trade relations package. A classic example of the highly competitive nature of the large commercial aircraft sector was shown four years ago when France's President Jacques Chirac visited Beijing to sign a sizeable order for Airbus aircraft destined for several Chinese carriers. The next day, respect ed media from around the world decried the visit on the basis of Chirac's lack of morals in the face of China's record on human rights. At the time, an industry source in Washington DC said that this was the Washington lobbying machine doing what it does best. Months before Chirac's visit, then US Vice President AI Gore had signed a similar deal in Beijing for Boeing. With record Boeing deliveries in 1999, the US Eximbank also posted a record $6.3 billion in loan authorisations during its 1999 fiscal year to 30 September on total aircraft sales of $7 billion. In figures released in mid-December for the 2000 fiscal year, coverage was reduced to $3.5 billion in loan authorisations on aircraft sales amounting to $4 billion. This accounted for 63 aircraft deliveries to 19 airlines in 15 different countries, reflecting a lighter delivery year for Boeing. RECORD YEAR FOR UK The UK's ECGD too reported a record year for 1999/2000 (to March 31 2000) for all UK exports but also the highest level of coverage it has ever given the aerospace sector - mainly Airbus - amounting to £1.3 billion ($1.88 billion) of UKsales. The French agency Coface and Germany's Hermes provided similar cover for Airbus, but Spain's export credit agency Casa does not support Airbus sales. While the USA offers sales support to deals which it says the market cannot do, it is not always so simple. The US Eximbank has pro vided cover for a large portion of Boeing's sales into the Asia-Pacific region because the cost of financing for many of these carriers would be very high in the commercial banking sector. "Airlines know that, within reason, Exim and the ECAs will try to support the sales of aircraft for their respective manufacturers by offering support to a whole host of different applicants. Airlines also know that this finance route will save them considerable amounts," explains one air finance banker in London. Banking and finance sources in the aircraft Airbus sales, such as those ofA300-600s to Qatar, are supported by European export credit agencies, while the US Eximbank helps finance Boeing sales 32 FLIGHT INTERNATIONAL 9 - 15 January 2001
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