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Export credit under scrutiny

Difference remains over moves to overhaul export credit agency support as end-of-year target date looms, writes Lori Ranson in Washington

Major global airlines have launched a campaign to overhaul the structure of export credit agency support for aircraft purchases, although a possible new financing agreement is targeted to be in place by year-end.

Sources are expressing doubts that a new understanding will emerge by 31 December as negotiators taking part in discussions at the Organisation for Economic Co-operation and Development sift through proposed changes offered by carriers and manufacturers over the level of financing that agencies such as the ExIm Bank in the USA, Coface in France, the UK's EDCG and Euler Hermes in Germany offer to airlines outside their home countries.

As fears intensified in 2008 and 2009 that commercial financing would dry up, export credit agencies stepped in and offered unprecedented levels of support for aircraft deliveries. ExIm's $8.2 billion offering in support of commercial aviation loans in 2009 was the highest in the bank's history, increasing 49% above the second highest year in 2008, when ExIm's level of financial support reached $5.5 billion.


Carriers secured terms for ExIm-backed financing that were very different to rates received during the downturn by airlines ineligible for export credit financing.

Information gathered by the Air Transport Association of America on numerous transactions completed in 2009 and 2010 shows credit-grade Southwest Airlines had a 6.88% interest rate on senior secured notes it issued in July 2009 to support five Boeing 737s, while Brazilian low-cost carrier Gol in January this year secured a 3.65% rate with export credit financing for three 737s. In October Dubai Aerospace achieved a 2.41% rate on financing for one 737.

Carriers forced to seek those higher rates through commercial financing began discussions in June and emerged as a unified front in October when ATA and nine European airlines released six principles they believe should be in the new OECD Aircraft Sector Understanding agreement.

Boeing agrees with the US and European airlines' proposal to the 20% delivery cap on export credit financing and calls reasonable the rest of the principles, which include lowering loan-to-value ratios for export credit financing and changes in premiums.

But the airframer believes that without export credit financing, the commercial backing some carriers were able to receive during the crisis would have been "more dramatically difficult to obtain and more expensive", says Boeing Capital managing director of capital markets development Kostya Zolotusky.

While the export credit "smoothed out bumps in the road" for manufacturers during the economic crisis, ATA general counsel David Berg argues that the support offered by the agencies created capacity unbearable by the market, saying: "Airlines go through tough times and don't get help from the government to smooth out bumps in the road."

The association estimates cost savings from ExIm credit guarantees resulted in recipient airlines introducing 17% more capacity to the USA than without the guarantees. ATA also believes export credit for carriers such as Emirates creates unbalanced competition not only in nonstop markets, but also on connecting routes. The association estimates Emirates has secured nearly $2.9 billion in export credit support since 2002.

The airline began US flights in 2005 and now flies to New York, Houston, Los Angeles and San Francisco in the USA. ATA says Emirates provides competitive connecting services against US carriers to 38 additional international destinations. "With 197 passenger aircraft on order, Emirates will inevitably serve even more destinations in competition with US carriers," it argues.

But Middle East carriers have hit back at recent criticism from some European and North American quarters. Emirates, for example, says export credit financing does not drive its aircraft ordering strategy and accounts for just over 20% of its total financing needs.

"We are an airline and these are government initiatives that have been in place for a very long time," says Emirates chief executive Tim Clark. "If the governments decide to change the home rules it's up to them. To say we shouldn't take advantage of those is absolute nonsense. To say we are successful because we get cheap credit is complete nonsense."

Qatar Airways chief executive Akbar Al-Baker also plays down the impact of ExIm financing and believes other factors are central to the region's cost advantages. "One very important thing is how we use our aircraft. European carriers are using their aircraft for eight to nine hours a day. Middle East carriers are using the aircraft for 13-14 hours a day," he says.


Despite discussions to reach a consensus on export financing, ATA and Boeing have pleaded their cases to the US government, with Boeing dismissing ATA's claims of overcapacity created by deliveries supported with export financing as "without merit". Boeing believes it is traffic growth driving robust aircraft demand and not the availability of export loan guarantees.

Bankers also see flaws in the argument over a direct link between export credit and uneconomic capacity entering the marketplace. "As unpleasant as it may be for some, these airlines [receiving ECA support] are placing orders because they have a robust business model and the space to grow," says DVB Bank board member for aviation and rail Bertrand Grabowski.

One proposal Boeing is floating to carriers is to cap the number of aircraft airlines can seek export credit to support, and any export credit offered beyond that level would be more expensive than commercial financing.

Berg of the ATA says the association hopes to reach an agreement with Boeing so that "we are on the same page".

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