Europe and the USA have been squabbling for years over the support given to their rival civil aerospace champions Airbus and Boeing. With the manufacturers now neck-and-neck and the competition as intense as ever, the behind-the-scenes bickering has continued, occasionally threatening to drift toward outright political farce.
The Large Aircraft Sector Understanding (LASU), signed a decade ago to settle such disputes, put limits on the amount of state support, either direct or through guarantees, that could back sales of aircraft essentially above 100 seats. Yet the disputes have dragged on. Both sides are understood to be picking through the minutiae of what they claim is unfair support. Industry sources in London, Paris and Washington say one bone of contention centres on the time limits set down by the LASU which limits financing to 12 years.
Since last summer, there has been heavy traffic of official communiqués across the Atlantic, according to informed sources. One key issue is the relative validity of Stretched Overall Amortisation Repayment (SOAR) offered by the Exim bank and the mismatch loans offered by the European export credit agencies (ECAs). There have been industry calls to extend the present LASU agreement, set at 12-year loan terms with 85% ECA cover plus either 15% in commercial loans or equity from airlines. However, neither side has shown itself publicly willing to budge.
The new system offered by both sides incorporates a third loan, raised in the commercial markets, which is effected at each required payment to the ECAs or Exim and refinances the debt service. The airline borrower pays the difference and the lender of this additional loan receives a final balloon payment at the end of the 12-year period.
Nevertheless, sources in Washington DC say there is a strong lobby from US manufacturers complaining about the European practice. But when approached on the subject, ECAs and Exim refuse to pinpoint a timescale for opening talks on extending export credit-backed cover beyond 12 years, even though financiers would welcome such a move. On both sides of the Atlantic manufacturers and politicians have been caught up in the fight to win orders, so much so that they seem to have overlooked the need to concede more liberal financing cover.
Export credit pressure
"Exim is under more pressure than ever to ensure Boeing does not lose a sale because there is a lack of financing support available to facilitate the sale of a group of aircraft, or even just one aircraft," says one Exim source. "The lobby is always a strong force here."
A source at the UK export credit agency ECGD says some US departments hinted last summer that a trade embargo would be initiated because Airbus product was allegedly being financially supported by the mismatch loan system. "It never came to that thankfully," says the source, adding: "Not yet anyway."
Meanwhile, aircraft deliveries are back hitting new records. This year Airbus and Boeing produced over 900 units, higher even than the heady peak of the last cycle (see Analysis page 86). Manufacturer support is surely there. Exim and the European ECAs were all busy in 1999 and their representatives say financial support for aircraft deliveries will probably be just as strong this year.
New highs
Tassos Philippakos, customer finance analyst at credit rating agency Moody's Investor Service, estimates that customer financing by manufacturers for large aircraft last year hit new highs, with net exposure exceeding $25 billion, even if the rate of increase has slowed drastically since the depth of the recession in the mid-1990s. Airbus and Boeing decline to discuss the issue, but show few signs of letting go of any edge in their bitter marketing battles.
Certainly, tough competition seems to be paying dividends to airlines. When planning its medium- to long-haul fleet renewal, Israeli flag carrier El Al played off the two manufacturers in pursuit of the best deal. Perhaps to take advantage of both set of cards on the table, the airline divided its decision by ordering three Boeing 777-200ERs and four Airbus A330-200s. Boeing made Israel Aircraft Industries (IAI), the country's main aerospace company, a partner in its expanding global service business and Airbus made IAI a risk-sharing partner in its A3XX project.
Any expectations that the fierce competition would settle down once Airbus finally drew level with Boeing, appear to have been premature. And if the manufacturers will bend over backwards for a relatively small order in Israel, one wonders what lengths will they go to secure a major contract.
Source: Airline Business
