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OECD labels new Aircraft Sector Understanding 'robust'

23-Dec-2010

A compromise deal to reform the system of export credits for aircraft acquisitions has been hammered out at the Organisation for Economic Cooperation and Development. A draft agreement reportedly has been worked out between the US and the European Union. Eight other countries are also party to the talks, including Canada and Brazil.

The new Aircraft Sector Understanding is reportedly due to be signed around 20-Jan-2011. The agreement will come into effect from 01-Feb-2011, provided there is full sign-off from the governments concerned. The OECD believes the agreement “robust” and means that government backed financing can “complement the market, without crowding the market out”.

Under the draft agreement, the minimum premiums charged by export credit agencies will be increased and referenced against market conditions. Raising the premiums charged for export guarantees will reduce competitive distortions between airlines in the aircraft financing market.

Aircraft purchasers will also pay a market surcharge on existing agreements. This will be revised quarterly. Changes will be limited to less than 10% to reduce volatility.

Aircraft orders for delivery up to 2012 for Boeing and Airbus aircraft have been immunised against the increases, reportedly covering approximately 540 aircraft. Another 138 aircraft ordered from the two big manufacturers prior to May-2007 have also had a waiver applied to them, although there will still be some financial penalties.

Regional aircraft manufactured by Bombardier and Embraer also have a waiver applied, for aircraft due for delivery up to 2013.

Aircraft deliveries require around USD70 billion in financing per year. Given the scale of the funds involved, it is understandable that the negotiations to reform export credit financing have met intense lobbying from airlines and manufacturers.

A 1986 agreement between the US and the EU prevents airlines from the five "home countries" of Airbus and Boeing - the US, France, Germany, the UK and Spain – from receiving government export credit agency support for aircraft manufactured in the country they are based in. The agreement was updated in 2007, but smaller manufacturers such as Bombardier and Embraer were excluded, primarily because their products did not compete directly with those of Airbus and Boeing.

On one side, an alliance of 24 European and US airlines have been pushing for reform to rules for aircraft financing from ECAs, claiming that the current system creates a serious market distortion against "home country" airlines. They have called for export credit agency-backed loans to be limited to 20% of any airline's or lessor's aircraft deliveries.

Against this is a group of carriers - including Emirates, Etihad Airways, Korean Air, Norwegian, Oman Air, Ryanair, Virgin Blue and Wizz Air - that have argued for the scraping of the home country rules but maintenance of existing financing rates. Doing so, the carriers have argued, would ensure a level playing field for aircraft financing and protect aircraft manufacturing jobs. The group has also argued that export credits are necessary to ensure aircraft purchases can be financed during critical periods, such as during the recent economic crisis when ECAs took up much of the slack as traditional sources of debt dried up.

Boeing and Airbus have also opposed any move to increase financing costs for aircraft, claiming it will harm demand for aircraft and ultimately lead to lower production levels. The two manufacturers have also been lobbying to freeze the financing arrangements already in place for aircraft in their backlogs. Boeing has been pressing for financing agreements in place for its B787 to be frozen until 2015.

Even if the agreement is signed in full in 2011, the issue won’t go away. The Aviation Alliance lobby group has warned they would keep fighting to keep existing financing agreements grandfathered out until the end of 2013.


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