New aircraft export financing rules create confusion, caution, dislike

Panelists said the rise of export financing has driven airlines to buy new aircraft directly from the manufacturer to the detriment of the used-aircraft market. However, the panel also concluded that with the new ASU, which increases financing costs through new fees for Export Credit Agency (ECAs) financing, airlines will return to lessors, decrease the pressure on home-market airlines and restore the balance between ECAs and commercial markets. The rising fees were designed to discourage the use of ECAs by well-heeled airlines that should be going to the commercial market.

Two panels debated the pros and cons of that new agreement and decided that while it may be flawed, it should be allowed to work to see its ultimate impact on the market.

The first panel -- made up of Boeing Capital Corporation Senior Vice President Scott Sherer, Airbus Senior Director Customer Finance Claude Brandes, Export Credit Guarantee Department Head of Aerospace Gordon Welsh and Aviation Working Group Secretary Jeffrey Wool -- tried to explain the ASU but most concluded it was a Goldilocks solution with some seeing it as too complex, while others said it was not complex enough or just right, depending on who was asked.

The second panel - Air Transport Association General counsel David Berg, Deutsche Lufthansa Vice President Corporate Finance Dirk Arhelger, Cargolux Director of Corporate Finance Yves Gereaux, Comair Ltd Joint CEO Erik Venter and THY Turkish Airlines Finance Director Eyup Isik - said Export Credit Agencies (ECA) have not kept up with changes in the industry and distorted the market but often are the only financing choice for airlines.

Objectives good

Mr Welsh briefed delegates on the ASU objectives saying that they were an attempt, under the framework of the World Trade Organization, to expand beyond large aircraft to smaller aircraft from Bombardier and Embraer. They were also designed to recalibrate the relationship between ECAs and commercial markets. ECAs account for 40% of the financing market, double their historical norm.

"The main objectives are two fold," he reported. "The first was to to promote exports and create jobs. Secondly, it was to ensure that in doing so there was a level playing field calling for equal treatment between manufacturers and airlines looking to buy Boeing, Airbus, Embraer and Bombardier and that the same terms and conditions apply regardless of which manufacturer is selected."

One panelist indicated the new rules were also designed to bring new sources of financing with new products into the market and if that happens the new ASU will be a huge success and could reduce ECA participation to 10% in 10-15 years.

Others suggested ECAs have played an important role in stabilising deliveries when commercial markets abandon the sector such as during recessions. The ECAs real value, they said, is when there is some shock in the industry and commercial markets withdraw such as SARS, 9/11 or the financial meltdown. ECAs are also more important for new-generation aircraft where the risk levels are higher because of new technology.

Dodged biggest issue

Manufacturers - and the Air Transport Association - want the aircraft decisions to be made solely on technology and not how an aircraft is financed.

However, the 2011 ASU did not address the largest problem experienced under the old rule, the prohibition against home-market airlines tapping export financing which puts Lufthansa, Air France, British Airways and US carriers, among others, at a competitive disadvantage when it comes to financing aircraft.

Nor does the rule address freighters, according to Mr Germeaux, who indicated that freighters are more difficult to finance because the market is much smaller with fewer buyers. "Aircraft prices and residual values also behave differently," he added. In fact, Mr Germeaux has been advocating for the elimination of the home-market rule as being antiquated in the face of globalization and so many new aircraft competitors.

Mr Wool said that Brazil, Russia and China were observers in the Aircraft Working Group but airline panelists, including Mr Arhelger, suggested that the home-market rule should be abolished, especially since no one expected that manufacturers in Russia and China would agree to such restrictions.

Apparently, the CSeries created further confusion in the old rules because it was unclear whether it belonged in the large or small aircraft categories. This was complicated by the fact that the use of ECAs went beyond its original mandate of providing credit where the commercial markets deemed the airline too risky. The top recipients of ECA financing, according to Mr Berg are some of the world's most profitable and strongest airlines.

"The top recipients have ordered nearly twice as many wide bodies as have US airlines," he said. "It distorts the market for finance and for competition."

Access to credit, Berg continued, should have a metering effect but the role of ECAs have stopped the metering impact provided by commercial market to the disadvantage of US and European airlines. "Export credit recipients have grown dramatically and US carriers have lost market share. Foreign airlines compete across their network not just in the US."

It was clear that the jury was still out on whether the new rules would be successful and there was more suspicion that comfort for now.

The new rules, call for allowances for discount financing for Boeing and Airbus aircraft that compete with the new Canadian jet. This matching allowance, however, remains to be defined by ECAs. Delegates and panelists expressed concerns that having the definitions defined by government puts them in the business of fleet planning in trying to decide what does and does not compete with Boeing and Airbus.

There was also differing opinions on the new rule depending on whether a delegate was a manufacturer, airline or international lawyer.

For some, said Comair's Mr Venter said ECA's constitute the only way to finance aircraft for some airlines. "We continue to struggle to find affordable financing for used aircraft, despite 65 years of sustained profitability" he said. "It is not so much the cost but how else to fund fleet replacement. The ability to buy new versus used is helped by ECAs."