Airline financing rift deepens as new alliance wants more subsidies to buy planes

25.11.2010    

A Financial Times article by Pilita Clark says :
 
AIRLINE FINANCING RIFT DEEPENS


Ryanair and Emirates have taken the unusual step of joining forces with eight
other airlines as a multibillion-dollar row over aircraft financing starts to
split the world’s largest airlines into two rival camps. The Irish budget airline
and Dubai’s Emirates normally shun industry alliances. But yesterday they revealed
they had teamed up with carriers such as Etihad of Abu Dhabi, Korean Air, Norwegian
and Australia’s Virgin Blue to block what they say are dangerous attempts to curb
the use of export credit agency backing for passenger jet purchases.    
link
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Full article at
http://www.ft.com/cms/s/0/eebf401a-f8c2-11df-b550-00144feab49a.html?ftcamp=rss#axzz16ORCmW1O

Many US and European  airlines are arguing it is not fair that an informal agreement
known as the home market rule prevents them from obtaining export credit support
to buy their aircraft on what they say are the "significantly cheaper" terms available
to Ryanair, Emirates etc.

The home country rule, which dates back to the 1980s, prohibits countries where
Boeing and Airbus aircraft are built – the US, Germany, France, the UK and Spain
– from providing export credit agency backing to their own airlines to help them
buy aircraft.

The problem has become worse during the recession,   because  export credit support
has  grown to unprecedented levels as banks and other traditional sources of aircraft
financing  were less available to airlines.  

BA and the other airlines in countries that build planes want the home market
rule to be scrapped. They also want  export credit support levels limited to  20%
of aircraft deliveries and the price of export credit financing raised.

Aviation Alliance airlines say there would be certain airlines who simply couldn’t
finance aircraft without the help of export credit.
 
The issue is coming to a head now as new global rules are  due to be finalised
by the end of 2010 through the Paris-based OECD (the Organisation for Economic
Co-operation and Development).
It is not clear if the home market rule will be scrapped.
 
Full article at
see also
 
 
 
Wall Street Journal
26.11.2010

Airlines Press for Access to Subsidies

Ten global airlines that are among the biggest beneficiaries of U.S. and European
subsidies to buy jetliners called for an easing of rules on aircraft-export guarantees
to defuse an international dispute on the issue.

The carriers, including Ireland’s Ryanair Holdings PLC, Emirates Airline and Etihad Airways from the United Arab Emirates, and
Korean Air, said at a news conference Thursday in London that airlines from all
countries should be eligible for government support in buying planes from Airbus
and
Boeing Co.

Under an informal agreement between the U.S. and European governments in 1986,
airlines from the home countries of Boeing and Airbus may not receive government
export support on the companies’ planes. Airbus is a unit of
European Aeronautic Defence & Space Co.

Twenty-four airlines from the home countries—the U.S., France, Germany, the U.K.
and Spain—in October complained to their governments that the current arrangement
is unfair. Many carriers in the ineligible group want access to export-credit
financing, while some want it limited for all airlines from developed countries.

 

Export credit, which mainly consists of government guarantees to support commercial
loans for airlines to buy planes, currently underpins more than 30% of Airbus
and Boeing deliveries.

The 10 airlines, calling themselves the Aviation Alliance, are some of the biggest
buyers of airliners today. They want to ensure that export financing isn’t closed
off.

“We care caught in the cross fire,” Ryanair Chief Financial Officer Howard Millar
said in an interview.

Talks on international rules for government support to jetliner exports are under
way at the Organization for Economic Cooperation and Development in Paris. OECD
officials declined to comment on the status of the yearlong negotiations.

Countries involved have said they want to revise existing rules by the end of
this year, although some officials have said the talks could slip into next year.

The once-arcane subject of export credit has gained more prominence since the
recent credit crisis. Before the crisis, airlines from the five home countries
were able to fund airplane purchases inexpensively through highly developed capital
markets. But since financial markets froze up in 2008, commercial financing became
more expensive than funding backed by U.S. and European government guarantees.

“Export credit financing is essential to the continued growth of the aviation
industry,” the Aviation Alliance said in a statement. “We have come together today
to call for the extension of export credits to all airlines in the U.S. and Europe,
irrespective of whether they are based in a country which manufactures aircraft.”

Other airlines in the alliance are Cargolux of Luxembourg, Norwegian, Oman Air,
Pegasus of Turkey, Virgin Blue from Australia and Wizz Air from Hungary.

The group said the changes it proposed would “protect hundreds of thousands of
jobs.” Airlines from the Airbus and Boeing home countries have said export credit
hurts them and costs airline jobs.

The home-market rule developed because the U.S. Export-Import Bank, which supports
foreign sales of American products, is forbidden from financing Boeing’s domestic
sales. To establish a level playing field between Boeing and upstart Airbus in
the 1980s, both agreed not to seek export-credit support for sales into the other’s
home market.
 

Mr. Millar called for an end to the home-market rule. “American carriers that
wish to buy Airbus should have access to export credit,” he said.

Industry officials say that’s unlikely to happen because Airbus could then have
a financing advantage over Boeing in the U.S. Because Airbus is based in four
countries, its home-country customers could theoretically get export support from
the other three countries.

A spokesman for Boeing said the company would need to see more details of the
group’s proposal before making a comment.

An Airbus spokeswoman said the company supports expanding access to export guarantees
“as long as the instrument remains economically workable for its original purpose,”
which includes helping “to support the stability of aircraft manufacturing.”
 
http://topics.wsj.com/article/SB20001424052748704638304575636320956360704.html
 
 
 
 
how export credit guarantees work is explained at
http://www.airfinancejournal.com/AboutUs/Stub/WhatIsAirfinance.html