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Boeing’s wings being clipped by short-sighted financial regulators

by Jamie Bullen

Only plane geeks or seasoned business travellers savvy about how much legroom they are about to endure really care what type of plane they are boarding. But even they are unlikely to worry about how that plane is financed.

Yet the financing of aircraft is to a large extent one of the last state-subsidised businesses supported through the heavy support of export credit agencies (ECAs).

ECAs are state-linked institutions or agencies that provide or guarantee financing to domestic companies for their exports. In the case of aircraft, that means underwriting commercial bank loans for foreign airlines that are buying a plane from that manufacturer’s country.

However, Boeing, which along with Airbus dominates the global commercial aircraft market has (for the moment) lost its state backer US Ex-Im.

US Congress decided not to re-authorise the export–import bank on 30 June, causing it to be shut down.

But the ramifications of US Ex-Im not being re-authorised are starting to cost Boeing orders. Ethiopian Airlines has recently written a letter to Boeing that it is concerned that it will not be able finance jets already ordered, and that Boeing is at a “competitive disadvantage” because of the bank’s shutdown. Airbus still enjoys ECA support from the UK, German and French agencies.

South African airline Comair has also raised concerns over its own $1.1 billion order from Boeing if US Ex-Im remains closed. The cause for this concern is simple – cost of capital.

Few airlines are investment grade - which means the capital markets are off-limits as a financing tool. That leaves either leasing the plane or securing a commercial loan as options. Yet lessors typically only have short haul planes, so for airlines that fly long haul, the only option is to buy.

But without the ECA support – where effectively the government underwrites the risk - the commercial banks will ramp up the loan’s pricing beyond what that airline can or wants to afford.

Simply put: if the airlines can’t get ECA support on a Boeing order anymore, then they’ll turn to Airbus where they can.

US Ex-Im has been criticised by many right-wing Republicans in the states for focusing too much on supporting large corporates and not small exporters and the jobs they provide.

They do have a point: in 2013, 75% of US Ex-Im’s activity was for 10 mega-firms, including Boeing and Caterpillar.

But not re-authorising US Ex-Im is shortsighted as not only does it hurt those small exporters, but it also ignores the reason Boeing receives so much US Ex-Im backing.

It is the only way their customers can afford it.

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