July 6, 2015, © Leeham Co. The US ExIm Bank authorization expired last week. As readers know, I’m a strong advocate of renewal of the authorization. Boeing, and other companies, hope reauthorization can be achieved this month.
I won’t restate the reasons I think ExIm should be reauthorized, nor my utter disdain for the right-wing Republicans and Tea Party types who don’t get that the Bank helps Boeing sell airplanes and sustain or create jobs. I’ve written about this many times, and the competitive disadvantage Boeing will have vs Airbus, whose European Credit Agencies will take full advantage of this.
But there are some points on the “other side” to revisit.
Judson Rollins, who reports on Skywriter Aviation, has an interesting perspective on the reauthorization. It’s interesting because he formerly worked for Boeing, and he favors letting ExIm go away, and further says Boeing will see no harm. (So much for any chance of Rollins returning to Boeing, I imagine.) Among other things, Rollins writes:
What are Boeing’s short-term options if Ex-Im authorization isn’t renewed? It could opt to retain some aircraft on its own balance sheet and finance them directly until alternative funding can be secured, or work cooperatively with lessors to arrange competitive lease terms. Longer-term options might include writing guarantees to third-party lenders or lessors, or possibly some sort of “buy-down” mechanism where Boeing would small upfront payments to banks in exchange for smaller loan or lease payments to be paid by an airline. Of course, such arrangements would be dilutive to Boeing’s margins, but they would be essential to stay competitive with Airbus, which still has access to European export credit assistance schemes.
This view, of course, is blasphemy to Boeing.
Delta Air Lines, which started the drive to kill ExIm several years ago, complained ExIm provided financing guarantees at below-market rates, enabling users to finance airplanes cheaper than Delta could. In 2011, the rules changed to double the fees, and today Delta, and other US airlines like United and American, can go to market and get cheaper money than ExIm-guaranteed carriers.
Delta then shifted gears slightly and said no wide-body airplanes should be guaranteed by ExIm. Wide-bodied airplanes, of course, are used by Delta for most of its international service so, eliminating guarantees in this type of aircraft would inhibit competitors on the profitable international routes.
One should note that Delta has no issue with using export credit financing for its Bombardier CRJs, or potentially, the Embraer E-Jets or the Bombardier CSeries, the latter which is a direct competitor to the smallest Boeing jets.
Boeing, of course, objects to excluding wide-body jets from ExIm support. No wonder.Aside from the competitive disadvantage that would exist vis-a-vis Airbus wide-bodies, look at the list of the top 20 ExIm Bank users we published last week (Figure 1), and note how many of these customers used ExIm funding–including the hated Emirates Airline–but also Etihad Airways, Cathay Pacific Airways and Cargolux. Some of the other customers undoubtedly funded wide-bodies, but this list doesn’t provide this detail.
Note that this list in the last 10 years covers the period during the Global financial collapse in 2008 and the Great Recession that followed, a period in which even credit-worthy airlines couldn’t find money in traditional capital markets. Boeing’s reliance on ExIm to finance their airplanes to non-US customers (or, in the case of Aviation Capital Group, airplanes destined for non-US airlines), spiked to an all-time high during the Great Recession.
We also published the list last week of pending ExIm guarantee applications, compiled by Wells Fargo (Figure 2). There are some obvious credit-worthy airlines on this list: Air China, Air Canada, Cathay Pacific Airways, Korean Air Lines, Thai Airways and Emirates. Clearly there are some customers who fall into poor(er) credit category, among them TAAG, Silk Way and Biman Bengledesh. These are the types of customers ExIm was intended to serve.
And this brings me to the point that seems to be the greatest argument Delta, American, United and the Congressional critics have about ExIm’s policies: why are credit-worthy carriers gaining access to the loan guarantees?
Setting aside for the moment the obvious retort that these customers have the same access to Airbus ECAs, I think the ExIm critics have a fair point.
ExIm was created 81 years ago, in 1934 during the Franklin Roosevelt administration and at the height of the Great Depression. It was and is intended to help US companies sell goods to poor(er) credits outside the US. Critics point out that Boeing airplanes overwhelmingly dominate ExIm Bank business, to such an extent that ExIm is called “Boeing’s Bank.”
Why the loony fringe Republicans and Tea Party types can’t see the benefits to job create, retention, competitiveness and benefits to the US trade balance is beyond me. Killing ExIm is throwing out the baby with the bath water. Does it appear reform is needed? Absolutely. Credit criteria could be tightened. A reallocation of funding guarantees might be adopted, with a cap allocated “for the export of commercial airliners,” freeing up money for other companies and industries. Let’s remember that very soon, Airbus will be delivering airplanes out of its Mobile (AL) plant. Although Airbus intends that these are destined for US customers, I can foresee the day where US-assemble A320s with US-made engines (Pratt & Whitney and, to some degree, the CFM US-French competing engine), along with its high US component content might be delivered to non-US airlines and thereby become eligible for US ExIm guarantees (wouldn’t this be ironic?).
A real reform effort is needed to return to the original purpose of ExIm and to reallocate the guarantees to open access to more companies. But killing ExIm altogether? Dumb idea.
And speaking of dumb ideas
The US Department of Justice is considering whether to launch an anti-trust investigation of American, Delta, United and Southwest airlines–the Big US Four that control 80% of the domestic market–and whether they’ve colluded to reduce capacity in order to boost profits.
After a decade or more of over-capacity to gain market share, promoting fare wars in the process, the US airline managements, spurred by the Great Recession, finally understood that too much capacity is bad for the bottom line. I hate flying today at 85% load factors, and truly relished the days of over-capacity and 65% load factors. But those days led to failed airlines and ultimately consolidation. Airline managements are finally running their companies like businesses. Now DOJ is asking whether statements in public forums, like conferences, press conferences, media days and earnings calls, represent “signaling” competitors, resulting in collusion.
Whatever happened to First Amendment Free Speech?
Jamie Baker, one of the airline analysts at JP Morgan, issued this comment last week in a research update on Delta. I found it hilarious and reprint it here:
Introduction to Baker’s note: Lastly, and despite our best efforts to resist commenting on that which we consider immaterial, our views on the DOJ investigation are included below.
Fares paid by consumer continue to rise in part because the Federal government taxes the ticket prices at rates that exceed “sin” taxes (tobacco, alcohol, etc), more than 25%, and shows no signs of mitigating this. Instead of investigating the airlines, DOJ should look at the taxes.