April 18, 2016, © Leeham Co.: Export Credit for airliners was back in the news last week, with the US taking aim at the prospect of Canada’s agency supporting sales of the Bombardier C Series to the US and France and Germany suspending export credit support for Airbus airplanes.
The week before, Dennis Muilenburg, the CEO of The Boeing Co., testified before Congress that although the US ExIm Bank was reauthorized, Senate action—or more accurately, inaction—on confirming members of the ExIm Board of Directors has kept the agency shut down for new deals. There isn’t a quorum of members on the Board to approve new deals.
The debate over the US ExIm Bank has been going on for years. We’ve covered this regularly and have been clear we support the bank and dispute claims by the wacko fringe in Congress that this is corporate welfare for Boeing. It’s needed to be competitive with Airbus, which until a week or 10 days ago, was sailing along with its export credit support from Britain, France and Germany (more on this below). Hundreds of US companies relied on ExIm and it supports thousands of US jobs.
There is no denying Boeing gets the largest portion of ExIm allocations, but this is obvious because Boeing airplanes are the most expensive export supported. There is no denying that further reform is needed to tighten the financial means testing for airlines applying for support; there is no reason Emirates Airline, for example, requires ExIm support given its recent history of a strong balance sheet.
But to kill ExIm entirely because of the absence of some needed revisions is ill-advised at best and just plain stupid at worst.
ExIm was finally reauthorized last year through tagging it onto a highway funding bill (such are the curious ways of Congress). But by then, enough members of the ExIm Board of Directors had left that there was no longer a quorum. Without a quorum, no new deals above $10m can be approved.
Hence, Muildenburg’s recent appearance before a Congressional committee imploring them to approve the new appointees so ExIm can get back to doing its business.
For those dunderheads who oppose ExIm, it needs to be said again and again: ExIm returns a profit to the US Treasurer. It supports thousands of jobs. It supports transactions for hundreds of companies. It’s not just about Boeing. Without ExIm, Airbus has a competitive advantage.
Until the last 10 days or so when Airbus apparently stepped on its own…tailpipe.
The United Kingdom, France and Germany provide export credit support for Airbus commercial airplane sales. As with the US ExIm Bank, the paperwork for applications is detailed. I’m not remotely close enough to any of the processes to know the level of detail required on applications, but according to news reports, the European paperwork requires disclosure of the use of third parties involved in arranging sales.
And this is where Airbus stepped on it (and not for the first time; Airbus has run into trouble before over the use of third parties). To its credit, Airbus itself disclosed to the UK authorities its applications were deficient in disclosing the use of third parties. According to The Wall Street Journal, this was enough for the UK to suspend approving export credit support. The UK authorities subsequently referred this to the Serious Fraud Office.
This in turn prompted the French and German authorities to suspend their export credit support. Although Airbus says the three countries typically act together, the effect is that now neither Airbus nor Boeing can use export credit support for their airplanes, an outcome desired by the wacko Congressional fringe, albeit not for the reasons they pursued.
And then there’s Bombardier, currently the perpetual Charlie Brown of the commercial aerospace industry.
For those unfamiliar with the comic strip character, poor Charlie Brown is the put-upon, well-meaning good guy who, despite all the best
efforts, winds up the loser in many of his endeavors. When he tries to kick the football, his nemesis, Lucy, always, always pulls the football away at the last moment. Charlie Brown falls flat on his back from the momentum of missing the kick. Inevitably, his laments, “Good grief.”
BBD has a superb airplane in the C Series. It’s CS300 economics competes directly with the Airbus A319 and small Boeing 737. The CS300 economics are hugely better than the A319ceo and 737-700 and better than even the re-engined neo and MAX versions.
But delays, management incompetence, a weak balance sheet, circumstances beyond its control and aggressive competitors have made life exceedingly difficult for BBD and its sales efforts.
Even oil prices seemingly conspired against BBD. The C Series was designed in a high-priced oil environment and it’s entering service this year in a low-priced one. This gives new life to the aging A319ceos and 737-700s in the used airplane market and enabled Boeing to sell 65 -700s to United Airlines at a screaming low price that offsets any economic gains provided by the C Series.
Bombardier went hat-in-hand to the government of the Province of Quebec, where its headquarters and principal operations are, and to the federal government in Ottawa asking for more than US$2bn in aid. Another $1bn-plus was obtained from the national pension fund. Quebec hasn’t yet turned over its investment—the agreement is still being negotiated—and Ottawa is balking.
Nevertheless, there announcements caused the Obama Administration to question the government investments as inappropriate under trade rules (which may be a dubious complaint). And finally, we get to the heart of the matter: Canada’s export credit support for the C Series.
Unlike the US and Europe, where each agreed that neither will provide export credit support to the “home countries” of Airbus and Boeing (ie, Europe won’t support Airbus sales to the US and the US won’t support Boeing sales to the UK, France and Germany), Canada is under no such restriction. Canada can provide export credit support for Bombardier sales to the US (or to the Airbus home countries).
When BBD sold only turboprops and regional jets, nobody cared because Europe and the US didn’t have competing products. But now that the CS300 is a direct competitor to Boeing, the Obama Administration is crabbing about the prospect of Bombardier providing export credit support for the C Series.
Several years ago, President Obama said that if Canada provided support, then ExIm would be authorized to do the same in the US. How this could be under the law was problematic, to say the least, but given the subsequent effort by the wacko fringe to kill ExIm, the Obama statement was fanciful claptrap.
The bottom line: even when it’s legal for Bombardier to offer Canadian export support, it gets put upon.