This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why U.S. Airlines Pay More to Finance Jets

ATLANTA ( TheStreet) -- In 2009, Delta (DAL) financed three 777s it bought from Boeing (BA), paying interest at 8.11% over nine and a half years. That same year, Emirates Airline bought three similar aircraft, paying interest at 3.4% over 11.9 years.

While the Emirates borrowing had a loan-to-value ratio of 50%, Delta's loan-to-value ratio was 40%. So Emirates' low-cost loan covered more of its purchase.

How can that be? The reason for the discrepancy is that Emirates and many other carriers can borrow at low cost for aircraft financing from the U.S. Export-Import Bank and similar agencies in Europe, Canada, Brazil and Japan, all aircraft exporters. But such financing is unavailable to U.S. and major European carriers.

"It's absurdly unfair to U.S. carriers that the U.S. government should be financing our foreign competitors with below market interest rates," said Ben Hirst, senior vice president and general counsel for Delta, in an interview. "It creates an unlevel playing field for U.S. airlines competing internationally, and it has led to [high] capacity levels in international markets that have been encouraged to develop regardless of market conditions."

U.S. carriers are speaking out now because this week, the Organization for Economic Cooperation and Development, a group of 33 developed countries, will meet in Paris to discuss extending a multilateral agreement called the Aircraft Sector Understanding, which codifies aircraft financing standards.

"We are particularly concerned that the damage to U.S. airlines caused by such export credits may be worsened by the outcome of the current negotiations," said Jim May, CEO of the Air Transport Association, in a recent letter to Secretary of State Hillary Clinton.

May noted that during the past decade, the Export-Import Bank provided guarantees backing $46 billion in financing for more than 800 Boeing aircraft. In fact, Boeing is the bank's principal beneficiary. In fiscal year 2009, aircraft financing accounted for $8.6 billion, about 40% of the bank's $21 billion in total export financing. "Given U.S. aviation's role as a major export factor and jobs source, it makes sense," said Boeing Capital Corp. spokesman John Kvasnosky.

But does it? The airline beneficiaries from the financing include nine of the ten most profitable airlines based outside of the U.S., France, Germany and the United Kingdom, May said. Among them: Air Canada, Air New Zealand, Cathay Pacific, Emirates, Japan Airlines, Singapore Airlines and WestJet. They all "compete with U.S. airlines for U.S. passenger traffic," May said. WestJet, founded in 1996, has received nearly $1.7 billion in Ex-Im Bank financing since fiscal 2002 -- and has been able to take traffic from U.S. airlines as a result, he said.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.66 -0.09%
FB $118.57 0.84%
GOOG $698.30 0.76%
TSLA $241.82 0.44%
YHOO $36.53 -0.19%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs