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.
Delta

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.

Hirst said the use of Ex-Im financing has expanded dramatically in recent years, as international markets have grown, partially because the U.S has negotiated nearly 100 Open Skies agreements with airlines around the world. One result is that international carriers have continued ordering aircraft from Airbus and Boeing even during a recession, enabling many of them to have far younger fleets than U.S. carriers do.

What do the U.S. airlines want? Hirst said airlines from developing countries continue to need help, but in general, "there should not be export credit financing for airlines that have an ability to go to the commercial market on their own. The market ought to regulate aircraft financing, not the governments. We're pushing for a more market based outcome."

Meanwhile, Boeing called the questions raised by the U.S. carriers "legitimate" and said that "export credit, and in particular the Ex-Im Bank of the U.S., has been an important funding source for many of our overseas customers, especially during the recent economic downturn when commercial financing has been harder to obtain."
Boeing

"Reconciling all of the global perspectives and issues involved in export credit policy is a challenging task," the aircraft maker said, in a prepared statement. "However, we are committed to working through these complex issues with the goal of ensuring a level playing field both for airplane and engine manufacturers and for their airline customers."

-- Written by Ted Reed in Charlotte, N.C.

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