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Global developments presenting risks and rewards for the aircraft trading and financing market

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Headline News was last updated: December 17, 2009

Service

Guide.

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December 2009

Large Commercial Aircraft (Source: Export-Import Bank of America)

In the context of officially supported export credits, the term “large aircraft” refers to aircraft with 70 seats or more.

Today there are two primary producers of large aircraft in the world –

(1) Boeing in the United States and (2) Airbus in Europe.

Airbus is a corporation owned by the European Aeronautic Defence and Space Company (EADS; the result of a merger in 2001 between Aerospatiale-Matra of France, DaimlerChrysler Aerospace of Germany and CASA of Spain).

Bombardier of Canada and Embraer from Brazil are gradually expanding into the Large Commercial Aircraft market.

The Russians and Chinese also build large aircraft, however, their products do not compete globally with U.S.- and European-produced aircraft.

Boeing and Airbus have accounted for roughly equal shares of large aircraft orders over the past ten years.

This 50/50 split of orders reflects the highly competitive environment in which large aircraft manufacturers operate.

The downward trend in orders that began in 2001, and that is expected to continue over the near term, creates additional competitive pressure on both Boeing and Airbus to provide aircraft that meet their customers’ technical requirements, at the lowest possible price and with an attractive financing package.

U.S. Aerospace Industry

The aerospace industry is associated with high-skilled and high-paying jobs that contribute significantly to U.S. economic growth and national security interests.

In terms of international trade, the aerospace sector consistently generates a net positive impact on the U.S. trade balance.

During 2000 and 2001, U.S. civil aerospace exports exceeded U.S. civil aerospace imports by $21.7B and $21.9B, respectively. Boeing is both the largest U.S. aerospace company and the largest U.S. exporter.

During 2001, Boeing delivered 526 commercial aircraft of which 163 (or 31%) were delivered to foreign buyers.

Exports (by number of aircraft deliveries) have accounted for 30% or more of Boeing’s deliveries since 1998 and Ex-Im Bank has supported approximately one-quarter of Boeing’s export deliveries over each of the past four years. 

Availability of term financing is a key variable that impacts the success of the U.S. aerospace industry in winning export orders. Accordingly, international disciplines exist for officially supported export credits for large aircraft.

These guidelines were established under the auspices of the OECD.

The specific OECD guidelines are summarized below, followed by a description of how the U.S. and European export credit agencies implement these guidelines and the volume of large aircraft supported through officially supported export credits.

The Large Aircraft Sector Understanding

Because the financing requirements of large aircraft exports differ from other manufactured products (e.g., significant capital costs and a longer useful life may justify longer repayment terms), the U.S. and European export credit systems negotiated an Annex to the OECD Arrangement dedicated to civil aircraft issues.

The section of the Civil Aircraft Annex that pertains to large aircraft is known as the Large Aircraft Sector Understanding, or LASU for short.

The principal participants to the LASU are the United States and the European Union, which, in this context, represents the interests of France, Germany and the United Kingdom.

The LASU establishes the terms, conditions and special guidelines of export credit support that OECD governments can extend to buyers of large aircraft.

It sets the minimum cash payment of 15%, a market-based interest rate for loans extended by an export credit agency (set at 120 basis points and 175 basis points over 10-year treasuries for 10- and 12-year repayment terms, respectively) and a maximum 12-year repayment term.

It also limits the amount of spare parts that can be included in the financing package and generally bans ECAs from providing tied aid financing for aircraft.

International Negotiations

While Ex-Im Bank and the European ECAs that support Airbus met regularly (two to three times per year) during the 1990’s in an attempt to update the LASU (particularly with respect to establishing a risk-differentiated fee system), there have not been any formal bilateral meetings since June 1999.

Export Credit Agency Practices

Although Ex-Im Bank and the European ECAs are subject to the same OECD guidelines, there are differences in the financing techniques each export credit system uses to support large aircraft transactions.

These differences enable each side to capitalize on the relative strengths of its respective export credit system.

For example, nearly all Ex-Im Bank support for large aircraft is done through the financial guarantee program, a financing option that provides lenders with 100% unconditional cover.

This approach yields attractively priced financing on the Ex-Im Bank covered portion of the transaction.

The European ECAs provide a combination of insurance and guarantee support and offer financing enhancements, such as a free interest rate option.

This option allows buyers to lock-in a fixed interest rate up to three years prior to delivery, provided the buyer has entered into a

purchase contract with Airbus.

Buyers may choose between this locked-in interest rate or another market-determined interest rate established between the time of contract signing and delivery of the aircraft.

In a rising interest rate environment, the free interest rate option could yield significantly lower financing costs to the foreign buyer.

Even in an interest rate environment in which the prevailing interest rates are falling or stable, the option is still an attractive feature of the European program since it represents a free hedge against rising interest rate costs.

The three European ECAs that support Airbus export sales revised their official financing programs (including a modification to the duration of the free interest rate option) for large aircraft exports.

These changes yield financing terms and conditions that are more closely aligned with the Ex-Im Bank approach (e.g., shifting from a conditional insurance product to a guarantee product).

Export Credit Agency Activity

Ex-Im Bank and the European ECAs that support Airbus financed more than $7B in large aircraft exports during the calendar year 2001.

Of that amount, Ex-Im Bank accounted for $2.9B (or 41%) and the European ECAs accounted for $4.2B (or 59%).

Large aircraft transactions supported by Ex-Im Bank were concentrated in Asia (52%), followed by Africa/Middle East and Europe (each accounting for 21%) and Latin America (6%).

European ECA activity for large aircraft was distributed across regions as follows: the Americas (41%), Asia (34%), Europe (11%) and Africa/Middle East (14%).

Large aircraft support accounts for a significant share -- between 17% and 40% of medium- and long-term activity -- of all four ECAs that support the large aircraft sector.

Source: http://www.exim.gov/about/reports/compet/competpart201.pdf