There’s a good chance you’ve never heard of the Export-Import Bank of the United States (Ex-Im Bank). The reason? Because it very likely doesn’t impact you in your daily life, or if it does, you don’t realize it. But the Ex-Im Bank has been controversial for several years when it comes to the airline industry, and you can expect to hear more and more about it as the bank comes up for re-authorization yet again next year.
The mission of the Ex-Im Bank is to boost American businesses by enabling sales of their goods to companies outside the US. How? Well, it helps foreign companies that can’t line up funding on their own to obtain financing, primarily through guarantees to lenders. The end result is that it should mean more jobs for Americans because more people around the world are buying American products. Hooray!
In 2013, in fact, the Ex-Im Bank authorized $27.3 billion in funding. Of that, an incredible $8.3 billion, or 30 percent of the total, went toward financing aircraft purchases by foreign carriers. As you can probably imagine, Boeing loves this. It helps provide cheaper financing and that should mean Boeing sells more airplanes. But not everyone shares the same rosy outlook.
The airlines, particularly Delta, have been very testy over the Ex-Im Bank subsidies. What’s even stranger? The Air Line Pilots Association (ALPA) agrees with Delta on this issue. The enemy of my enemy is my friend, or something like that. ALPA actually put out a release yesterday condemning the funding of widebody aircraft in advance of Congress starting to talk about this. After all, the Ex-Im Bank is due for re-authorization and that’s why the rhetoric is bound to ramp up.
Presumably the reason for opposing only widebody aircraft is because those are the ones that come from far away lands to compete with US carriers. I’m guessing I don’t have to explain that it’s really the Gulf carriers (eg Emirates and Etihad) that are causing a nervous reaction here (though Air India and others around the globe have also been in the spotlight). The Gulf carriers are buying a silly number of airplanes and rapidly increasing their number of destinations in the US so it is a major concern for Delta and others.
If you look at this from afar, then it seems rather silly. The Ex-Im Bank is basically deciding that Boeing will be the big winner since so much funding goes toward helping to buy airplanes. But the US-based airlines stand to suffer since those airplanes are being flown to the US in direct competition with US-based carriers. And those US-based carriers don’t have access to the same financing deals. That sounds pretty bad.
Of course, the reality is a bit murkier. While the airlines say that foreign carriers have a big advantage because of this arrangement, Boeing has said that the US carriers have access to lower financing rates than the foreign carriers can get even with Ex-Im Bank assistance.
And naturally, not all of these loan guarantees are going to fund rich airlines with deep pockets anyway. It was just last week, for example, that Iraq said it was seeking Ex-Im Bank financing assistance for the Boeing aircraft it had on order. That’s a different kind of situation entirely.
In perhaps the ultimate irony, Delta itself has even been the beneficiary of these deals. In February of this year, the Ex-Im Bank guaranteed some bonds so that Gol out of Brazil could buy engine maintenance services from the US… from Delta TechOps. Oy vey.
And yes, there’s also the fact that other countries offer export financing for their goods. So if the US walks away, you would want the others to walk away as well. I wouldn’t get my hopes up.
Even though it’s not as clear cut as it first appears, it still seems rather silly that the Ex-Im Bank needs to help rich carriers from afar to finance airplanes they’d likely be able to buy anyway. It does appear that the Ex-Im Bank can provide a real, valuable service, but maybe it’s time to tighten up the rules on who can qualify for funding. I’m sure we’ll hear a lot more about this in the coming months.
[Original stick figures via Shutterstock]
29 comments on “Why the US Export-Import Bank Has Angered the US Airline Industry”
I think the last time around Delta complained that Air India got financing for a 777 which is used for service to JFK and because of its lower costs, DL could not compete and had to drop the route.
I can’t comment on the validity of the statement, but Ex-Im certainly gets the airlines jumpy!
I think the Ex-Im bank is a good thing, but is it “choosing” Boeing over airlines? Do we have data for how many airlines fail and need the loan guarantees? Any hard data about the rates of guaruntees vs rates of US based airlines?
Noah – Yes, that Air India case has been in the courts for years – not sure if it ever was resolved or if it’s still flailing around.
While I’m guessing we could find this information, I wouldn’t know how to make sure we were comparing apples to apples. My assumption is that these are incredibly complex deals in general, so I wouldn’t want to try that on my own.
Why is the Ex-Im bank even talking to carriers like Emirates, Etihad and Qatar who have very large widebody fleets and happen to be state-owned ? It seems highly likely that if these 3 carriers wanted to borrow some cash, they could almost certainly find the funds from an alternate source. In its current state, Ex-Im granting loans to even the richest of foreign companies seems like little more than a significant market distortion.
It can (and probably) should be seen as a form of market distortion. The objective is to ensure that an Airline will buy a Boeing instead of an Airbus, so the distortion could end up helping the United States Manufacturing industry. Sidenote: I don’t work in the aviation sector, but I do live in WA, so you can see my bias towards Boeng.
Surely, all US carriers benefit when Boeing can spread development cost over many more aircraft, and thus can sell each aircraft for a lower price?
Kjell – I think the question to ask is whether or not these aircraft would have been bought anyway without the Ex-Im financing. Maybe not in the case of Iraq, but I’d bet that nothing would have changed with Emirates.
Cranky – Without the financing, I’m guessing chances are they’d buy more Airbus…
Just more proof that there is no such thing as a free market in basically anything. I don’t have enough knowledge to feel strongly one way or another but I’d bet the Europeans have something very similar in place to sell Airbus metal.
I do think US based airlines do have a valid argument about foreign carriers poaching traffic in a not quite so level playing field. Just don’t think this is the arena to make a stand.
I agree with Delta and the ALPA. We need to strive for a level playing field for all airlines.
That’s why Delta and the ALPA should agree to take back $1 billion in pension liabilities from the federally run PBGC.
“The pension plan for pilots is underfunded by about $3 billion, with $1.7 billion in assets to cover more than $4.7 billion in benefit liabilities. Of the $3 billion in underfunding, the PBGC estimates that it will be liable for almost $920 million, making the Delta pilots plan the sixth-largest claim in the agency’s 32-year history. The plan ended as of September 2, 2006 and the PBGC became trustee on December 31, 2006.”
We seem to give too much of our hard earned tax $$$ to foreign countries /banks etc How much do we …the US give the Ex-Im bank just what is our liability ?? We give the IMF too much also….
dotti cahill – This bank actually makes good money for the US. Last year alone, it returned more than $1 billion.
http://exim.gov/newsandevents/releases/2013/Numbers-Release.cfm
On that matter alone we should keep the ExIm. Either that or DL can pony up an extra $1.25b a year in taxes.. (A premium for getting their way…)
Dear C.F.,
What do you know about finance? By your article, precious little or how about next to nothing. Selling airplanes to the world is a business. Domestic commercial carriers are a joke. When the carriers are hurting for revenue, they’ll be glad there are foreign buyers with any kind of financing ability.
Falcon
Why can’t we just place tariffs on foreign flag carriers’ airfares to the U.S. to level the playing field?
ANCJason – Why do that when we can just end the financing deals ourselves if we wanted to? Tariffs would likely start a trade war, and the WTO wouldn’t look to kindly on that move.
Just scattershooting here:
Would it be possible for “certain” industries, like the airline industry, for the Ex-Im bank to guarantee loans for US Multi-national corporations just like foreign entities. The upside: Boeing still makes planes and we get jobs. Delta/AA/UA/VX/WN etc. get a more “level” playing field with regards to financing. I can see this working in a couple of ways. I know one of the articles above specify that domestic carriers already get lower rates than those guaranteed with Ex-Im bank, but that in and of itself isn’t guaranteed.
D-ROCK – Well, the bank is chartered to assist with financing exports. So it would require a change in the charter and I don’t know if there are other implications beyond just that. Probably not something that’s feasible.
“…help rich carriers from afar.” Of course, it’s politicians and their rich lobbyists from alocal.. Boeing spends big bucks in just about every State of the Union. It’s jobs, my boy, jobs!
As you know, these subsidizations, guarantees, promotions come in many types and who is to say what clearly is in the best interests of the country as a whole. You and I generally have no say, in any event, except by our ballots, and, oh well.
Reminds me of the infamous Fly America Act, or the “Save Pan Am Act ” (sorry, didn’t work) and the Government’s GSA-run, city-pair, contract air fare program. Says in effect government and contractor travel SHALL be at the contract fare and on US-flag carriers, to the extent they are available. The airline may use a code-share with a foreign-flag carrier if it wishes and advises GSA. Precedence is given to such arrangements over another US-flag carrier, a losing or nonpbidder, with everyone understanding that the code-sharing will mean much of the revenue will go to the foreign-flag. Think DL cares if the money goes to a foreign-flag carrier and not UA. No way!
[And, nothing related to either the contract fare program or the Act mandates travel in a US-made aircraft. KLM Airbus, fine, as long as DL told GSA that it was going to code-share with KLM. Mostly, DL flies the route itself, but seeing UA not get a dime, it’s the American (or, is it the DL?) way!]
Well at least most of those are joint ventures.. So the profit is shared.. (although the employee salaries stay mostly in the other country..)
GSA contract fares are just a more-public-than-usual (appropriate, because it is the government) corporate contract. It’s common for corporate contracts to mandate that employees fly the contracted carrier — that’s how the company (the government, in this case) gets the preferred rate. And though the GSA fares are often more expensive than the cheapest walk-up fares, they’re fabulous for completely unrestricted (YCA) or capacity-controlled but no-change-fee (-CA) fares.
The Fly America Act is deeply problematic, but not because airlines US airlines can put you on their partner’s metal on routes they’ve won the bid for. Remember, KL gets the same share of the revenue on any DL/KL/AF trans-Atlantic flight anyway, irrespective of the marketing or operating carrier (amongst those three; dunno how VS factors in).
This is an excellent analysis of a very complicated issue. Very well done!
IRS just a way to get around the subsidies riles on airplane sales. As such, it is very likely a huge inefficiency. Get rid of such subsidies altogether. They do not benefit anyone overall, and are merely the product of corrupt domestic politics.
Would anyone happen to have a breakdown of which countries get financing? I’m pretty sure ExIm targets less developed countries like India, Thailand, Iraq, and Pakistan; basically countries whose airlines don’t actually compete that much with American ones.
If Qatar or Ethiad wants new planes, I’m sure they can get 0% financing from their respective governments and have zero use for ExIm.
Robert – Sure you can. Just look at the annual reports:
http://www.exim.gov/about/library/reports/annualreports/
For example, here are the 2013 authorizations by country:
http://www.exim.gov/about/library/reports/annualreports/2013/FY2013-auth-by-market.pdf
It is definitely not just for developing countries.
Delta keeps declaring it faces unfair competition, but never articulates the point. The Gulf carriers may have very little difficulty in securing finances and the EXIM Bank involvement covers a fraction of their needs. However, what everyone seems to conveniently forget is the fact the the Middle East carriers serving the USA are serving an expanding market that is neglected by US carriers. Further, their passengers are interlined on US carriers for travel to and from their final destination. Delta and A4A also overlook the effect these flights have on their destinations in terms of jobs and tourist traffic, which is measured in the hundred of millions over a period of 5 years or so. To the point that the mayor of Dallas and the CEO of DFW visited Dubai a couple of years back to promote business and tourism to the city and request an additional freighter flight.
Delta has been touting stellar profits in the last few years, which makes it even harder to imagine a real adverse effect on their bottom line. The truth of the matter it is Delta and by extension other US carriers that are not interested in the region beyond their alliance partners involvement and cannot compete on service or do not want to spend the effort to expand the market
This discussion is occuring in a vacuum, and it is far more complex than any of the previous posters has even suggested. Ex-Im bank exists to promote US industry (and in effect US jobs). How do you suppose Airbus sells airplanes into credit situations that makes most of the Ex-Im transaction look like they are gold plated? No one has mentioned the European counterpart of the Ex-Im bank, Its role is identical to Ex-IM bank except that it provides the same services for Europeans. By treaty the Europeans don’t operate in North America, and Ex-IM doesn’t operate in Europe. If you restrict Ex-Im banks activities, but don’t restrict the Europeans, can you hear the sucking sound as all of the civilian aerospace jobs are lost?
While DL and other US Carriers may have a valid complaint, the reason they have to pay relatively high prices for equipment is because the risk is higher. What do you supposed happened in the Delta, NorthWest, America West, USAir, AA, Continental and United Airlines Bankruptcies to the holders of that paper? For the US Carriers Chapter 11 is simply another business tool to reduce costs.
Reducing those costs in that fashion really upsets the people who get to take the haircut. The reality is the Europeans should be complaining about Chapter 11. In most of the rest of the word, there is no equivalent to Chapter 11. You are insolvent? You are liquidated, and management goes out the door almost before anything else happens.
The reality is the US Carriers have enjoyed unfair advantages over their competitors as well. Ex-IM bank isn’t going to go away. The US Carriers should spend their time and energy producing a better product, instead of complaining about the fallout from their own decisions.
Exim Bank debate
All major aircraft manufacturing countries i.e. Europe and North America subscribe to an international agreement which provides a level playing field for all exports of aircraft. This is is the OECD Arrangement for Export Credits. A US carrier buying Airbus gets the same terms in respect of term and interest rates as a European carrier buying Boeing or Bombardier.
The cost of aircraft financing in the life cycle cost of an aircraft varies but is very small, of the order of less than 5 % of total. It is a fixed cost over the life of the financing if part of the OECD arrangement.
Life cycle costs include variables (consumeables such as fuel, en route charges and passenger based costs) and fixed costs (staff, administration, marketing, IT and return on capital employed or asset financing) over the entire life time of the aircraft with the carrier.
An airline that pushes up its utilisation will bring that cost down to less than 2%. 2% is a big number to airlines already on the margin e.g. upping an a/c pack to a higher recycled air component i.e. less bleed air off the engine can make a huge difference in fuel consumption and savings of millions of litres of fuel.
US long-term domestic financing in USD is lower in interest rate cost relative to term than Exim Bank financing under the OECD Arrangement. The difference in life-cycle cost for Delta or any other airline, is less likely to be in the interest rate and term of the financing but in the cost of the asset purchase.
The manufacturers ( Airbus and Boeing mainly ) price their aircraft according to the customer and the volume of orders. Boeing and Airbus have very sophisticated aircraft and airline business models. They are very aware of how an airline makes its money and price aircraft accordingly. This is one of a number of reasons why aircraft financing and costs are so opaque and secretive.
This is much closer to the issue of why Delta and ALPA collaborating.
Delta wants Boeing to propose a lower life cycle cost in Delta’s next Boeing purchase to give them an edge versus there other US competitors (AA, United). Foreign carriers are a relatively small component of competition to Delta. AA, United and the LCC’s are a much bigger threat. They can’t use the Exim Bank strategy against their domestic competition. They can use it to ‘tweak’ Boeing which is one of, if not the largest, user of the Exim Bank facilities.
Why haven’t the other US majors airlines joined publicly and adversarially with Delta to get rid of this ‘unfair advantage’ enjoyed by foreign carriers ?
Perhaps because they get better life cycle pricing from Boeing than Delta believes it is getting.
I don’t understand ALPA’s joining with Delta to push this as there members in the other airlines must be at risk from Delta’s strategy. The Exim Bank is simply a foil in this very intense negotiation between Delta and Boeing.
The author of this article is not realistic. Comparing Brazil’s Gol loan guarantees from EXIm Bank and the same using Delta’s Tech Ops is very myopic to say the least. While Gol does not threaten our US carriers, providing loan guarantees to those who do not need and use the same wide bodies to compete with our own airlines, in our own hubs, is not very smart.
The key issue here is the US aviation market. I don’t think US carriers can compete with all these Middle Eastern Airlines anytime soon. All these Gulf carriers are state owned, they don’t run like corporation here in the US. They get unlimited state funding from oil money. The point is that, all the Gulf Carriers don’t face tight regulations in their respective countries. I am sure if they were more of a democratic countries, all these Gulf carriers could have never thrived in the aviation market, the way they are today. They simply enjoy the monopoly of state funding. The bottom line is Gulf Carriers like Emirates play with the EXIM bank for a better deal since they can alternatively buy Airbus wide bodies. If we look closely at the Dallas-Dubai route, they have replaced the B777’s with A380’s. If Gulf Carriers are eventually replacing their fleet of Boeing aircraft, EXIM should focus on the developing countries rather than helping the middle eastern countries.