State aid for buying planes in flux

Talks center on new rules as U.S., Europe draw rivals

— In the mid-1980s, Boeing and Airbus avoided a trade war by making a gentlemen’s agreement not to seek government financing to sell planes in each other’s home markets. The deal symbolized an aviation world dominated by the United States and Europe.

That world is a lot different now. No longer can Airbus and Boeing count on being the biggest manufacturers of large airplanes. Manufacturers in Canada and Brazil are seeking to gain a foothold in this lucrative market. And not too far in the future, China, Japan and Russia likely will be competing as well.

At the same time, airlines from Asia and the Middle East that did not exist three decades ago or were small players are now vying for a much bigger piece of the market.

The old rules, some airlines and plane manufacturers contend, are not working anymore.

Last week negotiators from the European Union and countries including the United States, Japan and Brazil met in Ottawa to grapple with the politically charged matter. Their goal is to draw up a new agreement by the end of the year on the rules for financing the airplane business, with a specific focus on how much government assistance is permitted.

The various interests are in conflict, and it is unclear whether the talks will be successful by year’s end.

“The home-market restriction has become unsustainable,” said Scott Scherer, vice president for strategic regulatory policy at Boeing’s financing unit. “It’s the big elephant in the room.”

The discussions, under the auspices of the Organization for Economic Cooperation and Development, are complicated by the fact that what might be in the interest of the airlines may not necessarily work for aircraft manufacturers.

The so-called home-market rule applies to only four European countries - France, Germany, Britain and Spain- where Airbus planes are produced, and to the United States, where Boeing is based. As a result, for example, Ryanair, which is based in Dublin and is one of Europe’s biggest low-cost carriers, has tapped into export-credit financing to buy most of its fleet of 200 Boeing planes. Its Londonbased rival, EasyJet, cannot make a similar deal.

The loudest objections to the current rules have come from European airlines, which say that cheaper, governmentbacked loans have helped fuel the growth of their rivals in Asia and the Middle East and given them an unfair advantage.

The charge is mostly aimed at Emirates Airlines in Dubai, the rapid expansion of which in recent years has rattled airlines in Britain, France and Germany. The airline threatens to take their international passengers away from European hubs and fly them instead through its gleaming new terminals in Dubai.

Emirates raised eyebrows this summer with two more jet orders - including plans to buy an additional 32 Airbus A380 jets valued at $11 billion at list prices, bringing its total orders for the twin-deck superjumbo to 90. In July, Emirates placed another order, for30 Boeing 777s.

Boeing and Airbus also worry about new competition. At the moment, their biggest concern is the emergence of a new jet from Bombardier of Canada, the C-Series. This single-aisle plane, due to enter service in 2013, will be able to seat about 130 passengers, posing the company’s first direct challenge to the bestselling Boeing 737 and Airbus A320.

The current rules set separate financing standards for large airplanes and regional jets with 100 or fewer seats. But the C-Series, with its larger capacity and range, has now blurred that line, Boeing and Airbus say. This, they argue, puts them at a competitive disadvantage for sales in the single-aisle category, the most profitable segment of the market.

“We do not support the so-called home-market rule,” said Marc Meloche, the senior director for structured finance at Bombardier Aerospace. “All customers should have access to all financing sources, based on market principles.”

The other major catalyst for the talks has been the economic downturn, which essentially shut down commercial credit markets and left official export agencies, especially the Export-Import Bank of the United States, as outsize purveyors of financing.

In 2009, about 35 percent of Boeing and Airbus sales were financed by credit agencies, according to the manufacturers, up from about 20 percent before the economic downturn.

In the United States, the Export-Import Bank guaranteed $8.6 billion in commercial aviation loans in its fiscal year ending September 2009, nearly double what it typically helped finance each year since 2002. This year, export credit agencies in the United States and Europe are expected to guarantee more than $15 billion in civil aviation loans, about the same as in 2009.

Export agencies, set up to help finance exports to countries with weaker credit, usually require quicker repayment than commercial loans and impose more restrictions on the airlines. But in today’s depressed market, industry experts say, the agencies’ loans are on average about 3 to 5 percentage points lower than commercial loans. This can be a significant factor for planes with list prices ranging from $60 million for a singleaisle plane to about $350 million for the largest airliner today, the Airbus A380.

Business, Pages 78 on 10/24/2010

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