The Export – Import Bank Dilemma

Let’s focus on the United States for a minute. In 2008 -2009, 11 wide-body aircraft were delivered to U.S. export – import bank eligible country competitors serving the U.S. for each one wide-body aircraft delivered to a U.S. carrier. So, in essence, the U.S. government is giving foreign competitors a price break its own country’s airlines don’t get. It’s a distinct and often hefty – financing can be upwards of $4 - 5 million per plane – competitive advantage.

Competition is one thing. That’s why the U.S. has championed “Open Skies” agreements around the world. Since 1995, the U.S. has negotiated 99 such agreements while other world governments combined have approved just 20.

The U.S. government creating an unlevel playing field is something entirely different. The financing advantage enjoyed by recipients of Export Credit Agency (ECA) loans facilitates events that are neither good for airline employees, U.S. tax coffers or the prospects for the U.S. airline industry returning to profitability.

Small costs differences have added up to big change in the U.S. domestic airline market, triggering tectonic shifts in the makeup of competition. When cost differences between network airlines and the low cost carriers approached two cents per available seat mile, low cost carriers grew at the expense of the networks. The same type of outcome could occur in the international arena - only it might not be U.S. flagged carriers replacing capacity lost by another U.S. carrier.

ECA programs offering financing 4-5 percentage points less on a $260 million wide-body aircraft is not small change. Foreign carriers can save millions funding a fleet at a level and rate U.S. airlines can’t possibly match in the commercial markets.
ECA backed funding first came available in the United States and Europe in 2000. U.S. competitors Emirates Airlines (UAE), Korean Air (Korea) and WestJet (Canada) have the distinction of not only being among the largest recipients of U.S. financing, but they are also the three airlines that have added the most capacity against competing U.S. carriers since 2002.

At a time when the U.S. government is imposing cost and regulation on top of the industry responsible for enabling more than one trillion dollars in economic activity, this would seem to be an easily resolved issue. Eliminate ECA funding and the ability it gives foreign airlines to use U.S. taxpayer dollars to simply swamp U.S. carriers with uneconomic capacity. Again, I am all for competition... Just not competition on an uneven plane that gives someone a significant advantage by subsidizing a cost center.

This is a slightly different virtuous circle than those we have referenced in the past – and one that can be stopped: U.S. government backs loans to foreign competition; foreign competitor costs decline as a result; lower cost foreign competition accelerates growth; opportunity cost to U.S. airline industry equal opportunities lost because of cost disadvantage; fewer U.S. employees to bolster the tax rolls.

So why is the ECA case different from the challenge the Gulf airlines pose in Canada? That’s about access to the marketplace. The U.S. provides access. ECA gives non-U.S. airlines a cash advantage to spend as they wish in that marketplace – whether by offering non-compensatory fares or to simply buy more airplanes to add new and marginal service to that marketplace that results in more non-compensatory fares.

You know how it goes from there.