Senate Commerce, Science and Transportation Subcommittee on Aviation Operations, Safety, and Security Hearing
Federal Information & News Dispatch, Inc. |
Thank you for the opportunity to address the competitive landscape with respect to commercial aviation, the
My name is
Before serving at BCC, I had the privilege of serving in
I am proud to be here on behalf of
I know the merits and track record of Ex-Im have been widely debated in recent weeks. There is probably little you have not heard on the subject. Today, I aim to focus my statement on aspects of global export credit assistance that has not received much attention, by:
* Providing broader strategic context about aerospace - and new, well-funded emerging players such as
* Discussing the critical role of the Bank in maintaining a functioning - and fair - market for commercial airplanes; and
* Finally, assessing some of the global consequences - for
A Global,
As a starting point it's important to understand that aerospace is a unique industry on the global stage. The rest of the world, rising economic powers especially, regard aerospace as a matter of national interest. Aerospace is not considered just another industry that produces goods or services and thus jobs and economic growth. It is considered a matter of national prestige, national competitiveness and, for some, national dominance.
Furthermore, countries like
The airline business is part of this, too. Just as it is common around the world to see state ownership of aerospace manufacturers, it is equally common to see state ownership of aviation businesses, like airlines. For many nations, the movement of people and goods into and out of their borders is too important not to assure directly, regardless of the country's level of economic or rule of law development.
The takeaway is that in global aerospace markets, it is not so much companies that compete; as it is countries - and all their traditions, aspirations, and occasional grievances. Whether the players on the manufacturing side are
In the realm of national competition against state-sponsored aerospace entities - both established and emergent -
The Global Model for
Having seen the economic and employment benefits
The development of the C-Series and C919 are important for the global aerospace community. The Chinese aspiration, like the Europeans during the 1970s, is to develop a full family of airplanes - from regional jet to narrow-body to eventually wide-body airplanes that can compete with the full range of large commercial airplanes offered by
In keeping with this type of commitment and aspiration, many of the governments of the nations listed above deploy vast resources into and coordination across their countries' supply chains, research and development, financial systems, and domestic airlines. These efforts are all directed towards the ultimate objective of growing their domestic aerospace capability, capacity, and market share. We are all familiar with the billions that
The emerging nations, of course, have the advantage today, unlike
The complexity of the world we live in could not be made any clearer than by the fact that the very nations that aspire to emerge as successful aerospace competitors are also some of our most important customers and respected partners, whether that is
These realities were made real to me during my time living and working in
At
Role of Export-Credit
As a company - and as a nation that cares about global competitiveness in aerospace - we are fortunate the majority of the emerging aerospace competitors have adopted an agreed approach to the use of export credit for airplane sales. Through the OECD, and via an OECD arrangement known as the Aircraft Sector Understanding (ASU), the aerospace nations have been able to agree on the most important mechanism for the control of export credit, which is price.
In 2011, in large part thanks to the good work of the U.S. government, a multilateral agreement was reached that has ensured that in aviation there is no such thing as "cheap export credit," a term often employed by critics of Ex-Im. Every banker, lessor, or capital markets player in-the-know will tell you that thanks to the 2011 ASU, export credit for airlines, at every credit level, costs the same or more than commercial bank credit. Standard & Poor's said it clearly in a recent report on Ex-Im: "the overall cost of ECA-supported financing, particularly for stronger airlines, is now equivalent to, or even higher than, that of alternative financing sources." And the leading independent academic source who conducted blinded bank bids to assure real world conditions in measuring price has published data showing the same.
The oft-heard complaints against Ex-Im that it allows foreign airlines to buy airplanes with "cheap credit" are without merit. In prior generations, that certainly may have been the case; but as explained above, the 2011 ASU assures it is not today and will not be again - the 2011 ASU requires quarterly resets to ensure the rates stay at or above the liquid market.
Since the complaint is also sometimes made that the supposed "cheap credit" gives foreign airlines who fly to the U.S. an advantage over U.S. airlines, it bears noting that U.S. carriers can and do borrow money domestically through the U.S. capital markets at even lower rates than the commercial bank credit at which the 2011 ASU is pegged. This provides U.S. carriers millions of dollars in advantage over foreign airlines who do not have the benefit of the geopolitical security, which a U.S. airline can offer the capital markets in any bond issuance.
Bottom line, there is no such thing as "cheap export credit" for airplanes.
So why then is export credit useful and relevant? We do not have to look far back in history to answer that question. Just compare what happened in our industry following the devastating attacks of 9/11 and the more recent global economic recession that began in 2008.
Taking the more recent first, after the recession, liquidity disappeared across all financial sectors. In aviation, many of our international airline customers still had strong demand for their product - travel. But they could not persuade financial institutions to lend to them; for the same reason so many Americans during that timeframe had a hard time getting a home loan. They had good earnings, strong credit histories, and reputable backgrounds; but we faced a liquidity crisis, and our banking system was not engaging in business as usual. In the midst of that crisis, if our customers had failed to show up with money to buy the planes they had agreed to buy from us 5 or 7 years earlier, U.S. aerospace would have had its own crisis, and inevitably, layoffs. Instead, strong U.S. leadership worked as intended. In the wake of the crisis, Ex-Im stepped forward, providing loan guarantees in support of roughly one-third of our airplane deliveries at that time. On those guarantees, Ex-Im made money that went to the American taxpayer via the U.S. Treasury.
Contrast that with what happened in the wake of 9/11. Following the attacks, the U.S. airlines faced their own crises. The U.S. government, recognizing our national sovereign interest in aviation, provided U.S. domestic carriers with billions of dollars in direct assistance. Yet the airlines, facing operational challenges and without liquid financing options to see them through, had to walk away from airplane deliveries they had previously agreed to take.
The difference between the episodes is stark and summed up in a word: Jobs.
Returning to the first scenarios, the recent global recession, it is important to note that after the liquidity crisis was averted and the jobs were preserved, Ex-Im next acted perfectly in line with U.S. policy: walking back from aviation just as quickly as it had stepped forward during the crisis. This year, Ex-Im deliveries will be down from the one-third high water mark of the crisis, to roughly 10 to 15% of deliveries.
When I talk to the leaders of banks, leasing companies, and capital markets players, I hear a resounding message: 'This is how it is supposed to work.' They not only do not object to Ex-Im's participation at the 10 to 15% range; they endorse it. They do so for the simple reason that they know Ex-Im is good policy that helps them, helps growth, and helps stabilize markets. This is hardly the response you would expect if Ex-Im were "crowding out" commercial players from financing airplanes, as Ex-Im critics often contend.
The result of the 9/11 episode also had a lesson-learned for the U.S. airlines. They are now much more likely to demand airplane manufacturers provide them backstop lending commitments when they execute contracts for airplanes. They no longer just rely on the expectation financial markets will be there for them when they get down the road 5 or 7 years to the agreed deliveries.
This is where Ex-Im comes in. Our U.S. airline customers are not the only ones to feel the pinch to have backstop lending commitments in place; our foreign airline customers equally feel it. They too need certainty that if the financial markets seize up when they come to pick up their airplanes in 7 years time there will be a backstop finance option for them. Ex-Im takes that concern off the table for them. In effect, it is providing them geopolitical risk insurance that no one but a sovereign nation can offer in any meaningful and consistent fashion.
This is why
Role of
Ex-Im is a great and necessary equalizer. Ex-Im allows
Because of the great interest the airlines naturally have in securing backstop lending, if the availability of U.S. export credit is in doubt, airplane customers can be expected to hedge their bets by building preference in their order backlogs to those planes -
The logic is simple. If the U.S. is not at the table to lead building partnerships with
Ex-Im is the tool the U.S. must use in order to sit at the table and persuade other countries to continue even-playing field habits in the use of export credit. The multilateral 2011 ASU agreement tells the whole story. By ensuring that export credit for airplanes is not "cheap credit," it has ensured there is no subsidy in play. It has ensured there is no unfair advantage for any country, or for any segment of the aviation industry. But that simple and powerful mechanism will fail if competitors do not join the multilateral agreement; or worse, if they leave it altogether.
Case in point is a recent letter from a European turboprop manufacturer, ATR, to the OECD. It complained
It is not hard to envision the future when countries with emerging airplane manufacturers that carry the aspirations of an entire nation enter the market with export credit support like that. The best response the U.S. has remains Ex-Im. Through the statutory authorizations, Ex-Im has authorities to match subsidization when necessary to ensure fairness. More importantly, by simply holding that authority, Ex-Im creates the incentive and leverage for other nations to enter into the existing multilateral agreements that ensure everyone's even playing field.
A World Without Ex-Im
It does not take a creative mind to understand the dangers to an Ex-Im retreat are not singular. They are multi-dimensional. Who can believe, for example, that after an Ex-Im shut down, the Europeans (read:
If Ex-Im goes away, it is predictable
Over the span of two decades, illegal European launch aid - some
Export credit is not an unknown commodity to the world after all. Over 60 nations offer such programs.
In the near term, to make up for Ex-Im's absence,
Already, the political attacks on Ex-Im have taken a toll on our customers. Some of whom have made or are considering multi-billion dollar commitments to
Conclusion
Thank you very much for this opportunity and I look forward to your questions.
Read this original document at: http://www.commerce.senate.gov/public/?a=Files.Serve&File_id=56d3b561-17e8-4ea9-86a8-d1d07d8032a8
Copyright: | (c) 2010 Federal Information & News Dispatch, Inc. |
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