x Abu Dhabi, UAEThursday 18 January 2018

UAE carriers face financing turbulence

Airlines in the Middle East, Asia and Latin America will face higher borrowing costs for new aircraft soon after a new ruling from the Organisation for Economic Co-operation and Development.

UAE airlines are facing higher borrowing costs after the OECD’s decision to revise rules concerning government-backed export credits.
UAE airlines are facing higher borrowing costs after the OECD’s decision to revise rules concerning government-backed export credits.

UAE airlines will probably face higher borrowing costs for new aircraft after the Organisation for Economic Co-operation and Development (OECD) agreed to revise rules concerning government-backed export credits.

The agreement, which was reached on Tuesday but needs to be ratified by each member state by January 20, will phase out rules that made it easier for airlines in developing countries to finance aircraft purchases.

Up to now, carriers based outside of Europe and North America have been eligible for financial guarantees and insurance provided by export credit agencies. This led to cheaper financing terms than those enjoyed by airlines based in the five countries where Airbus and Boeing aircraft are manufactured. The rules being revised were introduced in 1986 to prevent a trade war.

"The proposed terms - following extensive negotiations at the OECD - would move fees closer to market rates and allow for regular adjustments to reflect market development," the organisation said.

Should the rule changes be ratified, Airbus and Boeing would still be allowed deliver aircraft through to the end of 2012 under the current state-backed financing terms, said Steven Tvardek, a negotiator with the OECD, which is based in Paris. The waiver also applies to 138 planes ordered from the two aircraft manufacturers before May 2007, he said.

The new rules are likely to affect Emirates Airline and Etihad Airways, which have used export credits to finance a portion of their aircraft purchases, and both have billions of dollars of aircraft still on order, with deliveries spread out over the coming decade.

Aircraft purchasers will also pay a "market surcharge", to be revised every quarter, with increments limited to 10 per cent, Mr Tvardek said. "It's a robust agreement," he told Bloomberg. "It will mean that government-backed financing can complement the market, without crowding the market out."

Laura Goodes, a spokeswoman for British Airways, said that the agreement was a step in the right direction but that the new financing levels for some of BA's competitors "are still cheaper than the market rate". Emirates is the fourth-largest recipient of export credit assistance from the US Export-Import Bank, after the petrochemicals company Pemex of Mexico, various Indian governmental entities and the budget carrier Ryanair of Ireland. Since 1996, 23 per cent of all of Emirates' aircraft borrowing has been facilitated by US or European export credit agencies.

In its report last year, the US bank said it had exposure to US$2.67 billion (Dh9.8bn) of guarantees and insurance with Emirates, up from $1.51bn in 2008.

Etihad, which was first rated by export credit agencies just last year, said 14 per cent of its purchases used export credits. Last year, it said the new rating would save it $20m in interest payments per year for eight wide-body aircraft it had just had delivered. Another UAE entity that has used Export-Import Bank funding is Dubai Aerospace Enterprise, which received $567.4m worth of export credit assistance last year.

US and European airlines began calling for policy reform this year, claiming the old OECD rules gave a competitive advantage to rivals.

The US Air Transport Association cited the financing of three Boeing 777s for Delta Airlines, which without any export-backed credit insurance last year raised capital directly from banks and arranged interest rates at more than 8 per cent. By contrast, Emirates raised $414m for three 777s last year, paying an interest rate of 3.4 per cent through bonds backed by the Export-Import Bank.

In October, Emirates said that it supported the proposed rules changes but that the issue had been taken up by rivals to criticise the Dubai airline. "We believe that airlines should have open access to financing, but by the same token no airline should be singled out for capped or restricted access to export credit finance - something which has been advocated by Air France with a view to limiting our growth," Emirates said.

Marty Bentrott, the regional vice president of sales at Boeing, said this year he believed some airlines had overdramatised the issue of export credits. "I really don't think that [export credits] are providing any kind of substantial competitive advantage," he said. "If airlines have good businesses, good balance sheets, they will have good credit and their accessibility to lower-cost financing will be there."

* with Bloomberg