Monday, November 14, 2011

U.S. Airlines Fire On Aid to Foreign Carriers

American Carriers Assail U.S. Loan Guarantees for the Airline

By DANIEL MICHAELS

U.S. airlines have renewed an attack on U.S. government subsidies to foreign buyers of Boeing Co. jetliners, calling on the U.S. Export-Import Bank to reverse its approval of as much as $3.4 billion in guarantees for loans to India's troubled national carrier, Air India.

In a letter to Ex-Im Bank Chairman Fred Hochberg earlier this month, the Air Transport Association, a trade group for America's biggest carriers, called on the federal agency to slash subsidies to all overseas buyers of Boeing jets.

"The bank's support for foreign airlines injures U.S. carriers," said ATA outside counsel Michael K. Kellogg in the letter, which was reviewed by The Wall Street Journal. The letter focuses on Air India, arguing that the state-owned carrier's long-running financial losses and widely reported management problems should disqualify it for U.S. support. The ATA also criticized Ex-Im Bank for not being sufficiently open about its decision making.

A letter of response from Ex-Im Bank's general counsel, also seen by the Journal, said the bank stood by its decisions and processes, although it would investigate some of ATA's assertions about its procedures.

Air India didn't respond to requests for comment. A spokesman for Boeing said the company is aware of the dispute but declined to comment on it.

The fight boils down to a dispute over which creates more high-value American jobs: airlines or Boeing and its suppliers. The plane maker, whose chief rival is Europe's Airbus, is America's biggest exporter and relies on a vast industrial base, much of which is in the U.S. American airlines compete against rivals from around the world, many of which get much more direct government support than American airlines do.

U.S. carriers believe that "foreign airlines are starting to flood international routes, including routes to the United States, with excess capacity, subsidized by the U.S. government," said Richard Anderson, chief executive of Delta Air Lines Inc. and the ATA's current chairman, in a written statement supporting the ATA's letter to Ex-Im Bank. Subsidized competition "is crowding U.S. carriers out of these markets and costing American jobs," he said.

Ex-Im Bank's boosters say that if Washington doesn't support Boeing exports, foreign airlines will buy more Airbus planes. The unit of European Aeronautic Defence & Space Co. gets export backing from France, Germany and Britain.

"It's not credible or reasonable to say that the sole U.S. manufacturer of large aircraft shouldn't be competing on a level with Airbus," said a senior U.S. government official familiar with Ex-Im Bank's policies. "The U.S. is not going to unilaterally disarm."

Ex-Im Bank's mission is to support U.S. jobs by boosting exports. It mainly guarantees bank loans that overseas buyers take to finance purchases. If a foreign buyer fails to repay a loan, Ex-Im Bank covers the payment and seeks to recover the balance. Thanks to the security of Washington's guarantees, buyers of American products as diverse as dental equipment and jet planes can significantly reduce their financing costs. Customers rarely default on loans backed by Ex-Im Bank.

Export-credit financing, as the funding is known, developed decades ago as a way to boost food exports by offsetting high borrowing costs for credit-worthy buyers in countries with political or other risks. Over recent years, it has become a key element in exporting Boeing and Airbus planes. Since the 2008 financial crisis, export-credit agencies have expanded their role in jet sales. Last year, they provided guarantees and loans for more than 30% of planes delivered by the two companies, valued at more than $20 billion.

ATA members oppose Ex-Im Bank backing for Boeing sales partly because U.S. airlines aren't eligible to receive it, since domestic purchases aren't exports. Last year, when governments from leading industrial economies were renegotiating a pact governing aviation export support, the ATA lobbied hard to eliminate or reduce the subsidies. The new pact, adopted in February, made export credit more expensive for buyers, who pay for the government support, but didn't eliminate it.

At that time, U.S. airlines linked up with nine major European airlines from home countries of Airbus in their attacks. Carriers from France, Germany, Britain and Spain are also ineligible to get export guarantees, under a longstanding trans-Atlantic pact keeping the home markets of Airbus and Boeing free of each other's export financing. The airlines harshly criticized export subsidies for profitable carriers and ones from wealthy countries, such as Persian Gulf states.

Asia Today: India's latest trade data show a slowdown in export growth; also, entrepreneurs face challenges setting up business in the country. WSJ's Isabella Steger and Paul Beckett discuss.

The new U.S. attack focuses on Air India because the airline faces deep financial and management problems that the ATA says should disqualify it from getting Ex-Im Bank financing. The Star Alliance of leading global carriers this summer suspended a plan to add Air India to the group. A person close to the process said Star did so after two postponements, because Air India couldn't meet basic entry requirements. "Air India is generally considered one of the shakiest, riskiest and most poorly run airlines in the world," Mr. Kellogg said in the ATA letter.

Air India's borrowing is backed by a sovereign guaranty of the Indian government and its business plan has been vetted by Ex-Im Bank staff, said the U.S. government official. If Boeing couldn't sell airplanes to Air India, then Airbus probably would, this person said.

Other Indian carriers also face trouble due to intense competition and high fuel prices. Kingfisher Airlines Ltd., a large private carrier, said Friday it is slashing routes and grounding planes because of financial problems.

—Vibhuti Agarwal contributed to this article.

http://online.wsj.com

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