AEROSPACE INDUSTRIES ASSOCIATION OF AME.RtCA, INC.

AEROSPACE INDUSTRIES ASSOCIATION OF AME.RtCA, INC.

AIRCRAFT EXPORT FINANCING AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC. 1725 De Sales Street, N.W., Washington, D.C. 20036 July 1981

AIRCRAFT EXPORT FINANCING Projected Traffic Growth and the Free World Open Market Airline traffic is forecast to continue at a substantial growth rate for the next decade. Free World traffic totaled 10.4 billion Revenue Passenger Kilometers (RPKs) in 1980. The projection for 1991 is 22.5 billion RPKs-an average 6.2% annual increase (Figure 1). The world's airplane manufacturers will be competing for a $122 billion free world open market over the next decade. This covers the airlines' requirements to add capacity for the increased traffic. It also considers the need to retire old and inefficient airplanes and replace them with improved technology equipment. The market is split with 60% ($73 billion) for non-u.s. airlines, and 40% ($49 billion) for carri ers in the United States (Figure 2). Sales competition occurs well in advance of actual deliveri es. Normal lead time for airplanes in production is 1 V2 to 2 years and longer for newly-designed models. Competition is keenest for the initial sale to an airline since follow-on orders will continue for the next 15-20 years, and that segment of the open market will be secure for the winning manufacturer. THE SIZE OF THE MARKET Non-U.S. Airlines -$73 Billion over the next 10 years THE NEED One-fifth of all aircraft sales to emerging nations Private capital market limitations -Country risk -Tenor $48 to $57 Billion of Eximbank support over the next ten years THE PROBLEM Airbus penetration of the aircraft market U.S. Airline market -$49 Billion over the next 10 years Increasing market share Subsidized customer financing Airline economics -Debt-service burden with high rates and short term THE BEST ALTERNATIVE Non-subsidization Market rates-tenor 4

FIGURE 1 TRAFFIC GROWTH FORECAST FOR FREE WORLD MARKETS (Traffic Doubles from 1981 to 1991) 3.0.-------------------------------------------------------~ ACTUAL F'oRECAST I 2.0 AVERAGE GROWTH 1980-91: 6.2% BILLIONS RPKs 1.0 0 ~----------~----------~------------~----------~--~ 1970 1975 1980 1985 1990 5

FIGURE 2 $122 BILLION OPEN MARKET TH ROUG H 1991 (Free World Airlines) COMPETITION FOR DELIVERIES STARTING IN 198283 PLUS FOLLOW-ONS TAKES PLACE IN 1981 82 SALES CAMPAIGNS (CONSTANT 1981 DOLLARS) 15 10 ANNUAL DELIVERIES U.S. AIRLINES-- OPEN MARKET: $49 BILLION THRU 1991 DOLLARS IN BILLIONS 5 Delivery Year 1981 1982 1983 1984 1985 1986 Order Yea r 1979 80 198081 1981 82 1982 83 1983 84 1984 85 6

The U.S. Share Assuming Eximbank would support export financing of U.S. aircraft, the potential for the next decade lies between $48 and $57 billion. This is 65% to 80% of the total $73 billion open market for non-u.s. airlines. It is forecast that $15 billion in U.S. aircraft already supported" matched" will be delivered to foreign customers in this 10-year period. An additional $33-42 billion will also be sold to non U.S. airlines. These short-medium and long range models will be directly competitive with the new foreign designs and therefore be.eligible for Eximbank support. " MATCHING" REQUIREMENTS WILL GROW POTENTIAL FOR U.S. AIRCRAFT SALES TO NON-U.S. AIRLINES, 1981-91 Aircraft Already "Matched"* Short-Medium Range Aircraft That Will Be " Matched" Short-Medium Range Long Range Sub-Total Total $ 15 Billion $8-12 Billion 25-30 Billion 33-42 Billion $48-57 Billion Total Potential Sales-$48-57 Billion (65% to 80% of Total $73 Billion Open Market) TOTAL POTENTIAL EXIMBANK SUP PORT -$48-57 BILLION FOR NEXT 10 YEARS ALL OECD NATIONS FACE INCREAS ING DEMANDS FOR SUBSIDIZED LOANS TO COMPETE UNLESS AN AGREEMENT IS REACHED. Matched-U.S. aircraft defined by Eximbank as being directly competitive to foreign models and therefore eligible for financing. 7

FIGURE 3 EMERGING PUBLIC SECTOR MULTINATIONAL ENTITIES AIRBUS SHARE OF WIDE BODY MARKET* 50,-------------------------------------------------~ PERCENT OF WIDE-BODY MARKET 40 30 20 A300A310 1 "" I? I I 10 ol--l~~~~--l_j L L L~ L L L_~_j 1970 1975 1980 1985 SUBSIDIZED CUSTOMER FINANCING MAY INCREASE PENETRATION *ANNOUNCED ORDER DOLLARS 8

Airbus Market Penetration The penetration by Airbus into the market has been significant and rapid (Figure 3). A steadily increasing share of the widebody market illustrates the trend. As new models of foreignmade aircraft are added, other market segments will feel their presence. Unanswered subsidized financing will make the penetration of Airbus certain. Airbus is expanding its product line. At the Paris Air Show, the formal announcement was made of the A320 program with firm sales and follow-on options to Air France. The objective of Airbus is a "family" of airplanes with range and size capabilities equal to those of U.S. models. Introduction of the BAe 146, coupled with plans for the MDF-100, further increase the direct competition matrix (Figure 4). These new aircraft types will eliminate former " ground rules" used by Eximbank to segregate aircraft types as " competitive" or "non-competitive." All U.S. aircraft will have direct foreign competitors. There are practical alternatives to the high levels of subsidized export financing required in this competitive environment-alternatives that would benefit the manufacturers, the airlines, and taxpayers. Although raising the interest rate from a subsidized level to market rate will increase the FIGURE 4 ALL U.S. AIRCRAFT WILL HAVE DIRECT COMPETITION WHEN NEW MODELS ENTER THE MARKET SHORT MEDIUM RANGE LONG RANGE u.s. AIRCRAFT 737-20~ DC-10-10...J... L-1011-500~ I L-1011 ~ ~ ~ 737-300'---'.;D727-10~ ~-1011-200 fl ~~ PRESENT jk" ~ ~ 00 ~~ X 747SP '"--' DC-9-3~~ ~l"' 75% DC-10-30 : ~ 747-loo I...J... - 2 oo 767-200 : v-4~ DC-9-80 747S~ '"L ~ FUTURE JOINT VENTURE ~ DF-100 FOREIGN AIRCRAFT 8Ae1 * jka320-100 ~300-600 PRESENT 1 1r~gr A310...J... ~ A320-20't]~J +~, A30084 t; I F-28 - - - - -- -... ~-------+~~~------,L-----~~~ --- ~--------~ FUTURE I TA9+ 1 ~:,;+ 1,000 2,000 3,000 4,000 5,000 6,000 DESIGN RANGE (NAUTICAL MILES) MODELS CURRENTLY DEFINED BY EXIM AS COMPETITIVE 9

total financing cost to the borrower, the burden can be partially offset by increasing the repayment terms to market tenor-15-20 years (Figure 5). The Best Alternative The objectives of an international agreement regarding aircraft export financing should be to involve the private sector financial organizations on a worldwide basis. The capital markets must be allowed to serve all financial requirements including equal access, free mobility and full parity for all parties concerned. The best alternative is an effective agreement with OECD countries which results in: Longer term Private sector funding Equal access Free mobility Full parity FIGURE 5 COMPARATIVE DEBT SERVICE REQUIREMENTS Ten Year Subsidized Versus Fifteen Year Market Financing ($20 Million Package) ANNUAL PAYMENTS DOLLARS IN MILLIONS 6~------------~----------------~----------------~ 10 YEAR TOTAL TERM 15 YEAR TOTAL TERM SPLIT DEAL: EXPORT CREDIT AGENCY COMMERCIAL BANK GUARANTY ONLY. AT 15%, 5-YEAR TERM. 15 YEARS-USING EXPORT CREDIT AGENCY 12% RATE. 4 AT 914 %, LA TIER 5-YEAR TERM. 2 -- -- ---- 1 5 YEARS TOTAL COST TO AIRLINE: $31.3 MILLION AVERAGE$3.1 PER YEAR 10 TOTAL COST TO AIRLINE AT 12%: $39.2 MILLION AVERAGE $2.6 PER YEAR 15 10