U.S. considers loan guarantees to domestic airlines to buy Boeing 737s

The U.S. government is considering backing narrow-body jet sales to domestic airlines with loan guarantees. It is a break with a long-standing practice forced by increased Canadian competition.

With the imminent introduction of the Bombardier CSeries jets, for which the Canadian government will provide loan guarantees, Boeing could have lost sales of its single-aisle 737 without similar support from the U.S.

But Fred Hochberg, chairman and president of the U.S. Export-Import Bank, in Seattle on Thursday said Boeing "can rely on our backing."

"We're not going to sit back and let the Canadians provide export-credit-agency support for the Bombardier CSeries in America and not step up to Boeing," he said.

"It's a question of competing for jobs in Washington state or Quebec," Hochberg added. "I have a clear preference where I want the jobs to be."

In the risky, often money-losing airline business, the Ex-Im Bank is the federal agency that guarantees commercial bank loans to foreign airlines to buy Boeing jets.

If an airline defaults, the Ex-Im pays off the loan and pursues the airline for its money back.

Such financing has played an increasingly vital role for Boeing since the global credit crunch of 2007. In the last two fiscal years, Ex-Im has backed 300 Boeing aircraft sales worth almost $16 billion.

But until now, Ex-Im has stayed out of domestic sales. Since the 1980s, there has been an informal agreement between the U.S. and the four home countries of Airbus in Europe: The U.S. government's Ex-Im Bank and the corresponding lending institutions in Britain, France, Germany and Spain don't provide loan guarantees to airlines in each other's home markets.

That is now set to change.

Hochberg said that in any three-way sales competition in Europe or the U.S. that pits the CSeries against the Boeing 737 and the Airbus A320, the European and U.S. governments could each set aside the agreement and match any loan guarantees from Canada.

By law, the Ex-Im Bank will need permission from the U.S. Treasury to provide such loan support domestically. Treasury will have to rule in individual cases that "unfair competitive financing" is putting Boeing at a disadvantage.

Expect the sales competitions to be fierce.

If the CSeries is to succeed, Bombardier has to sell into the world's two largest markets for single-aisle jets — the U.S. and Europe — and must win over customers who now fly either Airbus or Boeing planes. Last year, Indianapolis-based Republic Airways, until then an Airbus customer, ordered 40 CSeries jets

A U.S. diplomatic cable made public last month by WikiLeaks revealed tense private negotiations between Canada and the U.S. that failed to head off the emerging confrontation over aircraft loan guarantees.

According to the cable, officials from the U.S. Treasury warned their Canadian counterparts in September 2009 that the outcome now playing out could "trigger a contagion effect in which the (U.S. Government) and the Europeans could be forced to become significantly involved in domestic aviation financing and Canada could find itself in a race to the bottom."

But the Canadians didn't buy it.

In the diplomatic cable, the Americans reported the Canadian position that any arrangement denying Bombardier access to export credits was a "nonstarter." The cable quoted one official saying Canada's Finance Minister Jim Flaherty would "go ballistic" if such a deal were made.

Negotiations failed last year, and Hochberg said the Canadian equivalent of the Ex-Im Bank now expects to finance the first $10 billion worth of CSeries sales.

That's because the CSeries is a new aircraft type with no established market. The five-abreast, 100-to-145 seat jets with new, fuel-efficient engines are scheduled to enter service in 2013.

Any bank lending money to buy a new type of jet risks losing it if the plane is not a success. Government loan guarantees provide commercial banks the security to go ahead with the financing.

Boeing faces that issue with its new 787 Dreamliner and 747-8 jets. The majority of those aircraft have been sold to foreign buyers.

Bob Morin, who oversees the Ex-Im Bank's jet financing, said the first 787 with Ex-Im financing support will be delivered to Air India later this year. Likewise, some of the first 747-8 freighters will be backed with Ex-Im financing.

As Boeing prepares over the next two years to raise its 737 production rates to unprecedented levels, the U.S. government may find itself stepping in repeatedly to back sales to stave off the CSeries threat.

And Hochberg said as more competition arises in the single-aisle jet market, the same scenario could play out with the Chinese and Russian manufacturers.

Then it will be Airbus and Boeing against the newcomers, with all parties offering government financing of sales.

"It's really just to level that playing field," Morin said. "Neither the Airbus export credit agencies nor the Ex-Im Bank want to leave our manufacturers defenseless."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Information in this article, originally published May 20, 2011, was corrected May 23, 2011. The U.S. Export-Import Bank is considering loan guarantees for domestic airlines to buy Boeing 737s if the Canadian government offers such financing for the rival CSeries jet. The original story quoted the agency's head stating his agency had decided to seek to support Boeing sales in this manner. The original story should also have noted that the U.S. Treasury would have to sign off on any sale where Ex-Im Bank provides loan support to a U.S. airline. The original story also mischaracterized an informal agreement between the U.S. and the four home countries of Airbus in Europe. It means the U.S. Ex-Im Bank and corresponding European institutions currently don't provide loan guarantees to airlines in each other's home markets; the story said it covers guarantees in their own home markets.