Two reports in recent days have focused on the fate of the Boeing Co. in the event Congress opts against reauthorization of the Export-Import Bank. Both Standard & Poor’s and the Government Accountability Office effectively have concluded the aviation giant—Ex-Im’s biggest beneficiary by far—would manage just fine without taxpayer subsidies. The same can be said of the other multinationals for which the vast majority of bank financing is arranged.
The extent to which Ex-Im caters to Boeing is staggering. As of March 2014, at least 28 percent ($32 billion) of Ex-Im’s total portfolio was devoted to financing wide-body jets. Last year alone, the bank authorized financing for the purchase of Boeing aircraft in 25 countries, including China, Russia and the United Arab Emirates. Subsidies for air transport, in general, comprised more than 45 percent of all export subsidies in fiscal year 2013.
Big as those numbers are, Ex-Im is involved in only 2 percent of U.S. exports, which have hit record levels in recent years. That means Ex-Im subsidies equate to a tiny fraction of the overall revenues collected by its corporate clients. They easily could absorb the loss of Ex-Im largesse.
In the case of Boeing, which has a market cap exceeding $93 billion, expiration of the Ex-Im charter would not hurt its credit quality or ability to make planned deliveries in 2014 and 2015, according to Standard & Poor’s Rating Services, which concluded that “We believe that alternative financing sources, such as banks in the customer airlines’ region, could provide sufficient funding for those deliveries, if necessary.”
Of course, Boeing would face greater credit risk in the long-term to the extent the company was to forego private financing and instead provide its own financing to customers. But that risk—now borne by taxpayers—is simply the cost of doing business.
Standard & Poor’s also concluded that discontinuing Ex-Im is unlikely to affect the credit ratings of other big Ex-Im beneficiaries such as General Electric Co., Caterpillar Inc., and United Technologies Corp. “(B)oth buyers and exporters could arrange other forms of financing,” the analysts noted.
Similarly, the Government Accountability Office recently reported that various sources of private financing are “more competitive than ever.” This is largely the result of an agreement among Organization for Economic Cooperation and Development member countries to standardize and limit export subsidies for commercial aircraft “to encourage competition among exporters based on quality and price of goods and services exported rather than on the most favorable officially supported financial terms and conditions.”
The latest iteration of the Aircraft Sector Understanding imposes higher fees for government loan guarantees and other credit. Consequently, the GAO reports, the overall cost of such financing is equivalent to, or even higher than, that of private financing. The agency also reported no shortage of alternatives, which include:
- Cash. For profitable airlines that want to avoid new debt.
- Bank loans. Flexible terms and fast turnaround.
- Manufacturer financing. Loans, leases or other incentives to customers.
- Aircraft-backed bonds. Investment secured by airplanes as collateral.
- Enhanced equipment trust certificate. Aircraft-backed bond with lines of credit to cover missed payments.
- Unsecured bonds. Higher rates of return for aggressive investors.
As it is, some 85 percent of Boeing and Airbus large aircraft deliveries were not subsidized by export credit agencies, according to the GAO. Competition between Boeing and Airbus, the other primary supplier of commercial aircraft, is based largely on factors other than financing, including passenger capacity, range, fuel economy and life-cycle costs.
All of which belies claims that reauthorization of Ex-Im is necessary to plug gaps in private financing or to keep pace with subsidies provided by foreign governments. Even without Ex-Im, there’s plenty of business to keep Boeing and its suppliers busy.
There is abundant evidence Ex-Im subsidies are not driven by competitive necessity. Or, to put it another way, it is all too obvious the subsidies constitute cronyism. Indeed, although beneficial to Boeing, many of the deals run counter to common sense and fundamental principles of free enterprise, such as:
- $3.2 billion in loan guarantees for three airlines owned by the government of the United Arab Emirates to purchase Boeing aircraft (2009-2012). The UAE does not lack for cash. It ranks seventh in oil reserves and 17th in natural gas reserves.
- $1.9 billion in loan guarantees for government-owned Ethiopian Airlines, for the purchase of Boeing aircraft (2010-2013).
- $1.8 billion in loan guarantees for Air China, the state airline of the People’s Republic, to purchase Boeing aircraft (2011-2013).
- $1.3 billion in loan guarantees for government-owned Air India, to purchase Boeing aircraft (2011).
- $1.2 billion in loan guarantees for Australia’s Virgin Blue International Airlines, owned by Virgin Australia Holdings (market cap $1.5 billion) to purchase Boeing aircraft (2008-2012).
- $267 million in loan guarantees for WestJet, a Canadian discount airline with a market cap of $3.5 billion, to purchase Boeing aircraft (2012-2013).
It is perfectly understandable, of course, that Boeing and other beneficiaries of the bank use the subsidized financing. It is the responsibility of corporate officers to maximize shareholder value – including the retirement investments of millions of American workers.
But the subsidies also distort the allocation of credit and labor, and they are particularly harmful to all the domestic firms that must compete against foreign companies subsidized by Ex-Im. It is the responsibility of Congress, therefore, to terminate the bank’s charter. Although Ex-Im is hardly the biggest or worst manifestation of cronyism, it is a realistic target at the moment. As both Standard & Poor’s and the GAO have concluded, it’s simply unnecessary.