apados

If this was posted already and/or should be moved, my apologies...

According to this article, Delta financed the purchase of 3 777's @ 8.11% interest over 8 years while Emirates was able to finance the purchase of its jets at 3.4% over 12....

I'm assuming that the same tax credits for Airbus purchases exist for Non-US/Non-Western European Airlines....

I know people generally view international airlines more favorably (and often for good reason). But I'm wondering how much of this affects the playing field..

A back of the napkin calculation (based on Boeing's prices here), shows the overall cost at approx. $650MM (assuming no discounts, though I'm sure some were applied etc).
LTV for DL was 40% - assume they financed $260MM @ 8.11% interest per year for 9 years... so you're looking at approx $3.3MM per month in payments.

For Emirates its $325MM @ 3.4% interest per year for 11.9 years... so you're looking at approx $2.7MM per month in payments...

From a cash outlay perspective, Emirates is able preserve an extra $600K in cash each month for the same/similar jets..

Overall, Delta pays out $373MM with approx. $113MM in interest charges, while Emirates pays out $395MM with approx. $70MM in interest..

I am NOT an accountant/controller, so if my interest calcs are wrong... do point it out

Thoughts?

turnpike17

I remember now why I went for a marketing degree and not a finance/accounting. My head was spinning at 777.

GenevaFlyer

Hi,

One thought is that interest rates vary between countries, and thus it is quite possible that UAE rates are lower than US rates. In addition, the credit worthiness of the company borrowing may have an impact.

For example, current 10-year fixed mortgage rates in Switzerland are around 2.7%. If you go floating, you get a whipping 0.61%. What can you get in the US?

Then, which of the two airlines went through bankruptcy? Are you, as a banker, going to trust them more/less than a company that does not have unions and a much younger fleet?

Yes, interest rates play a difference, but that's globalization for you. I don't think that interest on planes is what brought US airlines to their current state.

Cheers,

GenevaFlyer

eheinz

I think you misunderstand a number of key points.

First, regardless of the role of Ex-Im Bank, financing rates have nothing whatsoever to do with "tax credits", except in that interest is deductible as an expense. Therefore, Delta actually has a bigger tax deduction for interest than Emirates.

Second, Emirates financed its acquisition through a bond issuance, not a bank loan. See this article. For a borrower with a reasonably strong credit rating (I don't know Emirates', but it's 100% owned by the government of Dubai), corporate bonds ordinarily carry a lower interest rate than a bank loan. Conversely, for a company like Delta that has recently undergone a Chapter 11 reorganization and operates in a distressed industry, a bank loan will be cheaper than if it floated a bond, but will still be significantly more expensive than a bond issued by a more creditworthy borrower. In either case, the interest rate will depend significantly on the quality of the security (i.e., the lender's recourse if the borrower defaults). The best possible security is a guarantee backed by the full faith & credit of the United States (e.g., an Ex-Im Bank guarantee), which presumably drove Emirates' already-lower borrowing rate even lower still.

Third, Ex-Im Bank's charter only allows it to offer its financial services (usually loan guarantees, credit insurance and similar products that do not require it to front its own money; less commonly it will provide direct financing -- but in this case all it provided was a guarantee) in support of foreign purchases of American products. Therefore, it absolutely could not provide any support in connection with the sale or purchase of Airbuses. Of course, the EU (like Japan and a handful of other countries) also has an ECA (export credit agency) akin to Ex-Im Bank, but according to the article linked to in the one I mentioned above, for reasons I don't pretend to understand they are less present in the field of aviation finance (though if they did, they would presumably help finance Delta's purchases of Airbuses!).

By the way, Ex-Im Bank, like its sister agency OPIC, offer their services at market rates and historically have not cost taxpayers anything, but to the contrary have operated at a profit (granted that in a full-scale economic meltdown they have the potential to be another Fanny Mae/Freddie Mac disaster, but that seems unlikely). They are well-run, professional agencies.

In sum, as a policy issue, it cuts two ways: should the US government be in the business of supporting US airlines (e.g., Delta)? Or should it be in the business of supporting US airline manufacturers (e.g., Boeing)? One answer might be that either is a form of corporate welfare and interference in the free market. Another answer is that airlines are too important to the nation's economy, and foreign countries' airlines and foreign countries' airline manufacturers receive support from their own governments, so it's only fair and appropriate that we do likewise.

However, to a degree those two goals are simply incompatible. In any case, it doesn't follow that one tool (e.g., an Ex-Im Bank loan guarantee) can be used for all purposes. Delta and other domestic airlines would need to be supported though some other mechanism, and without violating our WTO obligations or costing US taxpayers for corporate welfare.

hfly

Geneva, however yes DL did go CH.11, then again so have several Dubai government owned/controlled entitites which wre structured the same as EK.

GUWonder

US airlines also got heavily subsidized by their partners/suppliers, who -- in the interest of maintaining revenue targets -- bailed out US airlines in their own way before, during and after US-style bankruptcy protection. Of course the downside for the airlines of all of that and US-style bankruptcy protection was more airlines were able to compete with them than would be the case if the financial zombie airlines were put to rest forever.