APPENDIX 1
Memorandum by Airbus
INTRODUCTION
Airbus welcomes this opportunity to give the
Select Committee on Trade and Industry our views on the future
of ECGD, as a contribution to the Committee's review of ECGD.
Airbus wants the ECGD trading fund to be set
up in a way that promotes rather than hinders British business.
In recent years ECGD to date has helped Airbus
make a major contribution to UK economy. We want that help to
continue. It may help the Committee if we begin by summarising
the commercial and economic background, before we address the
future of ECGD, to show how important that help has been.
AIRBUS: A MAJOR
CONTRIBUTOR TO
THE UK ECONOMY
Airbus is a major European company that competes
in the high-value market for large commercial aircraft. When Airbus
was formed in 1970 two US companies, Boeing and McDonnell Douglas,
dominated the market.
However, over the last three decades Airbus
has developed a product family that embodies the latest technologies
to reduce operating costs and to cut emissions to meet environmental
targets. These products have been well received by airline operators
and their customers, with Airbus gaining market share at the expense
of its American rivals. Restructuring in the US led to the removal
of McDonnell Douglas after takeover by Boeing, with the latter
company now ruling supreme in the US.
Airbus now has a successful product range that
competes vigorously and successfully with the US competition,
with Airbus in 2003 for the first time delivering more aircraft
in a year than its American rival, Boeing. The provision of ECGD
support has been an important factor in this market success that
is providing significant benefit to the UK economy:
— Airbus has a strong presence in the
UK, with its UK-based subsidiary Airbus UK having been responsible
for the design, development and manufacture of the wings for every
Airbus aircraft. As centre of excellence for wings, Airbus UK
has a high-technology work-share that provides long-term employment
for a highly-skilled workforce and in a supply chain of more than
400 companies across the length and breadth of the UK. Airbus
currently supports more than 64,000 jobs in the UK from direct,
indirect and induced employment and this is set to rise to around
100,000 in the next few years as production builds up on new products.
— ECGD support is helping to generate
a significant positive contribution to the UK trade balance, with
Airbus UK currently providing net exports of more than £1
billion and this is set to rise to more than £1½ billion
when the A380 reaches full production.
— Airbus UK is investing considerable
amounts in Research, Development and Capex to provide new methods,
processes and equipment that are supporting the continuous improvement
in productivity. Indeed, the company has been investing in R&D
and Capex at the rate of some £2 million for every working
day over the last two years.
— Aerospace is a technology-rich sector,
and Airbus and its research partners in the UK are investing large
sums in the development of cutting-edge technologies in areas
such as the development of new materials, new structural and aerodynamic
analysis techniques and new design and manufacturing processes.
Other UK firms gain benefit from the spill-over of these technologies,
with a consequent upgrading of skills and technologies in other
UK business sectors.
THE IMPORTANCE
OF A
COMPETITIVE ECGD MECHANISM
Aerospace forecasters are predicting that the
annual growth in revenue passenger-kilometres will average some
4-5% over the next two decades, which will require the production
of more than 15,000 new large civil aircraft with a total value
of around $1.4 trillion. Airbus is well placed to take a good
share of this business and the UK economy stands to benefit therefrom
via the mechanisms described above. Therefore Airbus wants the
ECGD trading fund to be set up in a way that promotes rather than
hinders British business.
The market for large civil aircraft production
has some characteristics that make this objective very important
for Airbus. The central feature is that it is not a free market.
There is market failure of a profound kind. Boeing's only global
rival is Airbus, with these two companies forming a duopoly in
a market that has significant barriers to entry. Furthermore,
both companies enjoy funding from Governments with consequent
market distortions.
Boeing receives stronger support from EXIM Bank
than currently is available to Airbus from ECGD and the other
European ECAs, as will be described below. This puts Airbus at
a competitive disadvantage to the US competitor.
In addition Boeing benefits from huge financial
support from the US Government, including NASA funding of "near
to market" R&D and "leakage" from US Department
of Defense military R&D into civil aerospace. These two sources
provide huge financial inflows to Boeing. Arnold and Porter estimated
that between 1976-91 some $18-22 billion was provided as a US
government support to its civil aerospace industry. Hogan and
Hartson assessed support to the US commercial aircraft industry
in FY 1995 in the range $1.6-2.9 billion. Professor Lawrence estimated
that these two sources alone provided an absolute minimum of $1
billion in 1996 and 1997, with perhaps twice as much being plausible
in the light of previous estimates. Furthermore, this support
is non-repayable: grant funding pure and simple.
In sharp contrast UK launch investment is repayable
by levies on aircraft sales designed to reimburse the Government's
contribution and to provide a return on its investment. In the
case of the A320, HMG provided launch investment of £249
million towards the wing development and to date as received reimbursements
in excess of £500 million. Not only has HMG made an excellent
direct financial return but also is securing substantial wider
economic benefits from the sources described above.
CURRENT ECGD SUPPORT
TO AIRBUS
ECGD, along with its European counterparts,
is an important partner for Airbus. Each year ECGD participates
in the financing of 20 to 25% of all Airbus deliveries and for
four of the last five years Airbus was the second largest user
of ECGD supported financing. In the near future Airbus expects
a growing number of its customers to seek ECGD support to finance
their aircraft acquisitions.
For Airbus the ongoing support of a strong and
competitive export credit agency is essential for its own competitiveness.
This is why we are concerned that the changes occurring within
ECGD and the proposed move to trading fund status must be done
in way that preserves Airbus competitiveness and allows benefits
to be continued to be delivered to the UK economy in the manner
described above.
Furthermore, HMG has a direct financial interest
in the form of launch investment on various Airbus products, including
the £530 million committed in March 2000 towards the development
of the A380 wing. A competitive ECGD scheme will help to secure
aircraft sales on which levies will then be payable to HMG, thereby
helping to safeguard the returns on existing HMG investments.
COMPETITIVENESS OF
ECGD
In overall terms in 2002 the European ECAs provided
cover for $2.1 billion in comparison with $3.6 billion of EXIM
Bank cover for Boeing.
There are many files where we do not get immediate
and full support from ECGD, whereas EXIM Bank issues a letter
of commitment to potential customers, albeit non-binding, at an
early stage. The fact that ECGD is not able to do so gives rise
to uncertainty for our customers. Furthermore once support has
been offered, ECGD has an increasing tendency to seek non-standard
terms. Over the last two years the situation has deteriorated
and now in the majority of cases ECGD either increases the premium
from the standard 3% or reduces the amount covered to less than
the standard 85%. As it is the accepted practice that the lowest
common denominator shall apply, the French and German ECAs, that
would have initially quoted standard terms, then have to mirror
ECGDs position. In consequence EXIM Bank support to Boeing is
more attractive than that available to Airbus.
ECGD in its own comparison report published
in February 2003 states that "ECGD did generally have less
cover available than the other ECAs" and as regards pricing
states that "its Buyer Credit is `above average' and a slightly
higher rate is charged than for the average product offered by
the European ECAs". For us this is a clear acknowledgement
of lack of competitiveness.
It is vital to Airbus that ECGD regains a competitive
attitude. On several occasions last year we suffered from the
much more aggressive competitive stance taken by the EXIM Bank
in some difficult markets. EXIM Bank was able to issue a commitment
letter, thus giving comfort to the potential customer during the
sales campaign, whereas ECGD was unable to. In consequence Airbus
lost sales of 11 long range aircraft and three single aisle aircraft
to Boeing.
On each occasion business is lost to our American
competitor, with the consequent adverse impact on UK exports and
high value jobs. Any potential future sales are also jeopardised.
Certain deals in isolation may appear relatively unimportant,
but there can be a "snowball" effect in the market place
as customers perceive ECGD to be less willing to do business and
in any case more expensive than financing through the EXIM Bank.
The following examples demonstrate the point:
— ECGD pricing for A330s for a major
Asian carrier, which was necessarily matched by the other ECAs,
was 33% higher than the EXIM Bank's demand for a B777 for the
same customer. Initially ECGD sought to double the standard premium,
a demand it subsequently lowered. In the end the airline still
had to pay $1.1 million more for the financing on the A330 than
it would have had to pay for a Boeing aircraft. In addition ECGD
covered only 75% rather than 85% of the net price. The EXIM Bank's
exposure to the airline is double that of the ECAs, and still
the EXIM Bank maintains standard pricing.
— For a European airline which is a
live case for current deliveries, ECGD is seeking pricing which
is, once again at a premium 33% higher on a much smaller volume
compared to the EXIM Bank. In 2003 Boeing had several 777 aircraft
covered 80% by the EXIM Bank, whereas ECGD may end up not covering
the total order of A319s, and at 70% cover only. This is a double
hit of $2 million additional cost for the airline and up to $300
million less volume when compared to the EXIM Bank's exposure
in 2003.
TRADING FUND
STATUS
The 11% level of return on capital now apparently
required is that of a strong commercial institution. Such a return
cannot fail to put pressure on premium levels. It may be maintained
that premium levels will remain where they are today (which is
higher than a few years ago) because of HMG support for ECGD.
We believe that this is the biggest danger, because it will expose
all of ECGD's business (of which Airbus is generally one third)
to public criticism, however unjustified, most likely by the United
States, that Airbus and other businesses receiving ECGD cover
are being subsidised.
Under the OECD rules EXIM and the other export
credit agencies work on a break even basis so we cannot see why
ECGD now needs to defend an aggressive ROCE of 11% in real terms.
Also we strongly believe that ECGD should not become a "commercial
institution". ECGD is surely there to take a long term view,
banks provide the short term view.
A UK requirement for a high ROCE for large civil
aircraft export financing, will fundamentally damage Airbus' competitiveness
in the global market and significantly influence the other European
agencies to the detriment of the Airbus overall competitive position.
A case in point today is a European airline, where the French
and Germans have agreed standard cover for A319s, like the EXIM
Bank on a 737 deal in 2003, but ECGD is looking for non-standard
terms. The lowest common denominator would prevail on such a case,
with the US competitor being better placed to win business.
In summary, Airbus considers that by supporting
UK civil aerospace programmes ECGD is supporting large numbers
of highly-skilled, well paid, long-term jobs in a sector that
has generated many examples of technology transfer and spillovers
to other parts of the UK economy. And it does so in ways that
recognise the markets ECGD's customers operate in, rather than
any abstract theory of how markets should work. These beneficial
externalities should allow ECGD to have a broader view in line
with other ECAs and to permit any ROCE be set at a much lower
level than for a commercial enterprise that has not access to
these benefits.
26 February 2004
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