Select Committee on Trade and Industry Written Evidence


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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