UAE airlines want cheaper credit for rivals

Etihad and Emirates are part of an alliance lobbying for waiver of the "home rule" in financing Airbus and Boeing purchases.

United Arab Emirates - Abu Dhabi - November 10th, 2010:  An Etihad Aeroplane practices a flyover at Yas Circuit that will be preformed on race day.  (Galen Clarke/The National)
Powered by automated translation

Etihad Airways and Emirates Airline have backed rivals by lobbying for European and American carriers to be eligible for government support, or export credits, on Boeing and Airbus purchases.

The two UAE carriers are among 10 international airlines that have formed a group called Aviation Alliance, the primary goal of which is to end the "Home Country" rule, which was agreed to through the Organisation for Economic Co-operation and Development (OECD).

That rule prevents airlines based in the countries that produce Airbus and Boeing planes from receiving government-backed loans at attractive rates.

That list of carriers includes some of the UAE airlines' largest rivals such as Air France-KLM, British Airways and Lufthansa.

The unusual bipartisan effort comes amid rising tensions between Gulf airlines and their European rivals, including criticisms that Gulf carriers have unfairly benefited from export credit assistance to support their ambitious fleet growth plans.

"This group has been formed to promote a wider perspective on export credit rules for aviation and to correct certain misconceptions that have been encouraged by ill-informed competitors," said Brian Jeffery, the senior vice president for corporate treasury at Emirates.

"We believe that it is an important source of financing and should be available to all carriers, regardless of their home base."

Aviation Alliance's other members are Oman Air, Pegasus Airlines of Turkey, Ryanair of Ireland, Virgin Blue of Australia, Korean Air, Norwegian, Wizz Air of Hungary and Cargolux of Luxembourg.

Etihad has said it relies on export credit guarantees for 14 per cent of aircraft purchases, while Emirates uses the financing tool for just over 20 per cent. The airlines also rely on Islamic financing, bonds and conventional loans.

Their use of export credit backing could increase as both airlines boost their fleets over the next decade.

Etihad will tap into credit markets for US$13 billion (Dh47.75bn) over the next decade, including $780 million this year and $600m next year.

Emirates, the world's biggest airline by international traffic, needs more than $28bn to expand its fleet of wide-body airliners by 2017, almost double the sum it has raised since 1996.

Export credits are brokered by national export promotion agencies such as the US Export-Import Bank, the UK export credit guarantee department and Coface of France.

They lower the risks to lenders by guaranteeing loans to airlines for aircraft purchases, resulting in more attractive financing terms.

The guarantees have not been available to airlines based in the five nations that produce Boeing and Airbus aircraft - the US, France, Germany, Britain and Spain.

Two dozen airlines based in these countries recently raised objections to being frozen out of the credits and have asked to limit the loans to 20 per cent of an airline's aircraft deliveries.

The freeze stems from a 1986 gentleman's agreement in the OECD, which was forged to prevent a trade war between the two aircraft makers.

Howard Millar, a spokesman for the alliance, said export credit financing was essential to the continued growth of the aviation industry.

"We have come together to call for the extension of export credits to all airlines in the US and Europe, irrespective of whether they are based in a country which manufactures aircraft," Mr Millar said.

The issue of export credits mirrors larger tensions between the sustained growth of Middle East airlines and carriers in Europe and North America.

This week, Abu Dhabi International Airport reported a 13.3 per cent rise in passenger traffic last month compared with October last year, while traffic at Dubai International Airport rose 14.8 per cent to more than 4 million.

Air Canada, Air France and Lufthansa have all recently lobbied their governments to prevent further market access from Gulf airlines, raising criticisms of protectionism.