Airlines in nations as far-flung as Azerbaijan and Nigeria are about to find it harder to pay for 747 jumbo jets, complicating Boeing’s efforts to line up buyers for a plane that’s already falling out of favor.
After months of struggle in Congress, the charter for the U.S. Export-Import Bank is set to expire after Tuesday, eliminating a longtime source of financing for aircraft orders from Boeing’s overseas customers.
That leaves the planemaker facing a tougher time sealing deals for its 747-8, whose emerging-market purchases are crucial amid shrinking demand for four-engine jets. Boeing’s choices: Do nothing and risk losing orders in credit-constrained countries like Russia. Or, provide funding and tie up capital that could be plowed into development programs and share buybacks.
“I’m not sure what’s the bigger concern for Boeing,” said Chris Denicolo, an analyst with Standard &Poor’s Financial Services. “The general market for the 747, or if they do sell, they’d have to take on more of the financing.”
Nine jumbos with a list value of $3.3 billion, representing more than a quarter of Boeing’s 32-plane backlog of 747s, are bound for markets like Russia, Azerbaijan and Nigeria, where buyers rely on Ex-Im support, according to data compiled by George Ferguson, a senior analyst with Bloomberg Intelligence.
Boeing is also working to firm up a commitment by Russia’s Volga-Dnepr Group for 20 additional 747-8 freighters valued at $7.4 billion. If Boeing succeeds in landing that sale, the Chicago-based planemaker would lock up enough orders to keep its jumbo-jet assembly line busy for almost two years.
Without Ex-Im backing, Boeing will be at a disadvantage as it competes with Europe’s Airbus Group, whose customers can tap three government export credit agencies, said Tim Neale, a Boeing spokesman. He declined to comment on the 747’s prospects.
While Boeing is prepared to provide some short-term financing, “there are real limits to how much of that we can do,” Neale said. “Capital tied up in customer financing is capital that’s not available for product development.”
Ferguson said a “white-hot” market for commercial financing will help jet buyers line up loans, and the Boeing Capital unit “could always pick up some of the challenge.”
Regarding the 747, he said: “If Boeing thinks it strategic, they could step in to support the airplane.”
Jumbo-jet financing is a subset of Boeing’s larger challenge after Congress decided not to renew the Ex-Im Bank charter. While Boeing and other defenders say the bank boosts exports and jobs, foes say Ex-Im is “crony capitalism,” with the government picking winners and losers in U.S. business.
The lapse in the charter may be temporary. Ex-Im backers plan to meet with President Barack Obama on July 8 to discuss how to revive the bank, according to Democratic Sens. Heidi Heitkamp of North Dakota and Maria Cantwell of Washington, the home of Boeing’s commercial hub.
“Our hope and expectation is that this will be one of the first things considered” when Congress returns from its Independence Day recess, Aric Newhouse, senior vice president for policy and government relations at the National Association of Manufacturers, said during a conference call Tuesday.
Boeing Capital has stepped up 747-related financing as dwindling orders forced the planemaker to slow the production tempo four times in the past two years. The new rate, effective in February, will be 12 a year, down from 16. Operating leases for the jets have more than doubled since the end of 2013 to $580 million at the end of March, according to company filings.
Ex-Im is expected to help finance 13 percent of Boeing’s 2015 deliveries of all types of jets, down from 30 percent in 2012 when European banks were still recovering from a global slowdown, said Philip Baggaley, an S&P managing director. This year’s Ex-Im commitments are mostly lined up, Baggaley said.
The threat to Boeing lies in financing aircraft like the 747, out of favor with other lenders as airlines opt for more- efficient twin-engine models; the next aerospace-industry slump, or a jarring event like a Greek exit from the euro zone that disrupts capital markets, Baggaley said. In the worst-case scenario, Boeing could face a credit downgrade — its current S&P rating is A — that increases borrowing costs.
“One of the risks is that the portfolio ends up with the weaker airlines, weaker collateral in some cases,” Baggaley said.
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