Jetrader - November/December 2010 - 15

Moving Forward in Aircraft Financing
With ﬁnancial markets continuing to improve, aviation’s challenges for 2011 and beyond include signiﬁcant changes in global export ﬁnancing. Boeing Capital’s Scott Scherer, who also co-chairs the aviation ﬁnanciers’ industry association, the Aviation Working Group (AWG), talks with Jetrader about what lies ahead for aircraft exporters and their customers. Q. We’re hearing a lot about infrastructure as it applies to aircraft trading and ﬁnance. In that regard, what’s of greatest interest and concern heading into 2011? Scott Scherer – The most tangible development in 2011 will be a new and revised Aircraft Sector Understanding (ASU) from the one agreed to in 2007. The ASU, like the Large Aircraft Sector Understanding that preceded it, governs the pricing and terms of export credit ﬁnancing for all global commercial aircraft manufacturers. The reason for renegotiation is that the version agreed to by the various governments in 2007 was a bifurcated system. There was one pricing structure for regional aircraft and another one for large aircraft. When Bombardier sought to have its recently launched CSeries aircraft classiﬁed under the ASU, they sought to have it classiﬁed as a regional jet (RJ). Boeing and Airbus argued strongly and successfully that it’s not a RJ but rather a competing large aircraft. Q. Why is the classiﬁcation debate important? S.S. – There are quite material differences between the classiﬁcation’s pricing under the 2007 ASU. The terms are much more favorable for the regional aircraft than they are for the large aircraft. For example, the RJs could get term ﬁnancing up to 15 years, while large aircraft only 12. The large aircraft also have mandatory risk mitigants, things like shorter-term, lower advance rates, and level principal amortization as opposed to mortgage-style amortization. All of that was not required under the RJ’s so-called Category 2 of the ASU. Q. Is bifurcation being addressed in the process underway now? S.S. – The AWG asked, ‘Why are we arguing over the classiﬁcation of the CSeries when what we really need to be focusing our efforts and energy on is a single fee system for all airplanes?’ As manufacturers, how do you explain to a customer that you get one set of terms for your CRJ or E-195 and then another for your 737-800 or A320? There was no logic to it, but at the time it was a political necessity as part of the ASU process. So the governments agreed to spend all of 2010 to develop a new ASU, with a single system applicable to all passenger jets and freighters operated by commercial airlines, before the 2007 version takes effect at year end. There’s actually a separate system of terms and conditions for business jets and smaller aircraft, and that will remain true under a new ASU as well. Q. With much of 2010 behind us, how is the new ASU process going? S.S. – The ASU process has evolved beyond the classiﬁcation challenge. Another key element is the so-called “home market” restriction that applied to Boeing and Airbus aircraft, where their respective governments agreed not to provide export ﬁnance into each other’s home markets. That agreement worked quite well for more than two decades and was anticipated to continue under the 2007 agreement. Now, with the CSeries, that cannot continue as

Scott Scherer – Boeing Capital, SVP of Strategic Regulatory Policy, and Aviation Working Group co-founder and co-chair, on a global aviation export credit policy for 2011 and beyond: “The goals are a level playing ﬁeld for the manufacturers and their airline customers, and a system that has an appropriate balance with the commercial markets.” (Boeing photo)

The most tangible development in 2011 will be a new and revised Aircraft Sector Understanding (ASU) from the one agreed to in 2007.

Jetrader 15

Jetrader - November/December 2010

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