Subsidy-Lite? The Cost of Airplanes Just Went Up (BA, EADSY, ERJ, RYAAY, DAL, UAL)

The Organization for Economic Co-operation and Development, the OECD, which includes the US, the European Union, and several other developed countries, has reached an agreement on how airlines will be able to finance purchases of new passenger jets. The deal is not especially good news for Boeing Co. (NYSE: BA) or Airbus maker EADS (OTC: EADSY), but should be helpful to makers of the smaller regional jets, like Canada’s Bombardier Inc. and Brazil’s Embraer S.A. (NYSE: ERJ).

The old rules did not permit an airline based in the home country of a manufacturer to qualify for export credits when buying a plane from a manufacturer from outside the country. The effect falls hardest on smaller carriers, like Ryanair Holdings plc (NASDAQ: RYAAY), which have used the export credits to reduce the financing costs of buying new aircraft.

Large carriers like Delta Air Lines Inc. (NYSE: DAL) and United Continental Holdings (NYSE: UAL) did not qualify for the credits, and have wanted the rule change for some time.

Under the new rules, export credit providers, like the US Export-Import Bank, will charge fees to those airlines that qualify for the credits that will bring the financing charges more in line with commercial rates. The fees will not rise more than 10% from quarter to quarter. Existing export financing rules will be allowed through the end of 2012.

Ryanair and other members of a group that benefited from the old rules wanted extended financing through the end of 2013. The new rules could effectively double the financing charges for these airlines.

Boeing and Airbus favored the old rules, fearing that the higher financing costs will reduce demand for their passenger planes, which would lead to production cuts. Some critics of the old rules pointed out that the export credits artificially boosted demand for new aircraft during the recent recession, when commercial credit was hard to get.

It remains to be seen what the impact on Boeing and Airbus orders will be, but a good guess would be “not much.” The large airlines should benefit from a more market-driven cost of financing. They were concerned that smaller airlines able to receive the export credits were poaching their routes. Makers of smaller jets should feel no impact, except for the certainty that comes from having an agreement. The major impact will be on carriers like Ryanair, where higher financing costs could stifle growth.

Paul Ausick