Money Matters - Simplified

No More Free Money for Boeing

 Warning: Today's column is going to wax a bit wonkish. If you're not exactly a detail-oriented Fool, you might want to skip right past the next few paragraphs, proceed to the takeaway about Boeing (NYSE: BA), and move on to the rest of your day's reading material.


 On Tuesday, the governments of Brazil, Britain, Canada, France, Germany, Spain, and the U.S. hammered out an agreement on the rules for export financing of aircraft. (Remember -- you were warned about potential dryness.) Why is this important? Well, take a stroll with me down memory lane, to January 2010, when we were discussing the advent of Bombardier's new CSeries 100-seat commercial jet up in Canada.

Without going into too much detail, Bombardier's new jet was coming to market at an advantageous time. Boeing and Airbus had just agreed to restrictions on the amount of export financing their home governments could provide to foreign airlines buying their planes. Because such financing generally came at below-market rates, it benefitted both the airlines (which paid less for their planes) and also the plane builders. The only losers in this game were the taxpayers, who picked up the tab for the subsidies.

(Actually, not everyone would agree that taxpayers were the only losers. Airlines domiciled in the same countries as the plane builders, such as United Continental (NYSE: UAL)Delta(NYSE: DAL), and AMR (NYSE: AMR) in the U.S., all say these subsidies hurt them by providing less expensive planes to foreign rivals such as Ryanair (Nasdaq: RYAAY) in Ireland. Then again, they could always buy their planes from Europe's Airbus ...)

The biggest winners
As I say, subsidies help plane makers. Of course, companies like General Electric (NYSE:GE), which build jet engines, also benefit from any trend that tends to make it easier to ink plane-sales contracts. But the biggest beneficiaries of the export financing restrictions were new plane makers like Bombardier, Sukhoi in Russia, Mitsubishi Heavy in Japan, and SAIC in China. None of these guys were covered by the Boeing-Airbus detente, and so they were allowed to sell their planes even cheaper than the big boys.

As you can imagine, this is a pretty sticky issue. Boeing, Airbus, and their home governments have been haggling over a new deal for years; they finally concluded negotiations this week. Subject to final approval from the governments involved, premiums charged to airlines that receive export financing are set to nearly double. Your average investment-grade airline is going to have to pony up a minimum 8% premium to secure financing for its foreign airplane purchases going forward.

What's this mean for Boeing?
Essentially, the agreement hashed out in Paris is going to reduce the size of subsidies governments can give their airplane builders, to the detriment of Boeing and Airbus. Now, there's good news, too. Under the new regime, smaller builders like Bombardier and Embraer(NYSE: ERJ) in Brazil get their subsidies restricted as well. So out the cockpit window goes their built-in pricing advantage.

Further good news comes from the fact that Boeing and Airbus were able to twist arms and get part of their backlogged orders grandfathered into the old subsidy regime. Seeing as Boeing and Airbus have built up a seven-year backlog of planes -- while Bombardier, SAIC, et al, are only just beginning to market their jets -- this would appear to confer a pricing advantage on the incumbent airplane oligopoly. Up to 69 planes per builder can be sold to foreign buyers under the ultra-lax, pre-2007 subsidy system. Plus, any planes Boeing and Airbus manage to deliver from their backlog between now and the end of 2012, which were sold under more favorable subsidy rules, can be delivered at the lower prices.

Problem is, this last bit of "good news" is also bad news. Now, you may not be aware of this (it really hasn't gotten much press), but Boeing has run into a few hiccups in the production of its marquee 787 Dreamliner aircraft. Its latest snafu has some analysts saying deliveries of backlogged 787s could be delayed by another 12 months. And since the first planes were most recently slated for delivery in early 2011, that would push the actual delivery date off well into 2012. The very year in which the U.S. government begins waving "buh-bye" and ushering cheap financing for such planes out the door.

Foolish takeaway
In short, negotiations in Paris have handed Boeing an advantage over newer entrants to the plane-building game -- but it's an advantage with an expiration date. The faster Boeing gets its 787 production line up and running, the more profits it can reap. One more major delay in deliveries, and Boeing may lose much it stood to gain from this deal.

© 2010 UCLICK L.L.C.