BEFORE THE BOARD OF DIRECTORS
EXPORT-IMPORT BANK OF THE UNITED STATES
WASHINGTON, D.C.
)
)
)
APPLICATION NUMBER AP087801XX FOR A
FINAL COMMITMENT FOR THE EXPORT OF )
BOEING 777 AND BOEING 737 AIRCRAFT TO )
)
CHINA
)
In the matter of
EIB–2013–0024
JOINT COMMENTS OF DELTA AIR LINES, INC., HAWAIIAN AIRLINES, INC.,
AND AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
Communications with respect to this document should be addressed to:
MICHAEL K. KELLOGG
Counsel for Delta Air Lines, Inc.
Kellogg, Huber, Hansen, Todd,
Evans & Figel, P.L.L.C.
Sumner Square
1615 M Street, N.W., Suite 400
Washington, D.C. 20036
(202) 326-7900
mkellogg@khhte.com
ANDREA FISCHER NEWMAN
Senior Vice President – Government Affairs
Delta Air Lines, Inc.
1212 New York Avenue, N.W.
Washington, D.C. 20005
(202) 216-0700
andrea.newman@delta.com
JONATHAN B. HILL
Counsel for Hawaiian Airlines, Inc.
Dow Lohnes, P.L.L.C.
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, D.C. 20036-6802
(202) 776-2725
jhill@dowlohnes.com
RUSSELL BAILEY
Senior Attorney
Air Line Pilots Association, International
1625 Massachusetts Avenue, N.W., 8th Floor
Washington, D.C. 20036
(202) 797-4086
russell.bailey@alpa.org
BEFORE THE BOARD OF DIRECTORS
EXPORT-IMPORT BANK OF THE UNITED STATES
WASHINGTON, D.C.
)
)
)
APPLICATION NUMBER AP087801XX FOR A
FINAL COMMITMENT FOR THE EXPORT OF )
BOEING 777 AND BOEING 737 AIRCRAFT TO )
)
CHINA
)
In the matter of
EIB–2013–0024
JOINT COMMENTS OF DELTA AIR LINES, INC., HAWAIIAN AIRLINES, INC.,
AND AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
Delta Air Lines, Inc. (“Delta”), Hawaiian Airlines, Inc. (“Hawaiian”), and the Air Line
Pilots Association, International (“ALPA”) submit these comments in response to the recent
Notice by the Export-Import Bank of the United States (“Bank”) of an application for final
commitment for a loan guarantee supporting the purchase of Boeing 777 and Boeing 737 aircraft
by Air China (the “Guarantee”).1
I.
Introduction
Air China seeks final approval for a loan guarantee in excess of $100 million to purchase
Boeing 777 aircraft to “provide long-haul airline service between China and various international
destinations.”2 The Bank acknowledges that Air China may use the aircraft purchased with the
aid of the Guarantee to “provide services in competition with the exportation of goods or
provision of services by a United States industry.” Indeed, Air China is Asia’s largest carrier, a
1
See Export-Import Bank of the United States, Application for Final Commitment for a
Long-Term Loan or Financial Guarantee in Excess of $100 million: AP087801XX, Public Notice
2013-0024, 78 Fed. Reg. 20,913 (Apr. 8, 2013) (“Notice”), attached hereto as Exhibit A.
Although the Notice concerns financing for both Boeing 777 and Boeing 737 aircraft, this
Comment only addresses the financing for the 777s because those aircraft will compete directly
with domestic airlines, resulting in significant harm to the U.S. airline industry and lost jobs for
its employees.
2
Id.
serious competitor to U.S. airlines, and a major recipient of Bank support. Air China already
competes with U.S. airlines on flights between 70 different international city-pairs, which
account for approximately $2.4 billion in annual U.S. airline revenues. Air China recently
announced plans to increase service to the United States, including the addition of flights to a
new destination (Houston) and an increase of flights to existing destinations (New York City and
Los Angeles). That will cause additional significant harm to U.S. airlines. For example, if Air
China uses the Bank’s support to add just one daily flight between Beijing and another U.S.
destination, such as Washington, D.C., it would likely result in estimated lost annual revenues of
at least $11 million to $41 million for U.S. airlines. It is therefore clear that the Bank’s
Guarantee will provide a competitive advantage for Air China against U.S. airlines, and that
advantage to Air China will result in lost opportunities for U.S. airlines and lost jobs for their
employees.
Even apart from Air China’s direct – and increasing – competition with U.S. airlines, the
Guarantee comes at a time when there is already structural oversupply in the airline industry.
The Bank should not contribute to that oversupply at the expense of U.S. airlines and their
employees.
The Bank should reject Air China’s application.3 Part II of this Comment explains why
the Bank must evaluate the harm that the Air China transaction will have on U.S. airlines and
their employees under the statutes passed by Congress. Part III explains why the Bank should
3
At a minimum, under the Bank’s newly effective economic impact procedures, the
Bank should perform a detailed economic analysis of the transaction to determine whether there
is a net benefit to U.S. industry. See Part IV, infra; see also Export-Import Bank of the United
States, Economic Impact Procedures and Methodological Guidelines (effective Apr. 1, 2013)
[hereinafter “New EIPs”], available at
http://www.exim.gov/generalbankpolicies/economicimpact/upload/Final-April-2013Procedures.pdf.
2
accurately measure and evaluate that harm to U.S. industry under the Bank’s new Economic
Impact Procedures. Part IV details the substantial harm to U.S. industry that the Bank’s approval
of the Air China Guarantee would cause.
II.
The Bank’s Charter Requires the Bank To Consider the Adverse Economic Effects
of the Guarantee in Detail
In the Export-Import Bank Reauthorization Act of 2012,4 Congress made clear that the
Bank must consider the potential adverse effect of all transactions it subsidizes through loans and
guarantees, with no exception for aircraft. Congress required the Bank to provide advance notice
of all applications for financing above $100 million and an opportunity for the public to
comment. See Pub. L. No. 112-122, § 9(a) (codified at 12 U.S.C. § 635a(c)(10)(C)(i)). The
notice must provide “a brief non-proprietary description of the purposes of the transaction and
the anticipated use of any item being exported, including, to the extent the Bank is reasonably
aware, whether the item may be used to produce exports or provide services in competition with
the exportation of goods or the provision of services by a United States industry.” 12 U.S.C.
§ 635a(c)(10)(C)(ii)(I). The statute also requires the Bank to “seek comments on the application
from the Department of Commerce and the Office of Management and Budget,” id.
§ 635a(c)(10)(C)(i)(III); provide any comments to the Bank’s Board of Directors before the
Board takes final action, id. § 635a(c)(10)(E); and to provide to requesting commenters a “nonconfidential summary of the facts found and conclusions reached in any detailed analysis or
similar study” conducted for the application, id. § 635a(c)(10)(F).5 These new requirements,
which were added to the Bank’s pre-existing obligations to consider the potential adverse
4
Export-Import Bank Reauthorization Act of 2012, Pub. L. No. 112-122, 126 Stat. 350
(“2012 Reauthorization Act” or “Act”).
5
Congress also requires the Bank to “consider and address in writing the views of parties
or persons who may be substantially adversely affected by the loan or guarantee prior to taking
final action on the loan or guarantee.” 12 U.S.C. § 635a-2.
3
economic effects of all transactions,6 make clear that the Bank must consider the specific adverse
economic impact resulting from its decision to finance aircraft exports.
The 2012 Reauthorization Act further requires the Bank to “develop and make publicly
available methodological guidelines to be used by the Bank in conducting economic impact
analyses or similar studies under section 2(e)” of its Charter. Pub. L. No. 112-122, § 12(a). On
September 27, 2012, the Bank published a notice seeking comments on a new set of economic
impact procedures and methodological guidelines. See Export-Import Bank of the United States,
Economic Impact Policy, 77 Fed. Reg. 59,397 (Sept. 27, 2012). The Bank adopted these
proposed procedures and guidelines (with minor changes) to take effect beginning in April
2013.7 The new procedures acknowledge that the Bank can no longer ignore the adverse
economic impact of its aircraft financings. As the commenters have explained through prior
objections, there are serious flaws in the Bank’s new approach to aircraft transactions, and this
comment incorporates those objections in full.8 Even under the New EIPs, however, the Bank
6
See id. § 635(b)(1)(B) (requiring the Bank to “take into account any serious adverse
effect of such loan or guarantee on the competitive position of United States industry . . . and
employment in the United States”); id. § 635a-2 (the Bank must “implement such regulations
and procedures as may be appropriate to insure that full consideration is given to the extent to
which any loan or financial guarantee is likely to have an adverse effect on industries . . . and
employment in the United States” (emphasis added)); id. § 635(e) (prohibiting the Bank from
approving applications that would cause “substantial injury” to U.S. industries).
7
See New EIPs at 1.
8
See, e.g., Joint Comments of Delta Air Lines, Inc., and Air Line Pilots Association,
International, in Exp.-Imp. Bank of United States, Public Comments on the 2012 Proposed
Economic Impact Procedures (Nov. 5, 2012) [hereinafter “Public EIP Comments”], available at
http://www.exim.gov/generalbankpolicies/economicimpact/upload/Public-Comment-Nov-52012.pdf; Joint Comments of Delta Air Lines, Inc., Hawaiian Airlines, Inc., and Air Line Pilots
Association, International, Comment on Application Numbers AP087595XX, AP087595XA,
AP087595XB For a Final Commitment for the Export of Boeing 777 and 747 Aircraft to South
Korea (Feb. 8, 2013) (explaining that Korean Air competes directly with Delta and Hawaiian and
that ExIm subsidies to the foreign carrier greatly disadvantage the competing U.S. carriers); see
also Delta Air Lines, Inc., v. Exp.-Imp. Bank of United States, No. 1:13-cv-00424-RC (D.D.C.
filed. Apr. 3, 2013). Additionally, the New EIPs are the subject of a legal challenge brought by
4
should not approve the Air China Guarantee. Because of the substantial injury to U.S. airlines
detailed in Part IV below, the Bank should conduct a detailed economic impact analysis of the
Air China Guarantees to confirm whether the benefits of this transaction in fact outweigh its
profound costs to U.S. industry and employment.
III.
The Bank’s New Economic Impact Procedures Should Lead The Bank To Conduct
a “Detailed Economic Impact Analysis” of the Guarantee
A.
The New Procedures
The Bank’s New EIP procedures describe a four-stage process. Stage I examines the
overall state of the global airline industry and aims to determine whether it suffers from long
term structural oversupply. If so, any financing transaction for a foreign airline can be approved
only under “exceptional circumstances.” If the Bank determines that there is no structural
oversupply, it will run the transaction through three additional stages. Stage II consists of three
threshold tests: (1) whether the “evaluated transaction” exceeds $200 million; (2) whether the
transaction will cause “substantial injury”; and (3) whether the airline will use a “significant
number” of flights from the “evaluated transaction” to “direct[ly]” compete with U.S. airlines.
All three threshold tests must be satisfied for a transaction to pass this stage.
If the transaction in question clears Stage II, the Bank will conduct a detailed economic
impact analysis of the transaction, which is described in Stages III and IV of the New EIPs.
Stage III of the analysis consists of determining (1) whether Export Credit Agency (ECA)
support provides a price advantage to the foreign airline and (2) whether any price advantage
translates into a calculable direct loss. The second step of Stage III entails “evaluat[ing] the
nature and extent of direct competition [and] quantify[ing] the likely impact of the price
Delta, Hawaiian and ALPA, which is currently pending in federal court. See Delta Air Lines,
Inc. v. Exp.-Imp. Bank of United States, No. 1:13-cv-00192-RC (D.D.C. filed Feb. 13, 2013).
5
difference on relative market share and total income potentially lost by the U.S. airline.”9
Following these determinations, Stage IV consists of comparing the “export value of the
‘evaluated transaction’ under review (and any future spares/replacements of the order package)”
to the direct loss to determine “whether there [is] likely to be a net economic benefit to the order
package.”10 As a part of Stage IV, the Bank must consider public comments made regarding the
transaction.
B.
There Is Long Term Structural Oversupply in the Airline Industry
The Air China transaction should not proceed past Stage I because of the long-term
structural oversupply in the airline industry.11 As previously explained, the focus of this inquiry
must be the international routes flown to and from the United States, not the capacity of the
global airline industry in general.12 But even looking at the global airline industry, it is evident
that long-run structural oversupply exists.
As industry expert Daniel Kasper and economist Eric Amel explain in the attached
declaration, an industry can be said to be in a state of long-term structural oversupply when
profits consistently fail to justify the industry’s investments.13 A standard measure of an
9
New EIPs at 15.
10
Id.
11
The new EIPs state that the Bank’s Stage I analysis will be conducted “annually by an
independent, external source recognized as an expert (and neutral party) in the airline field.” Id.
at 13. The Bank has not publicly released any further information about its annual study. To the
extent the Bank has already conducted its analysis for the coming year, the commenters maintain
their objection that they were not able to participate in the process, see Public EIP Comments at
41-42, and they request a copy of the any conclusions reached, pursuant to § 635a(c)(10)(F).
12
See Public EIP Comments at 41 (“Most importantly, any evaluation of structural
oversupply must focus on international routes to and from the United States, not on the airline
industry generally. Those international routes are the areas in which the Bank’s subsidies have
the most significant effect on U.S. airlines and their employees.”).
13
See Declaration of Daniel Kasper and Eric Amel at 6-8 [hereinafter “Kasper-Amel
Decl.”], attached hereto as Exhibit B.
6
industry’s investment returns is its return on invested capital (ROIC).14 If an industry’s capital
costs of investments—often estimated using a Weighted Average Cost of Capital (WACC)—
exceed its returns on invested capital, ROIC, then it is in a state of structural oversupply.15 As
the following graph shows, the airline industry has suffered from structural oversupply since at
least 1993; at no point since that time have returns on invested capital been sufficient to cover
the cost of the capital invested:16
Return on invested capital in airlines and their WACC
10.0
9.0
WACC
8.0
7.0
6.0
Investor
value
losses
5.0
4.0
3.0
ROIC
2.0
1.0
0.0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013F
Source: IATA, “Downward pressures may ease but risks to outlook remain high, Industry Outlook – September 2012.”
Other commentators have recognized this problem as well.17 In an article entitled “Why does the
airline industry over-invest,” the Journal of Air Transport Management published a conclusion
similar to the one reached by Kasper and Amel:
14
Id.
15
Id. at 7.
16
Id. at 8, Exhibit 1; see also Declaration of Igor Helman Ex. 1 [hereinafter “Helman
Decl.”], ROIC Analysis, attached hereto as Exhibit C.
17
See Helman Decl. Ex. 32, IATA Industry Outlook Presentation (Sept. 2012).
7
Since 1981, the listed airline industry earned meaningful economic profits only in 1984.
For a further five years, the industry approximately covered its cost of capital (1985,
1988, 1997, 1998 and 1999). During the remaining years, and since 2000, the industry
has failed to cover its cost of capital. In cyclical industries, to cover the cost of capital
over a cycle, a company has to earn sufficient economic profits in good times in order to
compensate the economic loss during downturns. The airline industry failed to achieve
this over the last two decades.18
No exceptional circumstances justify supporting this transaction in the face of such
overcapacity. Air China is a financially healthy and growing airline that, with the Bank’s
substantial support in years past, has already contributed heavily to the industry’s endemic
supply problems. The airline has grown its fleet to 289 passenger aircraft with an average age of
just 6.58 years.19 In the past two years alone, Air China has taken delivery of eleven 777-300s
compared only to two 777s (and eight widebody aircraft total) added to the entire U.S. fleet
during that time. This is the second notice for financing exceeding $100 million the Bank has
issued for Air China in as many months.20 During its recent rapid expansion, Air China has
enjoyed a six-fold increase in the number of passengers it carries to and from the United States
(from 47,000 annual passengers in 1997 to 316,000 annual passengers in 2012).21 The Bank
should not reward Air China for planning to increase this capacity even further. Nor does
anything suggest that Boeing especially needs the Bank’s help in this instance. Given Air
China’s previous purchases and existing commitments to purchase additional Boeing aircraft,22
18
Helman Decl. Ex. 30, Oliver W. Wojahn, Why Does the Airline Industry Over-Invest?
J. of Air Transport Mgmt. 19 (2012).
19
Id. Ex. 11, Air China 2012 Interim Report at 7; Kasper-Amel Decl. at 2.
20
See Export-Import Bank of the United States, Application for Final Commitment for a
Long-Term Loan or Financial Guarantee in Excess of $100 million: AP087801XX, Public Notice
2013-0024, 78 Fed. Reg. 16,852 (Mar. 19, 2013).
21
Kasper-Amel Decl. at 11-12 & Ex. 3.
22
See, e.g., Helman Decl. Ex. 26, Press Release, Air China, Air China Orders 15 Boeing
787 Dreamliner Aircraft (Nov. 20, 2007) (noting that the “Boeing 787 is the optimal aircraft to
support Air China’s strategy for continued international growth”).
8
any competition Boeing may face from Airbus in this case is purely speculative, and certainly
does not amount to an exceptional case.
C.
The Air China Transaction Satisfies All Three Stage II Threshold Tests
If the Bank proceeds to Stage II of its new EIPs (which it should not do, as set forth
above), it should conclude that the Air China transaction satisfies all three threshold tests of that
stage.
The first test of Stage II requires the Bank to determine whether the “evaluated
transaction” exceeds $200 million. The Bank defines “evaluated transaction” as “the total
number/value of Ex-Im Bank supported aircraft to be (or has been) delivered in the greater of: (a)
the authorization upon which the Detailed Economic Impact Analysis is based, or (b) 12 months
of such deliveries after/around/preceding the date of the authorization.” 23 The Air China
transaction almost certainly exceeds the $200 million threshold. A single Boeing 777 has a list
price of $315 million.24 Moreover, a number of 777 aircraft are involved in the “evaluated
transaction”: publicly available information indicates that Air China plans to receive nine
Boeing 777-300ERs within the next two years.25 The Bank’s historical support for Air China
likewise confirms that the first test will be easily satisfied. Over the past two years, Air China
has received over $1.2 billion in ExIm financing, amounting to more than $600 million per year,
and this is the Bank’s second notice of 777 financing to Air China exceeding $100 million issued
23
New EIPs at 13, n.26.
24
Helman Decl. Ex. 31, Boeing, Commercial Airplanes—Jet Prices,
http://www.boeing.com/boeing/commercial/prices/ (last visited May 1, 2013).
25
See Kasper-Amel Decl. at 9; Helman Decl. Ex. 2, Air China Turns Attention to
International Markets, But its Profits Are Regional and Domestic, CAPA Centre for Aviation
(Apr. 5, 2013) (showing Air China as scheduled for delivery of five 777 aircraft in 2013 and four
more in 2014).
9
in the past two months.26 There is no indication that the financing for Air China’s proposed
purchases of Boeing 777s in this Guarantee will be any less substantial than it has been in
previous years.27
The Air China transaction is also likely to meet the second threshold test of Stage II:
whether the “evaluated transaction” meets the threshold for “substantial injury.”28 The Bank has
not released sufficient information to ascertain the total number of airplane seats implicated by
its Guarantee. Using publicly available information, however, Kasper and Amel estimate that
that current capacity of U.S. carriers’ widebody aircraft is approximately 122,000 seats,29 and
that Air China currently configures its 777-300ER aircraft to have 311 seats. Plugging these
numbers into the Bank’s “substantial injury” formula, it would take four aircraft to exceed the
1% threshold.30
It appears that Air China seeks to finance at least four 777 aircraft within the year, which
would exceed that threshold. Specifically, Air China currently has nine 777-300ER aircraft
26
See Kasper-Amel Decl. at 9; see also Helman Decl. Ex. 3, Exp.-Imp. Bank of United
States, 2012 Annual Report, at 35 (showing loan guarantees to Air China totaling over $830
million); Helman Decl. Ex. 4, Exp.-Imp. Bank of United States, 2011 Annual Report, at 31
(showing Air China loan guarantees amounting to over $420 million); 78 Fed. Reg. at 16,852; 12
U.S.C. § 635(e)(6) (“For purposes of determining whether a proposed transaction exceeds a
financial threshold . . . under the procedures or rules of the Bank, the Bank shall aggregate the
dollar amount of the proposed transaction and the dollar amounts of all . . . guarantees, approved
by the Bank in the preceding 24-month period, that involved the same foreign entity and
substantially the same product to be produced.”).
27
Transaction amounts below $200 million may suggest that Air China’s loan guarantees
are being structured in an unnatural way simply to avoid being subject to ExIm Bank’s detailed
economic analysis. See Public EIP Comments at 43-44 (explaining why the “extraordinarily
high threshold of $200 million” is not an appropriate amount to use).
28
“Substantial injury” is found where the evaluated transaction divided by the number of
seats in similar aircraft (i.e., widebody or narrowbody) owned by U.S. airlines exceeds 1%. New
EIPs at 2, n.3.
29
Kasper-Amel Decl. at 9-10 & Ex. 2.
30
Id. at 10.
10
ordered and set to be delivered within the next two years, with five of those planes scheduled to
be delivered in 2013.31 Air China has already sought Bank financing exceeding $100 million for
777s in March of this year.32 In the previous two years, Air China has taken delivery of eleven
777-300ER aircraft, with six of those financed by ExIm Bank and delivered in the last year
alone.33 Consequently, the Guarantee is likely to meet the Bank’s “substantial injury” test of
Stage II.34
Finally, the proposed transaction is “virtually certain” to meet the third threshold test of
Stage II,35 which requires that the carrier seeking the financing in question fly a “significant
number” of flights “in direct competition” with U.S. carriers.36 For example, Air China currently
31
See Helman Decl. Ex. 2, CAPA Centre for Aviation, Air China Turns Attention to
International Markets (Apr. 5, 2013); see also id. Ex. 5, Boeing Orders & Deliveries (showing
19 777-300ERs ordered since 2007 and only 11 aircraft delivered through February 2013).
32
See Kasper-Amel Decl. at 2; 78 Fed. Reg. at 16,852.
33
See Helman Decl. Ex. 6, Air China Mandates for Two 777s, Air Finance Journal (Aug.
16. 2012); id. Ex. 7, Air China Closes 777 Financing , Air Finance Journal (July 31, 2012); id.
Ex. 8, Exclusive: Air China Closes U.S. Ex-Im Bond, Air Finance Journal (June 7, 2012); id. Ex.
9, Air China Closes Ex-Im Financing , Air Finance Journal (May 31, 2012); id. Ex. 10, Air
China Closes 777-300ER Financing , Air Finance Journal (Feb. 8, 2012).
34
Even if the aircraft covered by the “evaluated transaction” are insufficient to meet the
strict letter of the Bank’s current formulation of the substantial injury threshold, the Bank should
still perform a detailed economic impact analysis. The bottom line is that Air China expects to
receive at least nine 777 aircraft over the next two years – an average of 4.5 per year. It should
not be permitted to evade review simply by pushing off one delivery by a few weeks or days.
See Public EIP Comments at 45 (suggesting that artificially limiting the numerator to insufficient
length of time “ignores the accretive effect of the Bank’s financings”). Moreover, as previously
explained, “including the total daily capacity offered by U.S. airlines [as the denominator] makes
no economic sense and would be a totally inappropriate and erroneous base against which to
apply the 1% standard for measuring harm.” See id. at 45, 67. It is inappropriate to include U.S.
capacity on routes and in markets which Air China does not and cannot serve. Including
irrelevant capacity in the denominator of the formula artificially dilutes the impact that this
transaction will have on international routes of U.S. carriers. See id.
35
Id. at 4.
36
The commenters maintain their objection to this threshold test on several grounds.
First, the new procedures fail to define what number of flights is considered “significant.” Id. at
11
operates nonstop flights from San Francisco and New York to Beijing, and from Tokyo to
Beijing and Shanghai.37 U.S. carriers operate these same nonstop routes—which account for
$275 million in annual revenue to U.S. carriers—in competition with Air China.38 Air China
also competes with U.S. carriers for passengers flying Los Angeles-Beijing and Houston-Beijing
routes (which U.S. carriers service through hubs in cities such as San Francisco, Seattle, and
Detroit),39 which account for an additional $161 million in annual revenue to U.S. carriers.40 In
addition, Hawaiian just announced that it will begin its Beijing-Honolulu service, connecting
Beijing to the 11 U.S. cities Hawaiian services from Honolulu.41 Hawaiian will then compete
with Air China for passengers flying to at least three of these U.S. cities (San Francisco, Los
Angeles, and New York). Finally, Air China serves 26 international destinations from its hub in
46. Second, the focus on direct (defined as “non-stop or one-stop/same plane”) competition is
based “on a fundamental misunderstanding of the nature of airline competition” and is contrary
to the current understanding of the nature of competition in the airline industry. Id. Modern
airlines—including Air China and U.S. carriers—rely on a hub model, particularly for
international flying, which connects passengers through hubs to their ultimate destinations. See
Kasper-Amel Decl. at 11; Helman Decl. Ex. 11, Air China 2012 Interim Report at 6 (“We
continued to develop our hub and network strategy.”). The hub system means that U.S. airlines
compete with foreign carriers on both a nonstop and a connecting basis. Therefore, examining
only direct competition drastically underestimates the impact that ExIm financing of foreign
carriers has on their U.S. competitors. See Kasper-Amel Decl. at 11, 13. Third, the Bank’s
apparent focus on existing competition improperly fails to consider the preclusive effect of the
Bank’s support. As Air China adds additional routes with Bank-backed planes, U.S. airlines will
find it more difficult to expand into similar markets. See Public EIP Comments at 47-48.
37
Kasper-Amel Decl. at 13 & Ex. 4.
38
Id.
39
Id. at 14 & Ex. 5.
40
Id.
41
See id. at 16 n.32; see also Helman Decl. Ex. 35, Press Release, Hawaiian Airlines,
Hawaiian Airlines to Begin Service to China in 2014 (Apr. 10, 2013).
12
Beijing with travel times and distances that are competitive to routings offered by U.S. carriers
for those same destinations.42
In sum, Air China competes with U.S. carriers on flights between 70 city pairs that
generate approximately $2.4 billion in revenue each year for the U.S. carriers and their joint
venture partners.43 By any measure, these figures represent significant revenues for U.S. carriers
put at risk by this transaction.
IV.
The Guarantee Will Harm U.S. Airlines and Their Employees
The Air China Guarantee will significantly harm U.S. airlines and their employees.44 If
approved, the Guarantee will give Air China a significant competitive advantage over U.S.
airlines, which must finance their aircraft acquisitions with private capital at market prices. As
the Bank recognizes, Air China may deploy Bank-financed aircraft on international routes to and
from the United States. The cost savings and other advantages provided by Bank financing to
Air China will thus translate into direct competitive harm to U.S. airlines and their employees.
A.
As Air China Has Received Greater Bank Financing, It Has Significantly
Increased its Service to the United States in Competition with U.S. Airlines
This Guarantee is the latest in a series of Bank financings that Air China has used to
support its rapid growth on international routes, to the detriment of U.S. carriers. Air China has
received over $2.6 billion in Bank loans and loan guarantees since 1997, and this is the second
notice of a 777 financing exceeding $100 million that the Bank has issued in as many months.45
42
Kasper-Amel Decl. at 14-15, Ex. 6.
43
Id. at 16.
44
As explained in Part III.A, supra, the Bank has set forth how it will conduct its detailed
economic impact analysis of aircraft transactions in Stages III and IV of its new EIPs. The
commenters have elsewhere explained the many problems with these Stages and maintain those
objections here. See, e.g., Public EIP Comments at 49-56.
45
See Kasper-Amel Decl. at 2; 78 Fed. Reg. at 16,852.
13
The airline has used those below-market financings to dramatically increase the size of its fleet
and its global network. In the past two years alone, Air China has taken delivery of eleven
Boeing 777-300s.46 As of February 2013, Air China has received 134 Boeing aircraft and has
orders for 62 more, including nine more 777s and other widebody Boeing aircraft.47 This
unprecedented expansion has allowed Air China to grow its fleet to 289 aircraft, with an average
age of just 6.58 years, one of the youngest fleets in the world.48 In the next two years alone, the
nine 777s that Air China plans to purchase will likely be financed in part by ExIm guarantees.
This is in addition to the 30 other Boeing aircraft Air China is set to order for deliveries through
2015.49 In contrast, all U.S. carriers combined are forecasted to take delivery of 55 wide-body
aircraft through 2015. And unlike Air China’s rapid expansion, most of these deliveries to U.S.
carriers (48 out of 55) will replace retiring aircraft, not provide additional new capacity.50
During this period of massive expansion, Air China has dramatically increased the
number of passengers it carries to and from the United States: from 47,000 annual passengers in
1997 to 316,000 annual passengers in 2012 – an increase of 572%.51 Air China has also
expanded the number of cities it serves in the United States; it currently serves three cities and is
46
See Helman Decl. Ex. 11, Air China 2012 Interim Report at 7; id. Ex. 2, Air China
Turns Attention to International Markets.
47
See id. Ex. 5, Boeing Orders and Deliveries; id. Ex 2, Air China Turns Attention to
International Markets.
48
See id. Ex. 11, Air China 2012 Interim Report. By comparison, the average age of the
U.S. fleet is 13.8 years. See id. Ex. 12, Boston Consulting Group, Winning the Future: The Case
for a U.S. National Airline Policy at 227-28 (May 11, 2011).
49
See id. Ex. 33, Air China to Order 31 Boeing Jets, Air Finance Journal (Mar. 1, 2013);
see also id. Ex. 2, Air China Turns Attention to International Markets (Air China’s net gain of 13
widebody aircraft in 2012 “made the year the largest for widebody deliveries in Air China's
history, according to the carrier”).
50
Id. Ex. 12, Winning the Future at 227-28 (May 11, 2011).
51
Kasper-Amel Decl. at 11-12 & Ex. 3.
14
adding a fourth (Houston) in July of this year.52 Among other overlaps, Air China competes
directly with U.S. carriers on nonstop New York-Beijing and San Francisco-Beijing flights. Air
China also provides direct flights between Tokyo and both Beijing and Shanghai, in direct
competition with Delta.53 As Kasper and Amel’s data demonstrate, Air China’s rapid expansion
in the United States is closely correlated with the increasing financial support it receives from the
Bank.54
Air China’s competitive impact is not limited to flights between the United States and
Beijing. Air China currently provides competing connecting service to 26 destinations from its
U.S. gateway cities via its major hub in Beijing, which is well-positioned to allow the airline to
provide connecting service to numerous destinations in competition with U.S. airlines.55 Such
competing destinations include not only the domestic China market, but also other parts of Asia,
Australia, and the Middle East.56 Overall, Air China competes with U.S. airlines on international
routes between 70 different city pairs, which generate approximately $2.4 billion in annual
revenue for U.S. airlines and their joint-venture partners.57 Air China’s rapid expansion, fueled
by the availability of favorable ExIm financing, has increasingly allowed Air China to grow its
business at the expense of U.S. carriers.58
52
Id. at 11. In addition to Houston, Air China also serves San Francisco, Los Angeles,
and New York. Id.
53
Id. at 13 & Ex. 4.
54
Id. at 2.
55
Id. at 14-15 & Ex. 6.
56
Id. at 15 & Ex. 6. For example, a passenger flying from San Francisco, California to
Delhi, India can take a 22-hour Delta flight with a connection in Amsterdam or a 22-hour Air
China flight with a connection in Beijing. See Helman Decl. Ex. 13, Cheaptickets.com Search
Results (Apr. 10, 2013).
57
Kasper-Amel Decl. at 15-16.
58
Id. at 12 & Ex. 3.
15
B.
The Guarantee Would Give Air China Significant Competitive Advantages
Over U.S. Airlines
Because the Bank has not released the details about the financing terms that its guarantee
would offer to Air China, it is impossible to calculate the exact price advantage that Air China
would reap from the Guarantee.59 It is plain, however, that a price advantage exists. As the
Kasper-Amel Declaration explains, Bank financing enables Air China to finance its aircraft
purchases at below-market rates, making new Boeing 777 aircraft an even more attractive
investment for Air China, and giving it a substantial cost advantage over competing U.S.
airlines.60 Indeed, Air China’s desire for such financing makes clear that the Bank’s support
provides Air China—a growing and profitable airline—with a significant competitive advantage.
The availability of below-market financing makes it advantageous for Air China to deploy these
aircraft on routes that compete directly with unsubsidized U.S. carriers.61 The effect on Air
China’s expansion plans is clear. Since 2011, it has received 11 Boeing 777-300ER aircraft with
the aid of Bank financing (and has ordered nine additional Boeing 777 passenger aircraft). Air
China has added those aircraft to its international routes in direct competition with U.S. airlines,
using the Bank-financed planes to add new U.S. destinations and increase both the frequency and
capacity of flights to existing U.S. destinations.62
59
Id. at 16.
60
Id. at 10-11.
61
See id. at 17 (explaining that when “Air China deploys additional capacity on
international routes to and from the United States, it increases the supply of seats thereby putting
downward pressure on the fares on those routes”).
62
See, e.g., Helman Decl. Ex. 14, ‘Smiling China’ Kick-starts Service Upgrade, Global
Travel Industry News (Apr. 2, 2013) (noting that Air China used the new Boeing 777-300ER to
increase service on its “Beijing-New York route–the most important and busiest between China
and the United States–. . . from seven to 11 times a week” and that to “further cement its North
American foothold, Air China also plans to start direct Beijing–Houston flights on July 11, 2013,
the first service ever to link Beijing with the southern region of the United States”); id. Ex. 15,
16
Bank financing thus has provided (and would provide) Air China a substantial and
unjustified cost advantage over U.S. airlines. As Kasper and Amel explain, the competitive
nature of the airline industry coupled with low profit margins means that even minor cost savings
can translate into significant competitive advantages.63 This advantage is exacerbated by the
significantly lower fuel and maintenance costs that come with Air China’s new, Bank-backed
aircraft. The average age of Air China’s fleet is 6.58 years.64 By comparison, the average age of
U.S. airlines’ aircraft is 13.8 years.65 This disparity also encourages Air China to squeeze out
U.S. airlines in additional international routes to and from the United States by charging lower
fares for flights on newer, more appealing aircraft. For example, Air China uses its Bank
financed 777s to offer first class cabin service between New York and Beijing, and it is the only
airline to do so.66 The real world effect of these Bank-sponsored benefits is to help Air China
attract customers away from U.S. carriers.
Press Release, Air China, Fly Air China to North America (Mar. 20, 2013) (noting that the
Beijing-Los Angeles service will be expanded to twice daily, the “Beijing-Houston service will
start in July, and the flights will be operated with the B777-300ER”); id. Ex. 16, Air China 2011
Annual Report at 15 (stating that in 2011, North American passengers accounted for over 7% of
Air China’s revenue, a 16% increase over the prior year); see also id. Ex. 23, Air China Builds its
N. American Network While Hainan Air to Use A330 Instead of 787 to Chicago, CAPA Centre
for Aviation (Feb. 4, 2013) (“The North American market continues to outperform for Chinese
airlines, a result of high demand and more limited competition than on European routes. . . . A
decade ago Air China had only a three times weekly Beijing-New York service, reflecting the
rise of China as both a country and aviation market. Air China’s 2013 capacity to North
America will be 183% greater than in 2003 and is quickly closing in on United Airlines’ position
as the largest carrier between North America and China.”).
63
Kasper-Amel Decl. at 17-18.
64
Helman Dec. Ex. 11, Air China 2012 Interim Report at 7.
65
Id. Ex. 12, Boston Consulting Group, Winning the Future, at 46.
66
See id. Ex. 17, Air China to Upgrade Aircraft, Increase Frequency for NYC Nonstops,
Airline Industry Information (Feb. 7, 2013); see also id. Ex. 18, Zhang Yuwei, Air China
Expands Service Across US, China Daily USA (Apr. 1, 2013) (quoting an Air China executive as
saying that the focus is on “upgrading and expanding service” and that the new 777-300s bought
17
The Bank’s support is also unwarranted because Air China does not need the U.S.
government’s largesse to acquire Boeing aircraft. Air China is state-owned and supported, and is
financially successful and growing steadily, enjoying year-over-year profit increases from 2001
to 2007.67 The airline’s chief financial officer described the financial status of the company as
“very healthy.”68 Last year, Air China’s operating profit was up over 30%.69 Air China’s strong
domestic industry buoyed the airline during the recession of the late 2000s, and it is one of the
few airlines to post a profit during the first quarter of 2009.70 Air China’s strong financials give
it access to other sources of capital: for instance, it recently announced plans to issue 10-year
bonds valued anywhere from $804 million to $1.6 billion.71
with Bank financing has a cabin that “is wider, and coach-class seats [that] have individual
monitors and consoles with audio and video on demand”).
67
See id. Ex. 19, Air China, About Air China (explaining that the number of passengers
carried by Air China, as well as its passenger load factor have both increased in 2011, by 18.34%
and 2.77%, respectively); id. Ex. 16, Air China 2011 Annual Report at 7; see also id. Ex. 20
Jasmine Wang, Air China, China Southern Profits Decline on Currency, Fuel, Bloomberg (Mar.
27, 2013) (describing Air China as Asia’s biggest airline by market value).
68
Id. Ex. 21, Beijing Municipal Government: Air China Shows Strain of Large Airline
Debt, Hong Kong Gov’t News (Sept. 4, 2013).
69
Id. Ex. 22, Air China Operating Profit Up 31% in 2012, CAPA Centre for Aviation
(Mar. 27, 2013).
70
Id. Ex. 24, China Bucks the Downturn at Home, Airline Business (June 15, 2009)
(explaining that Chinese “domestic traffic is surprisingly healthy and has defied the downturn
with double-digit growth since October [2008]. . . . While international traffic has been badly hit
and is still down on last year, there are indications that China’s airlines are slowly recovering.
During the first quarter . . . Air China . . . posted profits. The domestic activity of Chinese
carriers is much bigger than their international business so domestic RPK [Revenue Passenger
Kilometer] growth has been enough to boost total RPKs.”).
71
Id. Ex. 26, Air China to Issue Bonds, Air Finance Journal (Jan. 18, 2013). Earlier
reports indicated that Air China’s bond offering may be as large as $1.6 billion of securities. Id.
Ex. 21, Beijing Municipal Government: Air China Shows Strain of Large Airline Debt, Hong
Kong Gov’t News. Air China has also received government support at times. See id. Ex. 25,
Joanne Chiu, China’s Top Airlines Post Sharp Profit Fall, Wall St. J. (Mar. 26, 2013)(observing
that Air China has “in recent years fared better than [its] international rivals thanks to
government financial support and growing domestic air travel”); id. Ex. 24, China Bucks the
18
In addition to its strong financial position, Air China is not likely to choose Airbus over
Boeing, regardless of ECA support. The Boeing 777-300ER aircraft is “Air China's preferred
long-haul airliner” because it is efficient, reliable, and offers exclusive business class features.72
Air China values Boeing as a supplier in part because it provides aircraft without a current direct
competitor, such as the Boeing Dreamliner 787 aircraft that Air China has purchased and has
committed to keep purchasing in the future irrespective of the Bank’s financing.73 The Bank’s
assumption that Air China would choose Airbus over Boeing absent Bank support is pure
speculation.
C.
The Guarantee Would Substantially Injure U.S. Airlines and Their
Employees
Even on very conservative assumptions, the Guarantee would result in substantial
revenue loss to U.S. carriers. Air China has recently announced that it is adding new and
expanded service to the United States. It plans to increase the frequency of its service to New
York from seven to 11 flights a week using a Boeing 777-300ER.74 It will also resume its
double daily flights from Los Angeles to Beijing, also using the 777-300ER, and will replace a
Boeing 747-400 that it uses on its San Francisco-Beijing route with a new 777-300ER aircraft,
resulting in an increase in seat capacity of 20%.75 Air China is adding Houston as a fourth U.S.
Downturn at Home, Airline Business (“In response to the [economic] crisis, the government
axed its tax on fuel surcharge revenue, opened China’s airspace further to allow more direct
routings and stepped in to bail out struggling state-controlled airlines.”).
72
Id. Ex. 14, ‘Smiling China’ Kick-starts Service Upgrade, Global Travel Industry News.
73
See, e.g., id. Ex. 26, Press Release, Air China, Air China Orders 15 Boeing 787
Dreamliner Aircraft (noting that the “Boeing 787 is the optimal aircraft to support Air China’s
strategy for continued international growth”).
74
See id. Ex. 27, Ben Mutzabaugh, Houston Lands Beijing Flights on Air China, USA
Today (Jan. 16, 2013).
75
E.g., id. Ex. 2, Air China Turns Attention to International Markets, CAPA Centre for
Aviation.
19
destination.76 With this expansion, Air China is on track to becoming the largest carrier between
China and North America, displacing a U.S. airline (United Airlines) that currently holds that
distinction.77 The Bank should decline to subsidize Air China’s expansion efforts, particularly
when they come at the expense of competing U.S. airlines and their employees.
In addition to these carefully planned and publicized expansions by Air China, Bank
financing will likely permit Air China to add even more destinations in the United States,
including major destinations such as Washington, D.C. Air China has continually pursued a
strategy of expansion in the United States, and Washington would be a logical city to add to Air
China’s growing list of U.S. destinations.78 Air China is already the largest Asian carrier and the
only Asian airline to fly nonstop from Beijing to U.S. destinations.79 Kasper and Amel also
76
See id. Ex. 27, Mutzabaugh, Houston Lands Beijing Flights on Air China (“Air China
has tabbed Houston Bush Intercontinental as its newest U.S. Gateway. The carrier plans to begin
nonstop service to Beijing on July 11, pending regulatory approval. . . . Air China plans to fly
four flights a week on Boeing 777-300ER jets.”).
77
Id. Ex. 23, Air China Builds its N. American Network, CAPA Centre for Aviation.
78
See, e.g., id. Ex. 28, Air China to Buy 31 Boeing Planes, Associated Free Press (Mar.
1, 2013) (“China’s leading airline, which last year partnered with US JetBlue Airways, is seeking
to expand its business in the United States.”); id. Ex. 18, Yuwei, Air China Expands Service
Across US (quoting Chi Zhihang, Air China's vice-president and general manager for North
America, as saying “The sky is the limit” when introducing Air China’s plans for the U.S.
market. Chi additionally “said the airline is focused on upgrading and expanding service. For
example, he said service between Beijing and the Canadian city of Vancouver is being increased
to 11 round-trip flights a week in mid-May and nonstop service between Beijing and Houston
will begin in July.”); id. Ex. 29, Press Release, Air China, Air China Flies a Million Seats per
Week and Launches Daily Service to San Francisco (Mar. 29, 2007) (quoting Mrs. Zhang Lan, a
Senior Vice President of Air China, as saying that “As the only airline with daily Beijing nonstops from both San Francisco and Los Angeles, Air China is showing its commitment to service
the growing demand for travel to and from China”).
79
See id. Ex. 34, Press Release, Air China, Air China Continues Expansion in North
America with New Nonstop Houston-Beijing Service (Jan. 15, 2013) (“Air China is the world’s
largest airline by market capitalization, according to the International Air Transport Association
(IATA).”); id. Ex. 29, Press Release, Air China, Air China Flies a Million Seats per Week; id.
Ex. 17, Air China to Upgrade Aircraft, Airline Industry Information.
20
explain that no Chinese carrier currently offers nonstop service between Beijing and
Washington, D.C. and there may be demand for adding this international service.80
As Kasper and Amel detail in their declaration, the impact of Air China adding a single
daily Boeing 777 flight between Washington, D.C., and Beijing would be substantial. This flight
would compete not only with connecting service by U.S. airlines to Beijing from Washington,
D.C., but also with connecting service by U.S. airlines to numerous other destinations that Air
China would serve from Washington, D.C., through its Beijing hub.81 Relying on conservative
estimates, Kasper and Amel project that Washington-based expansion by Air China would likely
cause U.S. airlines to lose between 9,521 and 24,850 passengers per year.82 These lost
passengers would account for 4.7% to 12.3% of total passengers carried by U.S. airlines on
competing routes, vastly exceeding the 1% statutory test for substantial injury. See 12 U.S.C. §
635(e)(1), (4). Moreover, Air China’s increase in capacity and aggressive pricing (subsidized by
the Bank’s below-market financing) would likely force U.S. carriers to lower prices, reducing
their revenues even further.83 Kasper and Amel estimate that U.S. airlines would lose between
$10.4 million and $29.6 million in annual revenue from just one additional Beijing-Washington,
D.C., flight.84 As past experience has shows, lost profits from subsidized foreign competition
translate directly into reduced routes for U.S. airlines and reduced wages and lost jobs for U.S.
80
Kasper-Amel Decl. at 18-19; see Helman Decl. Ex. 23, Air China Builds its N.
American Network, CAPA Center for Aviation (speculating that Air China may add “another San
Francisco service, up-gaug[e] Houston to daily, or introduc[e] a new city”).
81
Kasper-Amel Decl. at 18-20, 24.
82
Id. at 23.
83
Id. at 22-23.
84
Id. Kasper and Amel show that their estimated revenue losses understate the full
impact on U.S. airlines since the estimates do not account for the likely price decreases on
overlapping routes that would result from the influx of additional capacity that Air China flights
would provide. Accounting for these further losses, Kasper and Amel estimate that U.S. carriers
stand to lose anywhere between $14 million and $39 million in annual revenue. Id. at 23.
21
airline employees.85 This impact would be multiplied if Air China expands to additional U.S.
cities or increases capacity in the cities that it currently serves.86 Thus, the impact of the
Guarantee on U.S. carriers will be substantial by any measure.87
V.
Conclusion
For all of the reasons given above and in the attached declarations and exhibits, the Bank
should deny Air China’s application for financing. At a minimum, the Bank should perform a
detailed economic analysis of this transaction and make the results available to the commenters
in this case. Delta, Hawaiian, and ALPA request that the Bank’s Board of Directors consider
this comment before reaching a decision on Air China’s application as required by 12 U.S.C.
§ 635a(c)(10)(E), and that the Bank respond in writing to this comment and the attached
declarations within 30 days of making a final decision on the Guarantee, as required by
§ 635a(c)(10)(F).
85
See, e.g., Air Transp. Ass’n of Am. v. Exp.-Imp. Bank of United States, 878 F. Supp. 2d
42, 57 (D.D.C. 2012) (detailing Delta’s discontinuation of New York-to-Mumbai service due to
Bank-backed competition from Air India).
86
Kasper-Amel Decl. at 23-24.
87
Because the Bank has not provided financial information about Boeing’s costs of
building the aircraft at the heart of this transaction, the commenters are unable to evaluate
whether there is a net economic benefit to the transaction. However, in conducting this Stage IV
analysis, the Bank must be mindful that a large amount of Boeing’s aircraft parts are outsourced
to other countries, and do not result in an economic benefit for the U.S. workforce. See Public
EIP Comments at 54.
22