The Boeing Company BA, one of the largest commercial aircraft manufacturers, significantly benefited from the support it received from the Export-Import Bank (Ex-Im). After boosting U.S. exports for nearly eight decades, the credit agency’s charter is finally going to end today. Even though Boeing has lobbied hard for the continuation of Ex-Im, it appears that the U.S. government is unwilling to extend its operational life.
This decision is undoubtedly a setback for Boeing as a substantial portion of its foreign orders was guaranteed by the Ex-Im Bank. Boeing has lost nearly 4.8% in the last seven days and nearly 2.6% in yesterday’s session to close at $138.73, after it became clear last Friday that the Ex-Im Bank charter is not going for a renewal.
Role of Ex-Im Bank
The Ex-Im Bank was the export credit agency of the U.S. government. The objective of this bank was to provide financing to foreign customers for purchasing goods and services from U.S. companies. The Ex-Im Bank’s role was to promote U.S. exports and increase employment at home. This bank also helped U.S. exporters to compete with international peers who had the backing of their own domestic credit agencies.
Arguments against Ex-Im Bank
Though the Ex-Im Bank was created to augment U.S. exports, as per premium air transportation company, Delta Air Lines DAL, loan guarantees being advanced to certain foreign airlines for purchasing aircraft manufactured by Boeing were actually hurting U.S. prospects.
Delta Airlines filed a lawsuit against the bank stating that the subsidies offered to foreign airlines were having an unfavorable effect on the domestic business. The loan guarantees were expected to reduce the cost of capital of the foreign companies, allowing them to invest more in upgrading fleet dynamics or lower ticket prices. These measures would have rendered foreign carriers a competitive edge over their American counterparts.
Will Duopoly Players Change?
The wide-body long range commercial aircraft market is duopolistic, with Boeing and Airbus being the major players in the space. Both these players have enjoyed the benefit of their respective Ex-Im banks. If Boeing misses out on the support it was receiving from the Ex-Im Bank, the next few decades might see the company being replaced by some other government backed commercial aircraft producer.
Do Boeing Loyalists Need to Worry?
We believe that the discontinuation of the Ex-Im Bank is definitely a blow for Boeing as this bank is also mockingly termed as “Boeing Bank” as Boeing’s customers were its biggest beneficiaries.
Even in the absence of Ex-Im, it will be very difficult for other manufacturers to match the quality of aircraft and after sales service provided by Boeing. So, with or without Ex-Im Bank, Boeing will continue to see orders coming in. Commercial airliners do not want to change or mix aircraft in their operating fleet as it increases their operating costs.
Boeing exited the first quarter of 2015 with a backlog of 5,700 airplanes valued at $435 billion. With Boeing continuously adding to the tally it should easily retain its position in the commercial aircraft manufacturing space.
Boeing has decided to provide temporary financing for its international customers in case of a shutdown of Ex-Im operations. Boeing forecasts demand for 38,050 new aircraft in the next two decades, of which the company will receive a major share of the orders.
To Sum Up
Other than Boeing, the closure of the Ex-Im Bank will hurt other big-cap companies with an extensive international presence like Caterpillar Inc. CAT. But these companies have enough financial strength to counter any decline in orders. Mostly, the small exporters who actually depend on the Ex-Im guarantee will feel the heat of the dissolution of the bank.
It is assumed that the U.S. economy has come a long way from the 2008 recession so as to absorb any decline in exports from the closure of Ex-Im.
Boeing currently has a Zacks Rank #2 (Buy). Another stock in the same space worth considering is Lockheed Martin Corp. LMT, also carrying the same Zacks Rank.
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