U.S. taxpayers on hook for coming aircraft bubble burst

[Geee]

Washington Examiner:

You need to get ready for the next bubble to burst -- because you're going to pay for it.

The popping of the airplane bubble could be the next tremor to hit the U.S. economy, as economically unstable commercial airlines around the world buy up fleets of jets that they cannot afford. But if airlines can't pay their bills to jet-makers, you get the tab, thanks to a U.S. government agency -- the Export-Import Bank of the United States -- that has dedicated three-fourths of its loan-guarantee dollars to backstopping sales for the Boeing Company.

It's yet another pitfall of the Bush-Obama approach to economic policy. Just as President Bush and his predecessors favored housing with subsidies and regulatory tweaks, President Obama has lathered favors on manufacturing, specifically exports. Subsidies naturally flow to the big players, and you don't get much bigger than a jumbo jet-maker like Boeing.

"There seems to be a bit of exuberance in airplane orders," leading jet financier Henri Courpron told Aviation Week magazine recently. The exuberance is disconcerting because so many of the buyers -- commercial airlines -- are in financial straits.

Aviation Week also noted that aviation consultant Adam Pilarski "believes high fuel prices, plentiful financing backed by government export-credit agencies and aggressive selling by two air-framers [boeing and Airbus] aiming to hold off new competitors have created a hyper demand that is unsustainable."

Air India, for instance, has used more than $3 billion in U.S. Ex-Im loan guarantees to buy dozens of Boeing jets. "This support," Air India Chairman Arvind Jadhav gushed after pocketing the latest $1.1 billion guarantee in 2010, "has enabled Air India to raise finances for acquiring these latest state-of-the-art technology aircraft at competitive rates of interest as compared to commercial financing."

But India's comptroller and auditor general called the buying spree "a recipe for disaster."

Air India has defaulted on payments due employees and vendors, according to the Financial Express. When the airline sought permission to borrow more in order to pay these debts, the Indian government said no.

Air India hasn't made a profit since 2005, and in 2009-2010, every last one of its international routes lost money, according to a September 2011 audit by India's government.

U.S. taxpayers also have billions in Ex-Im exposure to Air China as China's economy slows, and threatens to stall. U.S. taxpayers are also exposed to the Ex-Im funded debts of unstable countries like Tajikistan and Egypt.

Troubled domestic airlines are on buying sprees, too. Holman Jenkins, the Wall Street Journal columnist who began warning of an aircraft bubble in 2010, writes that American Airlines "placed a huge order for 460 new jets even as it was sailing toward its inevitable Chapter 11 filing."

Earlier this summer, Ex-Im chairman Fred Hochberg said his agency is looking at multiple avenues for federally backing sales by U.S. manufacturers. That means Boeing could also unload onto taxpayers debts that American Airlines or its struggling competitors cannot repay.

If there is an airplane bubble, Obamanomics will bear much of the blame. The Obama administration has concluded that manufacturing is worth subsidizing, arguing that it has positive ripple effects on the economy. It doesn't hurt that Rust Belt-Ohio is arguably the most important swing state in the 2012 election.