Airbus Subsidies Don’t Fly

Boeing is justified in its complaints about the government help its European rival receives. Pro or con?

Pro: Excessive Lift

Forty years after the British, French, and German governments signed the historic Memorandum of Understanding creating Airbus Industrie, Europe’s primary commercial aircraft manufacturer should be standing on its own two feet.

We base that opinion on the level of global market share the European manufacturer has achieved—and on the fact that, by receiving European government subsidies, both the European Commission and Airbus contravene certain provisions of Article 3 of the Agreement on Subsidies & Countervailing Measures and those of Article 2 of the General Agreement on Tariffs & Trade (GATT). With the Interim World Trade Organization aircraft subsidies report on the specific U.S. case against the EC due on Oct. 24, the WTO should, in our view, set the scene for ending state aid to Airbus.

The U.S. complaint against the EC primarily centers on R&D money provided to Airbus that has no real counterpart in the U.S. This so far has amounted to a claimed $15 billion of what the U.S. rightly says is market-distorting launch aid made available to Airbus by four EU member governments (including Spain).

Although technically repayable through the aircraft type’s production lifetime, the reality is that no- or low-interest state loans are essentially risk free to Airbus. In a truly competitive and commercial world, one in which Boeing (BA) and Airbus should be playing on a level field, this is a ridiculous state of affairs. Now that Airbus has captured more than 50% of global market share for commercial aircraft, there are surely few in this industry who could disagree that Airbus has come of age. On that basis alone, Airbus should no longer need to rely on any form of state development-funding arrangements.

While the separate EC case against the U.S. alleges that Boeing has received $19.1 billion in “indirect” support—from combined Defense Dept. and NASA military research, development, testing, and evaluation purchase—the benefit to Boeing’s commercial aircraft operation is grossly exaggerated and completely misunderstood by the EC. In my view, the case has absolutely no merit, is a poor response to the U.S. challenge to the EC, and is aimed at causing mutually assured embarrassment.

Con: Unnecessary Turbulence

Boeing cannot criticize the government subsidies that Airbus receives for two fundamental reasons. First, all major commercial aircraft companies receive government subsidies. Second, Boeing received direct government subsidies on the 787 aircraft from the state of Washington ($3.2 billion equates to $3.2 million per production worker) and $1.6 billion indirect Japanese government subsidies from its Japanese partners.

The bigger issue in the World Trade Organization aircraft subsidies dispute is not whether Boeing or Airbus receives illegal government subsidies, since they both do; it’s how countries outside the WTO dispute subsidize their commercial aircraft industries. China and Japan both have national industrial policies to develop their commercial aircraft industry and openly fund the development of commercial aircraft. In fact, Canada and Russia have stated publicly that they are funding their national champions, Bombardier and Sukhoi.

But you do not see Boeing and its advocate, the U.S. Trade Representative, filing cases against these countries. The current case was filed so Airbus would not successfully launch a competing aircraft to Boeing’s 787 and 777. Although this tactic caused Airbus to delay the funding mechanisms and entry into service for the A350 XWB by several years, it did Airbus a favor. If Boeing had let Airbus receive its traditional repayable launch aid for the earlier version of the A350 (based on the A330 airframe), this would have kept intact Airbus’ euro-based production sites. Today, the A350 XWB has better technology advancements in all composite airframe and has production moving to a larger base of risk-sharing partners willing to contract in dollars.

So who is the winner in this current WTO dispute? Boeing might have won the WTO battle in stopping repayable launch aid to Airbus, but in the long term Airbus won the war by way of having a better aircraft in the A350 XWB.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Thomas

At what point does the author make a fluid argument that the A350 XWB is better than the 787? The only point I took away was that the A350 XWB is better than the 787 and is copying all technologies and production method enhancements that Boeing has been using for years on the 787 development.

Randall

Won the war? More than 700 orders for the 787 thus far. The airlines have voted with the orders. By the time the A350 comes to market, the 787 will have a proven record. Airbus will try in desperation to attack the 787 and the 777. Now that's the arrogant Airbus we all know.

random

Since when has the A350 XWB been a much better aircraft than the 777 and the 787? True, the 787 has not been tested yet, but the 777 has a great proven record while the A350 XWB is being hit with endless criticism from airlines who say they can't use it the way it is--and note major design flaws all over the plane. It may be better then the original they were building, but better junk is still junk no matter how you look at it.

As for the subsidies, both companies got more then their fair share of government help. Airbus just took a little more and was more unabashed about it.

GoesBySteve

The airplane business is not a free-market laboratory. Rather, it is marked by subsidies, offsets, regulatory concessions, equity partnerships, and national policy.

Lockheed and McDonnell Douglas made clear-eyed rational decisions to withdraw from the commercial airplane business because their market options did not pay off. Japan split the difference and found a sweet spot as Boeing's major supplier/partner.

Boeing would not have gone forward with the 787 without major subsidies and commitments from suppliers and subsidized customers.

We can clap our hands, squint our eyes, and hope for Tinkerbell to recover through free-market wish fulfillment, but the rest of the world, including Boeing, gets better results with oxygen, a glucose IV, and lots of physical therapy.

Rodney

Is "filing cases against these countries..." the main cause of the A350 delayed introduction? Big potential customers like ILFC and GECAS complained Airbus had the wrong design for the market. Two to three big redesigns and years later (from metal A310/330/340 222in. cross-section to 233in. XWB composite panels plus metal-frame, to XWB composite panels plus composite frame), we see the A350XWB.

Designing and building aircraft in their segments is a tough business. Huge investments could easily yield less than desired returns--the Concorde, the A340, etc. So each does everything it can to capture market share, not just for good returns, but for the glory of the company and its country or countries.

daniel

Stop being pro-American for once and accept that others can do a good job or better. Long live the A380 and A350 XWB.

Nathan

Neither the pro nor the con side as posted above addresses what should be seen as the core problem. Neither producer should be receiving subsidies, and both producers are fully capable of standing on their own two feet.

gulfbridge

Interesting arguments being put forward by many in support of Boeing. Seems to me the script runs something like this:

Denigrate Airbus.
Wave American flag.
Criticize Airbus products.
Sing Star-Spangled Banner.
Put pressure on third parties (like China) to buy Boeing.
Threaten Airbus with sanctions.

I just hope nobody plans to invade France any time.

T

I think Mr Pritchard's statement "the A350 XWB has better technology advancements in all composite airframe" is not A350 XWB vs. 777 or 787. I think he was typing in the context of A350 XWB vs. A350 (based on the A330 frame). In that context, the delayed plan is better off than the planned predecessor.

By the way, I'm not sure what anyone would gain by invading France.

Robert

Yes, as others already indicated here, the Boeing hard-core pro advocates start getting on everyone's nerves with their derogatory pseudo-arguments and infantile attempts to raise excitement. Dreamliner. Dream on, Chester. Fact is Boeing blames Airbus for what it has been doing itself (which, by the way, seems to have become a common paradigm under the current administration). America, wake up, and start realizing the world begins at your borders.

MINOU

Boeing is a crooked outfit that receives mega-dollar feeding by the military. Just check their "new" cargo plane that lives on earmarks. Boeing just can't handle serious competition. They are professional whiners. I prefer flying on Airbus anytime.

S Iyer

I recently flew Boeing 777. Once airborne, its cabin was much quieter than other aircraft, almost not needing a noise canceling headphone. Its interior was great in terms of style as well as usability. The only con was that it really rattled while taxying and takeoff, but quieted substantially better than other aircraft once airborne.

eric

Considering that it took Airbus only 30 years to overtake Boeing, they must have done something right. Making that happen has a lot to do with American attitudes. Yankee Land is a mixture of cutting edge "science" and incredible conservatism. It muddles on with a horse and buggy constitution and can't wean itself off medieval measurement units. Boeing works with decimal inches to make that cumbersome system useable, but steadfastly refuses to join the metric 21st century. Having outsourced large contracts to metric countries, Boeing can only hope not to pay dearly in delays for conversion mistakes. U.S. car manufacturers are another example of this conservatism. They and many other U.S. manufacturers never kept pace with the times, and lost out to innovative metric competitors. This is the reason America's trade balance is forever in the red. Sadly, that conservatism is all pervasive and forces U.S. children to waste precious time learning two measurement languages in a world that practically speaks only one. What makes that folly even worse is that America cannot function properly without metric units. This surely must be the most compelling reason to bite the bullet if only for the sake of needlessly disadvantaged children. With metric China intending to build passenger planes, Airbus and Boeing need to be even more innovative to survive that onslaught--something one can hardly expect of a company that finds moving with the times so difficult? Had U.S. science not switched to metric, America would be a Third World country today.

Mike Daly

The government loans given by various European governments to Airbus are drastically affecting the market in its favor. The statement that Boeing is being highly subsidized by the U.S. is not really true. Sure, local and state governments give tax breaks and incentives to lure companies to their communities. Matter of fact, Airbus has benefited from the strategy in its recent awarding of the USAF tanker bid (the states and local governments of Alabama and Mississippi played a huge role).

That goes for all industries--from building aircraft to making candy bars and everything in between. So, that argument with local and state governments' using tax and zoning incentives is moot in my opinion. The travesty that is going on here is the research and development loans Airbus gets.

In any technology business, from pharmaceuticals to aviation, the greatest costs are in research and development. Currently, Airbus has an endless barrel of cash in that department. If a program fails, Airbus doesn't have to pay its European government loans back. If the program succeeds, Airbus pays back the loan at absurdly low interest rates.

EADS (Airbus's parent) gets the same government contracts in Europe with European space contracts, as Boeing gets in the U.S. with NASA. Boeing is a supplier to the U.S. military, producing the F-18 Hornet and F-22 Raptor--hardly "pork barrel" spending. EADS is also the producer of the Eurofighter, which is purchased by many European nations and Saudi Arabia. So the difference between the two companies regarding military and science projects are not that great proportionally.

I think the U.S. government needs to put greater tariffs on all Airbus products. Presently, Airbus can offer an aircraft at a lower cost and still maintain its profit ratio simply because its R&D costs are almost nil. If the A380 is not successful (and I would have to read the loan agreements between Airbus and the different governments to see the definition of "unsuccessful program"), technically Airbus would not have to pay back the loans. That would never happen in the United States. Could you imagine the outrage if the U.S. government went in and bailed out Boeing because it created a product that was not marketable?

The time and money in just determining if there is a marketplace for a product already puts Boeing at a few million behind Airbus. You want proof? It's taken Boeing years to develop the new 787, while Airbus has been able to develop the A380 and the A350 at the same time. How is that? Simple, Airbus has virtually no research and development cost. If the A350 looks like it's going to fail two years before production, Airbus can simply eliminate the program at very little cost. A move like that, at Boeing, most likely would bankrupt the company.

eric

Well, time does indeed fly, but not the Dreamliner.
As to subsidies, who worries about a few billion dollars? That is chicken feed compared to what happens in the land of the free. Who spends billions on banks to get them out of the mess they created and who spends billions to keep people employed only to be pilloried for it? I am always amazed when I hear Republicans clamour for less government. Greed running amock and politcal corruption are the inevitable result of that attitude. Worse still ordinary Republicans have yet to learn that their policies are a perfect example of privatising profits and socialising losses. No wonder billionaires and millionaires can't stop laughing on their way to the banks. Rest assured they will never return that favour to the poor sods whose money they take and make that daylight robbery possible.

Give me Socialism anytime.

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