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.