Why Europe Keeps on Giving Loans to Airbus

Posted by: Carol Matlack on June 17

The transatlantic battle over airplane subsidies is heating up again. The World Trade Organization is expected to issue a preliminary decision by July on a U.S. complaint alleging unfair European government subsidies to Airbus. (Europe filed a counter-complaint about U.S. subsidies to Boeing Co., but a decision on that is expected sometime later.)

Yet even as Airbus faces the risk of a ruling that could force it to repay billions in past subsidies, European governments are gearing up to give the planemaker billions more. On June 15, representatives of France and Germany agreed in a meeting at the Paris Air Show to provide up to $4 billion in loans to help Airbus develop its new A350 jet. Britain and Spain will probably soon kick in more, so that government loans will cover about one-third of the A350’s estimated $15.2 billion development cost.

Boeing CEO James McNerney, upon hearing the news, told reporters at the air show that the Europeans seemed to consider the WTO proceeding “irrelevant.”

At first blush, it does seem strange that they would take such a provocative action now. But they have a couple of reasons.

First, Airbus needs the money now. A 2-year production delay on Boeing’s competing 787 Dreamliner has given Airbus an unexpected opportunity, narrowing the gap between the A350’s hoped-for debut in 2013, and the 787’s, which now is scheduled for 2010. The faster Airbus can get the A350 flying, the better it can compete against Boeing.

I think there’s another reason as well: The Europeans are making a calculated bet that they can escape WTO sanctions for the A350 loans – even if the WTO rules against them in the proceeding now under way.

How can that be? The current U.S. case against the Europeans, filed in 2004, involves roughly $4 billion in loans Airbus received to develop its A380 mega jet, as well as any outstanding balances on loans made for earlier Airbus planes. (Airbus hasn’t disclosed the balances, if any, on loans for other aircraft.)

Here’s where Europe’s gamble comes in. The $5 billion or so that Airbus will get for the A350 looks puny alongside the hundreds of billions that the U.S. and other governments have spent to bail out troubled banks and automakers in the last few months. “The rules of the game have changed,” Louis Gallois, CEO of Airbus’s parent European Aeronautics Defence & Space Co., told me on the sidelines of a June 14 briefing in Paris.

In other words, the Europeans are betting that even if they lose the first round at the WTO, the new subsidies flowing through crisis-ridden economies will make it all but impossible to block future loans to Airbus, and may even make it difficult for the U.S. to demand stiff sanctions against the Europeans if it wins the pending cases.

Naturally, Boeing sees it differently. When I outlined that scenario recently to Ted Austell, Boeing’s vice president for international policy, he said: “We are not worried about that at all.” On the contrary, Austell says the WTO is eager to show governments worldwide that “trade rules are important, there are boundaries that have to be respected.”

Executives of Airbus and EADS told reporters at the air show that the A350 loans would simply “level the playing field” against Boeing, which Europe claims has received billions in U.S. subsidies through its work on defense and space contracts, among other things.

Maybe they’re right – and maybe they’re not. But it’s already clear that for now, government loans will keep right on flowing to Airbus.