By Karen Di Piazza
When you have a duopoly, one or the other will try to dominate the other. In this case, it’s U.S.-based Boeing versus France-based Airbus. The U.S. and the European Union are suing each other at the World Trade Organization over subsidies to Boeing and Airbus. The legal battle over launch aid to Airbus and indirect subsidies to Boeing could take years to dispute. Who is going to foot the bill?
The most frequently quoted aerospace analyst, Richard Aboulafia, who is vice president of the Teal Group, Fairfax, Va., said that he suspected taxpayers on both sides would wind up funding much of this—the biggest WTO battle in its 10-year history.
“However, Boeing has hired a crack team of lawyers, at its own expense,” said Aboulafia, who is editor of Teal’s World Military and Civil Aircraft Briefing. “On the other hand, one deal Boeing got from the state of Washington calls for the state to fund legal work if the state’s support package is countersued by Airbus. Kind of ironic—a subsidized defense of a subsidy!”
After the 90-day WTO talks ended April 11 in futile negotiations between the U.S. and the EU, on May 31 the Bush administration decided to take the EU before a legal panel at the WTO. At stake are two midsize, long-range aircraft— Boeing’s 787 Dreamliner vs. Airbus’ A350.
Peter Mandelson, the EU commissioner, said, “America’s decision will, I fear, spark probably the biggest, most difficult and costly legal dispute in the WTO’s history.
“It will be hard fought on both sides, and I can assure you, Europe’s interests will be deeply defended.”
The first official day for WTO action was June 13, the first day of the Paris Air Show, which Mandelson said was timed so “Boeing could rain on Airbus’ parade.”
“The path of negotiations has been closed,” Mandelson said, blaming the Americans for the new trade war. “Obviously, absolutely central to what Boeing is doing is to undermine the launch and development of the A350.”
The Paris Air Show this year was nicknamed “the do-or-die-show” for Toulouse, France-based Airbus, which claimed over 50 percent of the large civil aircraft market two years ago. Aerospace analysts had noted Airbus’ mammoth 555-seat A380 is struggling to make delivery as promised, and now has been pushed back two to six months in 2006. Additionally, its A350 was behind the eight ball in design—past its third design, into its fourth design, according to Aboulafia.
“The A380 delay is serious,” he said. “It might suggest a problem with the weight of the plane, therefore with the economics. Lateness itself isn’t a problem; performance is. The real objective is to finish A380 development so Airbus can move on to the far more important A350.
“This A350 incarnation looks like it will do the job, providing a competitor against both the 787 and the 777-200. The A350 addresses a much more important market segment than the A380.”
Aboulafia explained that once the A380 can start bringing in revenue instead of draining it, Airbus could focus more readily on the A350.
Hong Kong consultant Jim Eckes at Indoswiss Aviation said most new aircraft projects, whether from Boeing or Airbus, have experienced delays, but that Airbus denied a push back early on, so now the media is focusing on it.
“It was that Airbus stuck to its promise of on-time delivery, even (in January) when rumors of a delay began swirling around Germany, where the plane’s fuselage is built,” he said.
Though Boeing claims 266 orders for its 787, which some aerospace analysts have used to predict Boeing’s return as the market “leader,” and the “death” of Airbus’ A350, Airbus and its shareholders have accused Boeing of “dumping” its 787 on the market at unprecedented low prices.
Clay McConnell, vice president of communications at Airbus North America, said the current order lead enjoyed by Boeing in this A350 vs. 787 race can be attributed to a couple of factors.
“One reason is that Boeing merely had a six-month head start on the A350 program, and the other reason is the overall financial terms on the 787 that have been offered to airlines,” he explained. “I don’t see how they can sustain financial terms like those recently offered on its 787 and keep the program viable for the long term. We’ll eventually have at least 50 percent of the market in this market category. This is a marathon, not a sprint; our customers fully understand that we will catch up.”
Mandelson may have believed that the timing by the U.S. to pick a fight with the EU over Airbus subsidies at the WTO would rain on Airbus’ parade, but McConnell said the WTO legal battle isn’t affecting Airbus’ prowess as the leading aircraft designer and manufacturer.
While both Boeing and Airbus will come under scrutiny over the course of the WTO hearings, some doubting Thomas’ predict litigation will favor Boeing in the short-term battle. That belief was based on Airbus’ search of securing more than $1.7 billion in launch aid to develop the A350, which analysts said was probably not going to happen due to WTO litigation—making investors, even government investors skittish. McConnell said cynics were wrong.
“The WTO legal battle hasn’t hurt us in the marketplace,” he said. “The A350 is launching and we have triple-digit orders!”
He said that the A350, which will seat 245 to 285 passengers, comparable seating on Boeing’s 787, still forecast for 2010 delivery would sell for about $153 million, but prices vary according to customer features, etc.
Further, McConnell said that European governments weren’t skittish investors; however, R&D funding by European nations would be for an undisclosed amount. He said that R&D launch aid was for the “development,” not the “production” of the A350, and such funding was 100 percent WTO-compatible.
When asked why the A380 had been pushed back two to six months, McConnell explained it wasn’t unusual for an all-new aircraft to enter service late.
“If you look at Boeing’s 747-400, which was a derivative, not a new aircraft, it was late by five months entering international service,” he said.
He confirmed that Airbus had 154 firm orders for its hulk-like A380, which sells for $280 million, and offered another reason for its late delivery.
“Customization is certainly a factor, but we’re not blaming the airlines, which of course, must cater to their customers—and they want to do that with the A380,” he said.
In response to Aboulafia’s statement that the A380 may have weight issues, McConnell said the test flight program is exceeding their expectations, and that there isn’t a weight issue.
“There are no performance issues at all,” he said.
He also denied rumors that any of its customers are suing Airbus over late deliveries, but confirmed that under Airbus’ contracts with various airlines they could seek “remedies,” which is a “normal” occurrence in industry. McConnell said remedies could mean many different things, which could include credit on components to airline customers, etc.
Though Airbus isn’t barred from pursuing aid while the case proceeds, which has many analysts asking why Washington pursued a legal offensive, it’s still likely to push for harsher investigations of Airbus’ subsidies. Likewise, the EU will do the same, asking the WTO to balance subsidies to Boeing—especially concerning its Japan-related partnerships and the state of Washington support it receives.
Mandelson said days before the U.S. filed suit, he offered a 30-percent reduction in launch aid investment available to the A350, in return for a similar offer from Boeing. However, U.S. trade representative Rob Portman expressed a no-go deal because the offer was a step back of goals to eliminate all subsidies to Airbus.
“We still believe that a bilateral negotiated solution is possible, but the negotiations won’t succeed unless the EU recommits to ending subsidies,” Portman said.
Mandelson argued that any Airbus launch aid investment would be repaid to governments, “unlike aid given to Boeing.”
“Nothing of the like exists in respect of Boeing,” Mandelson said. “Not one cent—not one dollar has to be paid back by Boeing.”
But Portman expressed that the Bush administration had no choice but to file suit because the EU and member countries were preparing $1.7 billion (1.4 billion euros) in launch aid for Airbus’ A350 to compete against Boeing’s 787.
The EU has mentioned in its complaint that Boeing’s 787 has received more than $7 billion in tax incentives and infrastructure support. The 787 delivery forecast is for 2008.
“We continue to prefer a negotiated solution, and we would rather not have to go back to the WTO,” Portman said. “But the EU’s insistence on moving forward with new launch aid is forcing our hand.”
Was WTO litigation an ironic move by the U.S.? According to Mandelson, it was.
“If the Americans had opted for a deal I offered on the table, and accepted a negotiated settlement, they would have immediately seen a sharp reduction,” he said, referring to launch aid. “This will take years to resolve, but in the meantime it’s open to Airbus to receive any amount of launch investment from member states prepared to make that investment.”
T. Allan McArtor, chair of Airbus North America Holdings, Inc., Herndon, Va., said Boeing would like to use the regulatory process to try to create some barriers for Airbus and catch up in the marketplace.
“It’s doing so by trying to create the 787 as an exclusive solution to that market space without the A350 competition,” he said. “The WTO rulings rule on what you can or can’t do in the future, not what you’ve done in the past, so decisions by the WTO are effective as of the date of decision, not the date of filing a complaint. The WTO process could take up to five years, and by then, the A350 will be well down the road.”
In an interview with Airport Journals in May 2005, McArtor said that if the U.S. thought that by filing WTO litigation it would stop the A350’s development, it was wrong.
“It’s not going to happen,” he said.
However, Portman said for almost a year, the U.S. has tried to convince the EU to negotiate an end to subsidies for large civil aircraft.
“So we were pleased when, on January 11 of this year, the EU agreed to a standstill on launch aid while we negotiated an end to subsidies,” he said. “Unfortunately, at this point, the EU is no longer willing to hold off on launch aid, and has only proposed to reduce subsidies, not end them.”
Portman said while the U.S. remains committed to resolving this matter through the negotiation of a new bilateral agreement, the U.S. concluded that filing a WTO panel request was necessary to ensure that, one way or another, the playing field is leveled.
“The WTO offers an agreed multilateral forum for resolving trade disputes according to agreed rules,” he said.
Boeing versus Airbus
Subsidies—who gets what from whom and how much—is an issue that Boeing and Airbus don’t see eye to eye on. For instance, Gregory Dole, Boeing’s director of commercial trade policy, who works out of Boeing’s Washington, D.C. office, doesn’t believe its relationship with the state of Washington and its tax-reduction law is a Boeing subsidy.
“The tax reductions are available to all commercial aviation firms doing business in the state of Washington, including Airbus’ suppliers and even Airbus,” he said.
He said that the state of Washington’s $3.2 billion tax reduction, for the most part, begins in 2007, but would be spread over a 20-year period.
McArtor didn’t see it that way.
“This isn’t entirely true, but I assume Boeing would apply for launch aid if it located in Europe!” he said.
Dole, defending Boeing, brought up local-regional tax reductions in Airbus’ favor, rhetorically asking how much in tax reductions does Airbus, its Miami, Fla., training facility or its parent EADS receive in Florida, Louisiana and Mississippi?
“The prohibition in the 1992 trade agreement is for production of commercial aircraft,” McArtor said. “EADS doesn’t do that, nor does our Miami training center.”
Dole said that he doesn’t agree with McArtor that indirect subsidies from the U.S. government R&D contracts, through NASA and the Pentagon’s R&D work, are exclusive to Boeing.
“The NASA R&D contracts benefit both Boeing and Airbus,” Dole said. “NASA is very transparent in the publication of whatever R&D work is performed by anyone. So, I don’t necessarily agree with his (McArtor’s) premise. As for these alleged benefits, in fact, they are available to all aerospace companies around the globe.”
Dole said that winglets, for instance, which NASA developed using R&D funding, were a benefit to Airbus as well.
“The first company to use those winglets was Airbus!” he said.
Dole said issues relating to aid aren’t easily understood, but the EU’s funding is massive and it targets the development of specific components.
“Unlike NASA’s approach of making R&D results available to the public, Europe doesn’t,” he said.
McArtor, though, said during the last 15 years, Boeing had introduced only one new airplane to world markets, its 777, which was one clear indication of a lack of R&D spending on Boeing’s part.
“Boeing has invested just one-third the amount in R&D as Airbus has in the past several years,” he said. “In 2003 alone, Airbus invested more in R&D than all the divisions of The Boeing Company combined.”
Dick Dalton, Boeing’s Washington, D.C. spokesperson on subsidies, said the contention or implication that Airbus spends more on commercial aircraft R&D is misleading.
“When you exclude government risk-sharing, BCA invests as much or more in its business than Airbus,” he said. “Unlike our competitor, BCA only gets to invest its own money. Generally, R&D comparisons are skewed; they depend on where each manufacturer is in the development cycle. For example, Airbus’ R&D spending has recently been elevated by A380 spending.”
Dalton said in turn, Boeing’s R&D expenditures would, as indicated, increase consistent with 787 developments.
“Airbus’ R&D spending includes large amounts of launch aid and thus money for which European taxpayers, rather than Airbus, have assumed the risk,” he said. “Approximately $760 million of Airbus’ total R&D spending of $1.25 billion in 2001 was launch aid.
“Airbus itself assumed only $490 million of the full risk for investment in research and development projects, compared with $860 million spent by BCA in the same year.”
Dalton added that in 2002, more than half of Airbus’ R&D spending was launch aid—$850 million of a total $1.6 billion in R&D spending.
“Only $750 million came from Airbus’ own money, again less than BCA’s 2002 R&D expenditure of $770 million,” he said.
McArtor believes negotiations should address the short-term issue of the two competing new aircraft, Airbus’ A350 and Boeing’s 787, saying the latter has become the world’s “most subsidized airliner ever.”
Airbus and its shareholders accused Boeing of amassing “more than $5 billion (U.S.) in government subsidies to pay for its development and production, through U.S. and foreign government R&D funds, tax relief schemes and launch aid.
McArtor, though, said Boeing wouldn’t have had composite wing technology had it not been for NASA, nor would it have the 777 had it not been for NASA Langley development on many of the core technologies for that plane.
“That’s false,” Dole responded, but he declined further comment.
McArtor said these issues and other indirect subsidies benefiting Boeing must be fairly balanced—otherwise it wouldn’t be fair or balanced to expect Airbus to abandon its government repayable launch aid.
Dole argues that Airbus’ parents EADS and BAE Systems, respectively 80 percent and 20 percent owners, have combined government work comparable in value to that of Boeing; a fair amount of the EADS/BAE Systems work with the U.S. government.
“This isn’t the issue; defense revenues are irrelevant,” McArtor says. “NASA has done billions of R&T for Boeing, and NASA brags about it.”
Further, McArtor is mystified at Boeing’s statements regarding Airbus’ A400M program, a military transport for Europe, which Boeing alleges Airbus benefits from in its commercial division.
“This is a turboprop—a slow military transport plane!” he said.
What about Boeing’s relationship with Japan? Does Airbus use government-supported suppliers in European countries and Japanese suppliers?
“Japan is not just a ‘supplier’ to Boeing; everyone knows that, and Boeing’s attempt to mask the substantial Japanese subsidies it’s receiving is just plain silly,” McArtor said.
Dalton confirmed that on May 26, Boeing and Japan Aircraft Development Corporation, representing its three Japanese 787 structure partners—Fuji Heavy Industries, Mitsubishi Heavy Industries and Kawasaki Heavy Industries—signed formal contracts outlining work agreements on the 787. Before the signing, Boeing and Japanese companies worked on the 787 project through “memorandums of understanding,” since November 2003.
Dole said its relationship with Japan is perfectly legal and didn’t contravene international agreements on production subsides.
MHI will design and build the 787’s wing boxes, which are the largest structural elements of the wings. FHI will design and assemble the center wing box, and KHI will provide part of the forward fuselage, the main landing gear wheel well and the main wing fixed trailing edge. Additionally, Japan’s All Nippon Airways will take first delivery of the 80 787s it ordered for delivery in 2008.
Dole said numbers are comparable between its relationship with Japan or tax-reductions from the state of Washington, compared with what Airbus gets.
“Launch aid is the one key issue,” he said. “If you look at all the benefits that Airbus alleges that Boeing gets, and if you look at what Airbus receives, the numbers are comparable—except for launch aid that has been provided to Airbus in the face amount of $15 billion, which Airbus has not repaid.
“Here are the facts; we’ve spent two years looking at public source documents in Europe, and we determined that net of repayment—the face value of the principal amount of those loans over the last 30 years—is about $15 billion, even if you count where payment has been made.”
Dole said applying a commercial rate of interest to that $15 billion is worth about $40 billion.
“That $40 billion is the subsidy associated with the launch aid,” he said. “Then there’s at least another $9.5 billion in additional subsidies in the form of debt forgiveness, equity infusions and infrastructure support; so we’re looking upwards at about $50 billion in subsidies to Airbus that haven’t been repaid.”
McArtor doesn’t agree.
“European member-state countries give repayable loans to Airbus for ‘specific’ development programs, but not ‘all’ programs,” he said. “In fact, only three of the last eight ‘new’ aircraft models took advantage of that system.
“Additionally, Airbus pays competitive interest rates on all loans, plus they pay a royalty on each aircraft sold, which is around 400 million euros a year paid in royalties. For example, the U.K. government has doubled its money on its investment in the A320 program.”
McConnell explained that Dole’s accounting isn’t accurate.
“Since the 1992 WTO agreement, Airbus has been a ‘net’ re-payer,” he said. “Airbus has repaid about 1.5 billion more euros than it’s borrowed!”
He explained that when the 1992 WTO agreement became effective, part of the rules stipulated that neither Airbus nor Boeing could complain about prior loans before that date, but it didn’t mean that prior loans for both Airbus and Boeing wouldn’t have to be repaid. He said that Airbus was still repaying loans that it received before the 1992 agreement.
McConnell also said that Boeing’s propaganda has falsely accused Airbus of receiving launch aid and not repaying government loans, when or if a plane doesn’t sell.
“Airbus wouldn’t know about that; we’ve never had a plane that didn’t sell,” he said. “And government loans, too, are roughly at commercial rates.”
When asked why Airbus sought government launch aid, since it could afford to develop the A350 without aid, McConnell said it was a good business decision.
“Could Airbus do it on its own? Probably, but that would be a poor business decision; it would make us highly uncompetitive with Boeing’s highly subsidized 787,” he said.
Dalton denies allegations about the 787 being subsidized.
“It’s utter nonsense and a desperate attempt to justify an antiquated business model where commercial risk is borne by the governments and taxpayers rather than a mature, profitable industry leader,” he said. “Similarly, the claims about supposed ‘subsidies’ received by Boeing through work performed for the U.S. government are only the latest in a litany of such unsubstantiated charges that have intended to divert attention from the real issue—risk-free launch aid subsidies to Airbus.”
Aboulafia said in the end, if there are fewer subsidies for manufacturers, that’s going to transfer into higher costs for airline carriers, and ultimately, the traveling public.
“Any economic impact on the global airline industry and passengers would be marginal,” he said. “But less financing from the government could mean fewer, new cost-saving technologies and fewer all-new aircraft.”
Regardless of trade woes, aerospace analysts worldwide, including Aboulafia, said Boeing’s colossal stock buyback program, gobbling up millions of dollars between 1998 and 2001, profited its investors and key management, but it hurt the company.
“Boeing’s R&D under-investment caused Boeing to lag behind Airbus,” explained Aboulafia.
Aboulafia said he agreed with McArtor that Boeing could’ve spent that money to develop a new airplane. McArtor said they didn’t have to buyback their own stock; they chose to buy it back.
“I’m not questioning if that was a good decision,” McArtor said. “It certainly was good for those who owned a lot of stock, which included a couple of senior executives.”
While Boeing’s share of new orders for LCA has eroded, he said, Airbus just didn’t sneak up on Boeing.
“Airbus has been delivering about 300 aircraft a year for the last six years; Boeing’s decline isn’t because of Airbus, as some people had believed,” he said. “It’s because the airlines of the world quit buying Boeing’s older generation, noncompetitive aircraft.”
He believes in balancing that market, you’d have to balance the risk sharing that’s available to both the 787 and the A350.
“The balance of risk-sharing programs hasn’t happened so far; it’s been resisted very strongly by Boeing,” he said.
However, Aboulafia said that after several years of “getting battered” by Airbus, the tide appears to be turning for Boeing.
“Thus far, the more airlines learn about Airbus’ A350 that will challenge the 787, the better the Boeing plane has been selling,” he said. Earlier, Aboulafia went so far as to predict the death of the A350, but that was before the A350’s launching.
“The 787 should be a good airplane; it’s about time! McArtor said. “But the A350 is every bit as good!”
Aboulafia, along with Aaron Gellman, Hans Weber and George Hamlin co-authored “A Shadow Critical Project Appraisal: the A380 Program,” in April 2005. The 99-page report concluded that the A380 program would lose about $9 billion over its life. Boeing paid for the study; however, the authors claim Boeing had no control, editing nor any input over the direction or conclusions drawn. Hamlin is a former Airbus employee, and Aboulafia has been a long-time skeptic of the A380.
Aboulafia said to be fair, his company, the Teal Group, has also performed consultant work for EADS and BAE Systems, but Boeing, EADS or BAE Systems, individually, hasn’t exceeded five percent of the Teal Group’s revenue.
Analysts David Pritchard and Alan MacPherson, both from the Canada-U.S. Trade Center, department of geography, University at Buffalo, co-authored “Industrial Subsidies and the Politics of World Trade: The Case of the Boeing 7E7,” which investigated Boeing’s 787, in June 2004.
Pritchard, who studies the globalization of the commercial aircraft industry, reported that subsidies received by Airbus for manufacture of its A380 was legal under the 1992 U.S.-EU agreement on trade-in large aircraft and the 1994 WTO-agreement on subsidies and countervailing measures, which allows for receipt of a loan—repayable with interest—to be used for aircraft research and development.
Boeing officials have said Airbus benefits unfairly from European subsidies of the A380.
However, Pritchard stated there are two major differences between an Airbus A380 “subsidy” and Boeing 787 “subsidy.”
“The Airbus subsidy is in the form of repayable loans with interest for aircraft development, which is legal according to the WTO,” he said. “The Boeing subsidy, on the other hand, is for aircraft production, which is prohibited by the WTO, and which never will be paid back.”
In March of this year, Pritchard and MacPherson published “Boeing’s Diffusion of Commercial Aircraft Design and Manufacturing Technology to Japan: Surrendering the U.S. Aircraft Industry for Foreign Financial Support.” The report, Using Boeing’s 767, 777 and 787 as examples, argue that the motives for Boeing’s commercial outsourcing to Japan are to access the market, spread risk, gain access to capital and lower U.S. spending on R&D.
“These contracts have allowed the Japanese to develop new capabilities in terms of production capacity, tooling, design and final assembly,” Prichard said. “Ultimately, these capabilities imply that Japan will eventually enter the market as a fully-fledged producer of commercial aircraft.”
Further, he expressed danger for the western aerospace sector, since the Japanese government has recently funded a research program to produce a regional jet plane.
Further, his report outlined significant U.S. job loss in the commercial aircraft industry, where he said by 2004, there have been 120,000 positions lost.
“In the space of only 15 years, this sector’s employment base has been cut in half,” he said. “The U.S. Bureau of Labor Statistics (2004) forecasts a further 17 percent employment decline by 2012.”
This report, as well as numerous reports, pro and con Boeing/Airbus, can be obtained at www.leeham.net.
Whatever happens at the WTO, analysts from every corner of the globe agree with one thing: Having two, financially healthy aircraft manufacturers, such as Boeing and Airbus, will overall be healthier for world economics.