Now we have a picture, although somewhat fuzzy, of the WTO findings against both Boeing/USA and Airbus/EU that frankly brings me to a different conclusion than some.  Without going into the complex findings on both sides and we really don’t have a public ruling on the EU claim yet anyway, we can begin to see the disparity come into focus slightly. 

The disparity comes in two forms.  First, the value of the violations.  Most conventional wisdom saw about $20 Billion in various subsidies that the EU and/or Airbus would need to remedy over time.  More important, it was a fairly loud condemnation of certain practices that will require fundamental restructuring in the EU to accomodate.  In other words, the Airbus business model, at first glance, will have to change pretty substantively. 

The first analysis of the WTO claim against Boeing and the US is a bit different.  The value of the violations is somewhere in the rough vicinity of $5 billion with about $2 billion of that already remedied by Congress.  The real kicker is that remedying these violations doesn’t require a fundamental business model change. 

The EU is already positioning itself to call, once more, for negotiations on this subject.  A number of US and EU based analysts predicted a need for negotiations on this.  I’m going to go out on a limb and say that I’m not so sure the US will be that interested in negotiations.  The incentive to negotiate usually comes from two parties having a roughly equal interest in having something settled.  At first glance, that doesn’t exist here.  Boeing takes far less of a hit by simply sucking it up, making the remedies and continuing their stance that the EU must take care of their own house.  It puts them on the high ground both politically as well as in a business sense.

I think the US/Boeing will likely make some nominal objections to the WTO ruling but I suspect they’ll breath and comply and then press their case even harder against Airbus.  The EU and Airbus will fight, kick and scream about changes on their own ends.  I think political leaders from the EU, in particular leaders from France and Germany, will press their case directly with our President and other members of our government.   While I do think there are some in our government (mostly Republican oriented members) who will be willing to negotiate, the truth is that it is not politically smart to engage in that over  here. 

We have an economy that is staggering still.  We have a population of 350 million people that our government has a responsibility to and most of those people are entirely unconcerned with the health and welfare of European nations who, quite frankly, have been rather snide and ineffectual during the global economic crisis over the past 2 years.   For Europe, the chickens have come home to roost and the crowing is going to sound awfully loud in the mornings.

In the long run, making those changes actually benefits Airbus.  Bringing them into a market driven business model as opposed to a subsidy driven business model will bring tangible benefits such as real profit and revenue.  The political leaders of the EU are the ones who really have to take the hit.  Airbus has been a huge jobs program for many of them and there will be a lot of fallout if and when Airbus leans itself out.

I think this will affect the KC-X tanker bid as well.  Secretary of Defense William Gates has repeatedly said that subisides shouldn’t play an issue in this award.  In fact, he may well be right about that.  However, right and what is politically smart are frequently entirely different things.  With this conflict on subisides receiving new light and a more clear picture forming, there will be massive political will being exerted towards a US based award and that means Boeing.

I think the KC-X tanker award gets pushed away from a November award.  With it scheduled so soon after mid-term elections, the wise thing will be to take stock of who will be in power and measuring the responses to each potential award.  Given that, I suspect this award will definitely push until January and potentially gets pushed until March of next year.  

Boeing needs to win this on merit this time.  A delay makes that more possible rather than less possible.  It allows emotions to settle and a rational decision to be made rather than a politically reactive decision.  They’ve lost this award twice now.  Once through corrupt practices and once with a bad set of requirements.   They can’t afford a third loss because of political winds shifting after an emotionally made award to them.  Play it by the book, offer the best price and make certain that your bid fully describes the work and realistic delivery. 

This latest (confidential) WTO ruling isn’t going to settle everything soon.  There will be appeals and counterclaims for a few more years.  However, it does put Boeing on higher ground and if they’re smart, they’ll refrain from crowing (too much) and get to work on selling aircraft.

Negotiations to settle this between the EU and US are unlikely if not for the reasons stated earlier in this post, then for world political reasons.  Several countries have emerging aerospace industries that will be encroaching on Boeing / Airbus territory.  They want a seat at the table and a negotiation between the US and EU over this doesn’t afford them much say in how they can advance their interests.   Boeing can best fend off that encroachment by continuing to take the most free enterprise approach it can in this market.  The move above board they are, the more the US can advance their interests and access to markets from this point forward. 

Boeing can, however, appease some of those countries by working even harder to bring those companies into partnership with Boeing.   One of the best actions to take would be for Boeing to draw those companies in both manufacturing as well as marketing partnerships that are profitable for both sides.  The first company I would approach is Embraer despite Embraer’s lean towards Airbus at this time.  Embraer has the most mature product line and it’s a natural fit to slide into markets in partnership with Boeing and just behind the Boeing product line. 

But I wouldn’t ignore Russia and Japan either.  Russia knows how to build aircraft and with just the right nudge, they could be a very effective partner for Boeing.  They could potentially even be a low cost manufacturing center in a decade.  They are the only other country outside the US and the EU to ever build large aircraft successfully.  Japan offers great engineering resources and manufacturing skills that embody the kind of quality control that is a must.  If Japan had built hose 787 horizontal stabilizers, we would have never heard about quality problems on them.   That’s a lesson learned for Boeing.

Yes, everything has a way to go yet but Boeing suddenly looks a lot better today than it did a month ago as a result of the preliminary WTO ruling.  The picture isn’t in perfect focus yet but it did get much more clear.

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