Since the widely known WTO ruling on Airbus and it’s launch aid from member countries came out, there has been a lot of speculation on its implications for the airliner market, Boeing, the KC-X tanker and what the WTO might rule against Boeing on in its counter-claim.  Conventional wisdom is that both parties will get slapped heartily and that might end up being somewhat true although I suspect that far less will be found against Boeing. 

The difference is in the business models.  In many respects, Airbus/EADS has been run much like a state owned entity and its financing has largely derived from loans from member countries or with member countries’ backing.  Boeing, on the other hand, operates much more as a commercial entity and while it does benefit from things like tax breaks (on a state and local community level) as well as from participating in research and development efforts on the part of the government, it’s primary method of financing its commercial product line is from the financial markets.

When Boeing needs money, it goes to the markets and obtains market rate financing in the form of loans, bonds or through stock sales.  That’s the key difference between Airbus and Boeing.   Boeing follows a traditional and, more importantly, acceptable model for its financing.  A model that makes it difficult to show harm to Airbus/EADS. 

I think both parties will have to modify their behaviour going forward but I think Airbus’ compliance will have far greater and far more long lasting effects on its business model than anything Boeing will have to do.  I also think that Airbus/EADS remains tied to answering to its member countries on things like exports and employment and that makes it much more difficult to outsource (a la Boeing) and/or manufacture their aircraft in other countries. 

In the long run, Airbus’ compliance will make them a stronger and more competitive business because they’ll retain the advantage of selling to their member nations but they’ll also understand how to respond to their financial needs as well as their customer markets. 

In the short run, it just got a lot more difficult for Airbus/EADS to launch new models because they’ll likely have to “pay back” that launch aid and obtain commercial rate financing.  In addition, their commitments to the A380, A350 and A400 projects make it very tough for them to obtain financing for and launch a new project such as an A320 replacement or a model that competes more effectively with the bottom end of the 787 model lineup. 

For Boeing, it probably means forgoing or even paying back tax incentives and it will mean Boeing having to examine where it builds its aircraft much more closely in the future.  Don’t be surprised if more of their production moves out of Washington State over the next 20 years.

Filed under: Aircraft Development by ajax