For more than 10 years, much has been made of the “launch aid” given to EADS/Airbus for producing new aircraft.  A recent preliminary WTO (World Trade Organization) ruling has said that the aid given for launching and producing the A330 was illegal. 

 

Europe/Airbus has prosecuted a counter-claim to Boeing stating that the tax incentives given by both states and the federal government as well as defense industry contracts illegally aids Boeing.

 

To a lot of people, it seems as if both sides have a point.  To Louis Gallois, CEO of EADS/Airbus, it certainly seems that way.  He’s actively pursued independent negotiations to settle the issues away from the WTO.   Boeing, on the other hand, has remained steadfast.

 

Like a lot of conflicts such as these, there are valid points on both sides.  I think the best way to look at the issue(s) is to test them according to a standard of transparency and economic competitiveness.

 

Airbus actively competes with Boeing around the world and does a fine job of it as well.  There is no doubt that their aircraft are world class and quite capable of competing in the marketplace against Boeing’s products.  An airline who buys Airbus isn’t putting itself at a disadvantage. 

 

It’s how Airbus got there that rankles most.  Originally a state financed consortium of aerospace manufacturers, Airbus received open funding from national governments to produce aircraft.  Ordinarily, this tends to be a bad idea since the product produced is often not market competitive.  That certainly wasn’t the case with Airbus’ products.  They sell on features and capability.  The A320 series can be considered the equal of the Boeing 737 series.  The same is true across the line.

 

It was important to Europe to find a way to continue building airliners and there is a good argument that the rise of Airbus has kept Boeing (and, previously, McDonnell Douglas) honest.  I would certainly agree with that.   Indeed, one could say that the demise of McDonnell Douglas’ commercial aircraft business was due, in part, to the rise of Airbus since MD found it very difficult to compete against Airbus’ aggressive pricing strategies in markets where McDonnell Douglas was the legacy supplier (Europe and parts of Asia as well as the United States.)

 

The line was crossed when Airbus didn’t transition to a self financing entity as the A330/A340 aircraft were being developed.   Airbus didn’t have to go to the market to borrow money, they went back to the respective European governments for more “aid”.   And the biggest part of the problem is that the aid wasn’t exactly required to be paid back.  The conditions were that *if* Airbus sold that line into profitability, the governments would start receiving a portion of those profits. 

 

That’s a big if.   Indeed, the current Airbus A380 program points to the problem with such a murky requirements.   This is an aircraft that, at best, has an extremely limited market and continues to struggle even with low volume production.  Deliveries are massively delayed and Airbus continues to depend on orders from a relatively few airlines to support the production.  At the same time, there is no pressure from the financial markets and/or shareholders to justify the production with potential profits.  Lacking that pressure, Airbus continues with a program that could never last in the United States.

 

The same was true for the A330/A340 program.  While the A330 is an unqualified success, the A340 never was.   The problem with this program is that the A330 succeeded not just on capability but price.  Airbus didn’t have to pay the rent on the money it borrowed to develop and sell the aircraft and was able to offer a capable aircraft at a price competitive with the Boeing 767.  It’s notable that, in many respects, it should have been competing on price with the Boeing 777 instead. 

 

In the United States, it’s true that we do support our manufacturing base with certain tax incentives.  However, it is notable that while Boeing might not have kept its production in Washington state, its laughable to believe it would have traveled outside of the United States.  Those tax incentives merely kept production where it was inside the US and even those incentives no longer seem to be enough.  Witness Boeing setting up a second production line for the 787 in South Carolina.

 

When Boeing needs to raise money to launch such a venture, it has to go to the international capital markets and borrow money.  Boeing must pay market interest rates for that money and, most importantly, it must make a solid case for the product they want to produce and its potential profitability.  I assure you that capital markets are an unforgiving place and without justification for their request for money, no one would loan it to them.

 

Boeing does receive research and development funds for defense work that does contribute to its body of knowledge for building commercial aircraft.  Boeing’s capability in manufacturing CFRP (Carbon Fibre Reinforced Plastic) derives from such defense programs.  However, there is a difference in how Boeing gets those funds.

 

Boeing must compete with a number of aerospace companies for those funds and justify its ability to deliver.  Those aerospace companies are largely US based but also include companies from Europe such as BAE, Airbus and others.   In order to receive that funding, the companies must make a financial case for them being the best to receive funding and if those companies prove incapable of delivering results on a funded program, it usually is terminated by the government.  The US Defense Department doesn’t just continue to fund a program for the sake of funding it. 

 

The difference in these arguments about illegal funding between Boeing and Airbus is really about transparency and competitiveness.  Boeing must be transparent and routinely demonstrate to the markets and the US government that it is not only doing what it said it would do but also succeeding in the world market place.  Airbus, on the other hand, answers to governments whose prime interest is in supporting an aerospace industry and has yet to have to justify itself to the world marketplace. 

 

I suspect that if the European governments involved in Airbus had adopted a hands off approach with the A380 program, the US government and Boeing would have declined to pursue a WTO case against Airbus.   I think some sort of arrangement would have still been possible if Airbus had justified their new A350 program in the world marketplace but they once again gratuitously accepted launch aid from governments who brazenly offered it in spite of their pledge to be fair participants within the WTO.

 

Both France and Germany have been particularly bad in their behaviour on all things Airbus.  National leaders of both governments have been known to fly to countries where Airbus is competing for a sale and nakedly pitch the Airbus product as a national interest priority and make the sale with inducements such as defense sales and other side trade agreements.  The United States has been known to flirt with this but never has engaged in such open pimping of their own industries.

 

The KC-X tanker program is the next battlefield.  Pitched against the DoD’s desire to have a real competition for the program (there are only two remaining manufacturers in the world capable of producing the aircraft:  Boeing and Airbus) and the fact supported case that the Airbus A330 derived tanker was and continues to receive state sponsored support and aid.*

 

What happens?  The United States has a decision to make in the next 2 to 3 years.  It either aggressively stops the unfair trade practices of the European governments (primarily France and Germany) or it must decide to fight fire with fire.   Wisely, the US government wants to avoid having to resort to the same tactics to support the US aerospace industry because they know the consequences are potentially very bad.  Competitiveness in our aerospace industry is, quite literally, what has kept us on the top of the hill when its comes to our nation’s defense.

 

Those same European aerospace industries supporting Airbus, also participate in the US defense contracts and have become essential to the US defense.  Companies such as BAE Systems are now prime contractors producing for the US and to ban them from competition is both bad for the US as well as the US industries.   Such is the web a global marketplace produces. 

 

My guess is that the US will seek to defend its ground by offering even more support to businesses and governments around the world in the form of low cost or no cost financing.   US Trade Representatives will be empowered to offer better and better terms to facilitate those sales and its hard to compete with the financial might of the US government.  

 

Until the US starts to aggressively combat EADS/Airbus and their supporting governments, the practices won’t stop.   Those governments have always pursued such policies and have never stopped engaging them until it became unprofitable to do so.   There is no historical precedent for them to play “fair” with, possibly, the exception of the UK.

 

*  Nominally the KC-X tanker program is a competition between Boeing and Northrup Grumman.  However, Northrup Grumman essentially is the “front” for Airbus where Airbus will produce the base airframe and Northrup Grumman will do the conversion modifications in Alabama.  NG and Airbus have promised to ultimately produce the A330 in Alabama after the first 20 or so airframes are built.  However, the A330 airframe isn’t that much younger than the 767 and the market for the aircraft is already quickly diminishing with the rise of the 787, A350 and even the 777.  The idea that a single tanker program could justify setting up such an assembly line without commercial demand is far fetched at best.   It’s a promise that is easily taken back after production started.

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