Yahoo Finance The turbulent feud between Airbus and Boeing
"Pork barrel" politics. Billions in illegal subsidies. Thousands of jobs in the firing line. The prospect of a trade war. The row between Airbus and Boeing – being fought for them by proxy between the European and US governments – has it all.
The long-running corporate feud flared up again last week, drawing in another player, Canadian plane-maker Bombardier. Boeing claims Bombardier received illegal support for its C-series small airliner when the province of Quebec took a $1bn (£740m) stake in the troubled programme. This support ultimately helped Bombardier, which will assemble the aircraft in the province, to agree a sale of up to 125 of airliners to US carrier Delta at big discount, a deal which Boeing says is a clear case of trade dumping.
Britain got involved in the dispute earlier this month with Theresa May calling Donald Trump to ask him to intervene. The UK is involved because Bombardier builds wings for the jets at its plant in Northern Ireland, with a £130m government loan supporting the Belfast factories which employ almost 5,000 people. Those jobs could now be at risk.
The American aerospace giant has lodged a complaint with the US International Trade Commission and if it finds in favour of Boeing, the sale of each C-Series airliner could have a multi-million dollar tariff slapped on it. This could kill the Delta deal, and possibly the C-Series programme.
In retaliation, Canada is reconsidering a $5bn purchase of F-18 fighters from Boeing. One of the most interesting thing about the case is that it’s not as if Boeing has seen sales snatched away by Delta’s purchase of the C-Series. The first iteration of the Bombardier jet seats 130 passengers, with later models up to 160. Boeing’s smallest airliner, the bestselling 737, typically seats about 180 passengers.
It’s here where the latest development most echoes the Airbus-Boeing dispute, according to Robert Stallard, aerospace analyst at Vertical Research Partners. “Boeing is aggrieved that Airbus has got to a 50:50 market share and believes it must have done it through nefarious means,” he says, adding that the US giant doesn’t want to see another potential competitor supported in the same way that has allowed the European plane-maker to come from nothing in the Seventies to being an equal rival today.
Indeed, those close to Boeing admit the same.
“Forty years ago we faced a similar situation and no action was taken and it hurt us,” said one source. “We are determined not be in the same position.” The details of the row between Airbus and Boeing are tortuous but boil down to this: each claims the other gets support – banned under international agreements – from their respective governments to help them develop and/or build new airliners, while insisting they do not receive the same.
Airbus enjoys something called “repayable launch aid” (RLA). Governments give loans to the company to fund development and construction of facilities, which are repaid – “with interest”, Airbus is keen to point out – as the aircraft goes into production and sales mount. A successful plane more than pays back this money.
Demand for the A320 family of small airliners was such that Airbus was able to renegotiate the terms so it paid back less on each plane. There are questions over how much of the RLA is returned on less popular aircraft, such as the A340 and A380. Boeing gets a lift from tax breaks, export subsidies and benefits from government-funded research through bodies such as NASA or defence contracts.
It’s not just cash being funnelled to companies that comes under scrutiny: anything state-supported that might benefit a plane-maker can come under inspection. “Infrastructure can also be part of it,” says Professor Keith Hayward, a Royal Aeronautical Society fellow. “Construction of new roads around Airbus’s plant in North Wales have been examined.”
The sums involved are mind-boggling – and disputed by all. Airbus claims it has lost $100bn in sales because of the benefits it says Boeing receives. The counter-claim from Boeing is that without RLA, Airbus would have never got to be such a major player in a market valued at $6.1 trillion over the next 20 years.
State subsidies for the industry have been an inevitable part of the aerospace sector for a long time. Much of the boom in aircraft advances came from technology first conceived around the Second World War and Hayward notes “there hasn’t been an airliner launched in the last 50 years without state aid in some form”.
The problem is the cost of developing a new aircraft – launching a new airliner is essentially a $10bn bet with no guarantee it will sell enough to recoup the initial investment.
“Building aircraft is a high risk, high cost business,” says Hayward. “Companies won’t risk that on their own and so the state has to take on some of that risk in whatever form.”
This aid paves the way to well-paid jobs in the industry and export opportunities, so it’s no wonder that politicians are willing to dig deep to support the industry. It’s the level of support that has caused the international disputes. America dominated airliner production and, until Airbus became a threat, no one worried too much about subsidies. As the European plane-maker came of age, the row escalated and in 1992 the US threatened action under General Agreement on Tariffs and Trade (GATT) rules.
An uneasy truce was struck over the practice, which lasted until 2006 when the US filed a case with the World Trade Organisation, challenging the subsidies. Europe filed a counter-claim and the cases have been going back and forth ever since, with each side claiming victory and the aid still in place. To say the case is bitter would be an understatement.
However, it does have moments of relief, such as Boeing’s childish online video spelling out the harm RLA does to American workers. Even more infantile is Airbus’s “WTO Warrior” app, where players pilot a “7PORK7” airliner collecting tax breaks, or can play “slap the porkliner”, which comes with a warning that “porkliners are hard to catch and don’t want to give up their perks”.
There could be a resolution later this year when Boeing believes a final ruling could come. If it wins the US government could theoretically impose trade sanctions on European products worth $7-$10bn a year. “Nobody wants a trade war,” said a Boeing source. “But it is the only way to change their behaviour.”
Experts believe that a trade war will not only harm international relations, it could also harm the now globalised aircraft industry. The Bombardier case has brought the whole issue of subsidies into relief again but sources inside the company question why the American industrial giant is going after it. “It’s Boeing against the world,” said one. “If they win then literally everyone else loses. Companies, countries, taxpayers, passengers.”
When the argument about which forms of state aid are acceptable will come to end is “an impossible question” says Hayward Only one thing is certain about this decades-long episode. “In the end, only the lawyers will win,” says Hayward.
