The Unfriendly Skies Boeing vs. Airbus

1. The Unfriendly SkiesBoeing vs. Airbus Dounia Bennani Juan Salazar Mike Boniakowski

2. Presentation’s focus • Analyze the trade frictions between Boeing and Airbus regarding government subsidies and their implications on the commercial aircraft industry. • Extend the analysis by reviewing the subsidy dispute of Boeing and Airbus at the WTO and finally discuss the possible outcomes of these disputes.

3. BOEING • Founded in 1917, Seattle Washington • the world's largest aircraft and aerospace manufacturer . • the second-largest defense contractor in the world • $ 21 billion in revenues (2004) • the world's largest civil aircraft manufacturer in terms of value (49 % of orders and 45% of deliveries) 2005 • the largest exporter in the world.

4. AIRBUS • Airbus (S.A.S) was established in 1970 as a European Consortium of French, German, and later Spanish and U.K. companies. • In 2001, it became a single integrated company. • The European Aeronautic Defence and Space Company (EADS) and U.K. based BAE Systems are the owners of Airbus (80%/20% respectively.)

5. Air Transport and Trade • Both companies have suffered after the terrorist attacks of September 11th, 2001. • But Airbus recovered faster and delivered more planes than Boeing for the first time in 2003. • Global Market Share (2003 orders) • Airbus 54% vs. Boeing 46% • Global Market Share (2003 deliveries) • Airbus 52% vs. Boeing 48% (ustr.gov)

6. TOTAL SALES

7. Boeing-Airbus ORIGINS OF TRADE DISPUTE • 1980’s:The dispute started when Airbus began to obtain all its capital from European government to launch new aircraft • 1992: US.-EU agreement on large civil aircraft. It places limits/ eliminate certain government support, including limiting “launch aid” to 33% of the costs of developing a new aircraft. • Launch aid - - Financing with no or low interest and repayment is tied to, and entirely dependent on, sales of the financed aircraft.

8. ORIGINS OF TRADE DISPUTE (Cont’d) • Support should be repaid at an interest rate no less than the government cost of borrowing and within no more than 17 years. • Limit indirect subsidies : result from civilian applications of programs financed by the military or entities such as national Aeronautics and Space Administration (NASA). • Such support was capped at 4% of the total revenue from the sale of a firm’s large commercial jetliners. • Prior to the agreement, 75% of development cost was provided by European government for Airbus • Boeing was a recipient of indirect support as well • Tax breaks from states (Washington, Kansas, and so on) • Technological benefit from govt. sponsored R&D programs . • Military contracts

9. ORIGINS OF TRADE DISPUTE (Cont’d) • Since the 1992 agreement, Airbus captured larger and larger market share (beginning 2003). • Fall 2004, attempt to modify the 1992 agreement • In October 2004, the United states withdrew from the 1992 agreement and filed a complaint in the WTO. • EU responded by filing its own complaint.

10. INITIAL REASON FOR DISPUTE • Each side claims that a large amount of the other’s subsidies has been channeled toward the launch of new super-sized passenger jets: • BOEING 787 “Dreamliner” • AIRBUS 380 Super Jumbo

11. A380 Super Jumbo • Expected to be the largest commercial jet (550+ passengers) • new technology—more efficient engines from either Rolls-Royce or Engine Alliance • better aerodynamic design, and the use of newer and lighter materials. • $6.5 billion: Largest amount of government funds • Airbus’ Comparative advantage over Boeing (not supported by the U.S. treasury)

12. BOEING 787 “Dreamliner” • 3 airplanes seating 200-300 passengers • Affordable, comfortable, non-stop, point to point travel to more destinations, • Fly faster, farther, using 20 % less fuel • 2008: expected entry into service

13. What is a subsidy? • WTO SCM Agreement • The definition contains three basic elements: • (i) a financial contribution • (ii) by a government or any public body within the territory of a Member • (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.

14. Airbus 350 • 250-300 passenger capacity • 15% better fuel efficiency • Expected to enter service in 2010

15. Boeing’s position • Case filed with WTO in 2005 in response to the $1.7 billion “launch aid” for its new A350 aircraft, which violates subsidy agreements • Risk-free money – shifts risk from manufacturer to EU taxpayers • Repayment is contingent upon success of aircraft sales. • EU claimed that launch aid was necessary to help an infant industry compete against a mature company. • In 2003-04, Airbus sold more airplanes than Boeing. • Is argument for launch aid still valid?

16. Airbus’ response • Airbus counter-filed against Boeing, claiming: • Boeing has been receiving illegal government subsidies through tax breaks and defense contracts. • Launch aid is fully compliant with 1992 agreement • Airbus contends that it has repaid over $6.4 billion in loans, over 40% more than has received.

17. Airbus’ position • Airbus claims that Boeing has been receiving illegal government subsidies. • $3.2 billion in tax incentives from Washington State for production of the 787 aircraft • Indirect subsidies through US military and NASA R&D contracts • Japanese government is providing $1.5 billion in loans to Japanese subcontractors in the production of 787 wings.

18. Boeing’s response • WA state tax incentives apply to entire aerospace industry, not just Boeing • Airbus and EADS benefit from similar incentives in FL, MS and LA. • Defense procurement is not a subsidy • Must provide a “good” to receive compensation. • Airbus receives gov’t funds to subsidize cost of development, which are then sold in the market. • DoD contracts are open to European bids • Boeing’s defense revenues (2003) = $23.7 billion, Airbus’ revenues were $23.8 billion.

19. Boeing’s response • R&D spending • As a condition of EU agreement to approve McDonnell-Douglas/Boeing merger (1997), Boeing must grant Airbus full access to its government-funded patents. • Airbus/EADS are not required to do the same.

20. WTO rules • Agreement on Subsidies and Countervailing Measures (ASCM) • EU claims US violates: • Article 3.1 (a) and (b) (which subsidies are prohibited) • Article 3.2 (Effects of subsidies) • Article 5 (a) and (c) (5 a – subsidy causes adverse injury to domestic industry of another member. 5 c- subsidy causes serious prejudice to interests of other member • Article 6.3 (a) (b) and (c) • US claims EU violates: • Article 3 - (Subsidies) • Article 5 - (No member should cause adverse effects to another through subsidies) • Article 6 - (Serious prejudice – exists if total ad valorem of subsidy exceeds 5% and if subsidies cover operating loss).

21. Actions taken by US & EU • Oct. 2004 – US requested consultations with EC. EC responded with counter-request. • January, 2005 – Both sides agreed to 8-point framework for bilateral relations 1 Secure comprehensive agreement to end subsidies on large aircraft 2 Principal shareholders are Airbus and Boeing 3 3 month negotiation window 4 Negotiation will apply to US and EU, could broaden agreement to include others 5 Pledge not to request WTO panels or offer new Gov’t support commitments to aircraft manufacturers during negotiations 6 Use definitions of subsidies in ACSM 7 Enforcement through transparency and DSB procedures 8 Establish agreed-upon terms and conditions for withdrawal from agreement • April, 2005, negotiations break down over items 1, 4, 5 and 6. • May, 2005 – US filed request for panel with Dispute Settlement Board (DSB) with WTO. EU filed counter-request same day.

22. Actions taken by US & EU • June, 2005 – DSB defers establishment of panel • Sept. 2005 – DSB initiated procedures provided in Annex V of ASCM • Oct. 2005 – EU requests Dir. Gen. to compose panel. • Feb. 17, 2006 – DSB establishes panel

23. -Establish fair market competition and development in both US and EU – Goal is to end subsidies -During negotiations, the parties will make no new government support commitments for LCA development or production The agreement will include the U.S. and the EU Enforcement of compliance to be exercised via increased transparency and Dispute Settlement Procedures Both parties agree to not request establishment of WTO panels relating to pending disputes  EU unwilling to eliminate subsidies. Will agree to reduce them. EU unwilling to support standstill of government launch aid during negotiations EU wants inclusion of Japan in negotiations Transparency is important to maintain clear channels of communication. US-EU Agreement on Terms for Negotiation to End Subsidies for Large Civil Aircraft (LCA) – Position as of May 31, 2005

24. Reality check • Trade disputes are normal actions in a world of highly competitive global economic systems. Disputes are useful and expected. • Share a trillion dollar economic relationship • We have been able to work together in the past. We initiated the WTO Doha round together attempting to regulate trade. • The Airbus/Boeing presence is stereotypical of a duopoly market. The market success of each firm is highly dependent on the price and output decisions of its competitor. FAIR MARKET RULES APPLY FOR OPTIMUM MARKET PERFORMANCE.

25. Current state of affairs • WTO will set up panel to investigate E.U.’s claims that the U.S. Government is subsidizing Boeing • Both sides playing blame game accusing one another of not cooperating • Complexity of case may result in further delays in resolving this issue - brings to question the ability of WTO to handle trade disputes.

26. Questions to ponder… • Can this case be viewed as a political dispute rather than a trade dispute? • Heads of state: Chancellor Schroeder, Prime Ministers Blair and Zapatero, and President Chirac at unveiling of A380 • Does the WTO possess the clout to settle this type of issue? • If WTO fails to resolve dispute, what next? • Unresolved issues accumulate: FSC, GMOs, bananas • Long term effects: Loss of credibility of WTO • Can WTO sustain more shocks from this and other failures to settle disputes?

27. Recommendations • Define what “subsidies” entail • Eliminate Launch aid for Airbus and all incentives provided by state and local governments for both companies • Agree to have open competition on Defense contracts and general government contracts in both nations • High level executives of both companies stress companies’ strong financial stability: • THEREFORE: • Eliminate all subsidies within twelve months • PRO ARGUMENTS: • Burden of financing companies loses not on taxpayers’ shoulder of taxpayers • Companies take responsibility for their actions; spend more wisely • The market forces of competition, supply and demand, etc. take over • Other nations may take advantage of more open market • CON ARGUMENTS • EU may pull out of talks • May not give companies enough time to determine whether or not they can survive without subsidies

28. Recommendations (cont’d) • EU must cooperate or face having Boeing-Airbus case labeled as “political” • Settlement of dispute is essential: • Avoid negative trickle-down effect on developing nations if issue is not resolved • Makes better business sense to liberalize trade worldwide: • Increase consumer base in other nations • An open market self-regulates: • Fairer competition; increased accessibility • Existence of price controls • Higher quality of control of products • Need to avoid marginalizing WTO. If deemed inadequate, trade disputes will proliferate and remain unresolved.

29. Joint Statement of USTR Rob Portman and EU Trade Commisioner Peter Mandelson regarding the dispute over Airbus/Boeing and the WTO (Office of USTR 05/30/2005) “We remain united in our determination that this dispute shall not affect our cooperation on wider bilateral and multilateral trade issues. We have worked together well so far, and intend to continue to do so.”

30. References • DISPUTE SETTLEMENT: DISPUTE DS317, United States — Measures Affecting Trade in Large Civil Aircraft, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds317_e.htm • DISPUTE SETTLEMENT: DISPUTE DS316, European Communities — Measures Affecting Trade in Large Civil Aircraft, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm • Office of the United States Trade Representative – “No New Subsidies”, October 6, 2004, www.ustr.gov • Office of the United States Trade Representative = “Trade Facts, A comparison of current US and EU positions and the Jan. 11 Agreement”, May 31, 2005, www.ustr.gov • “Nose to Nose”, Boeing vs. Airbus, June 23, 2005, The Economist, www.economist.com • “Enough is Enough”, Aircraft Subsidies, Jul. 22, 2004, The Economist, www.economist.com • Boeing, “Commercial airlines” http://boeing.com/commercial/787family/index.html • BBC News, “Q&A: Boeing and Airbus” (10/07/04) retrieved from http://news.bbc.co.uk/1/hi/business/3722888.stm • The Office of the United States Trade Representative “U.S. files WTO case Against EU over Unfair Airbus Subsidies” (10-06-2004) from www.ustr.gov • Wikipedia, Boeing,http://en.wikipedia.org/wiki/Boeing • Economist “ Towards the Wild Blue Yonder” (04/25/02) www.economist.com • Cage, Sam. “WTO to Probe EU Claims of Boeing Subsidies,” Washington Post, Feb. 17, 2006. • Office of the United Trade Representative, “A Comparison of Current EU positions and the Jan. 11, 2005 Agreement.” May 30, 2005, www.ustr.gov • Portman, Rob., Joint Statement of USTR Rob Portman and EU Trade Commissioner Peter Mandelson regarding the dispute over Airbus/Boeing and the WTO. May 30, 2005. www.ustr.gov • Swagel, Phillip. “Comments on Boeing v. Airbus: An Examination of the Issues.” American Enterprise Institute for Public Policy Research. http://www.aei.org/publications/pubID.22140/pub_detail.asp

31. Thank you for your attention!