When Trade is not only about Economics: Airbus vs Boeing

, by Pietro De Matteis

When Trade is not only about Economics: Airbus vs Boeing

The commercial war between the European giant Airbus and its American counterpart Boeing continues order after order from the world airlines. But what is it all about?

On 6 October 2004, the European Union requested consultations with the Governments of the Member States participating in the project (namely Germany, France, Spain, and the United Kingdom) concerning measures affecting trade in large civil aircraft construction, as the United States were claiming that the EU was providing subsidies that were not complying with the Agreement on Subsidies and Countervailing Measures and GATT 1994. At the same time the European Union requested consultations with the US concerning prohibited actions on the same matter.

Two types of capitalism

Some market analysts have often assessed how this controversial situation was heuristic in order to understand the two different existing forms of capitalism, the one in the EU (Rhenan Capitalism) and the other in the US (Anglo-Saxon Capitalism). They usually affirm that while in the US there is a real market economy, in the EU state aids are still very important and they name Airbus, as it is a project shared among and financed by different EU Member States, as a prime example.

Of course in Europe there is a variant of capitalism that finds a strong attention to welfare and sees banks playing a main role together with the government even if state intervention is allowed only to certain extent and it is less than in the past. By contrast in the US the main role is played by the shareholders who are able to decide in the short-term the policy of the business, while the government or any state aid is formally forbidden.

Having said so, in the light of what was focused during the consultation of the WTO, we can leave aside this simplistic way of analysing this specific matter. In fact, it is true that Boeing is not state owned, but the US Government provides large amounts of subsidies to US producers of large civil aircraft and in particular to the Boeing company nonetheless. These have the form of specific legislation, regulations, statutory instruments and amendments in order to allow such subsidies, grants, and any other assistance to US producers. Moreover, the EU pointed out how these include specified federal, state and local subsidies for the production of Boeing 747, specified NASA research and development subsidies, specified Department of Defence research and development subsidies, specified National Institute of Standards and Technology subsidies, FSC/ETI subsidies; research and experimentation tax credits, NASA procurement contracts, and so on.

It is true that Airbus obtained direct subsides as they are not forbidden and do not need to be occulted: the measures include for example the provision of financing for design and development to Airbus companies (known as “launch aid”), the provision of grants, goods and services to develop, expand or upgrade Airbus manufacturing sites as well as for the development and production of the Airbus A380.

So we are facing two different ways of capitalism and, in this specific case, two different ways of protecting/financing/subsiding a national enterprise. Complains coming from the US are most probably a result of the overcome from the European firm over Boeing thanks to its avant-garde technology. But this was not due to the amount of subsidies that Airbus obtained, as the US claims, but mainly to a difference in strategy: Boeing preferred to exploit at the maximum its aircraft, making little changes in technology and decreasing its selling prices, while Airbus invested in R&D creating 5 new aircraft instead of the one produced by Boeing.

Hard competition between the two

Lately Boeing announced to wait an order from Singapore Airlines worth around 8.5 billion euros, while Airbus concluded contracts with the Italian low cost airline Eurofly and India’s first low cost carrier Air Deccan.

Until now, Airbus managed to secure more than 5,900 orders across its range of 14 aircraft, from 213 customers: Air Canada, Air France, easyJet, Emirates, Iberia, Lufthansa, Northwest Airlines, United Airlines and US Airway while its market share is growing steadily from 44% in 2002 to 52% in 2003 and from 54% in 2004 to 56% in 2006.

It will be interesting to see if the new Airbus 380, the most spacious and efficient aircraft ever conceived with a capacity of 555 passengers, will meet the high expectations: by now 149 of these aircraft have been ordered. A direct contest will be with the upgraded 747

An ending consideration must be done from the political and macroeconomic point of view: such a big industry as is the aircraft production means employment and economic growth; for these reasons it is not difficult to imagine that governments will lobby on it in order to obtain company contracts and orders from national airlines. From this point of view the US seems to have an advantage as Airbus remains a project shared among different countries Germany, France, Spain, and the United Kingdom and is not a proper European project (yet).

This is another aspect that underlines the necessity of a really unified Europe, giving us lobby ability and a stronger position at the moment of closing deals at the international stage.

For further information:

http://www.wto.org

http://www.airbus.com

http://www.boeing.com

Image: Airbus A380, source: Wikimedia

Your comments

  • On 29 July 2006 at 04:35, by Sam Replying to: When Trade is not only about Economics: Airbus vs Boeing

    The basic difference is that Airbus forecasts sales. If they make the forecast, they then will repay the launch aid. In the case of the A380, Airbus forcasted something like 1,500 aircraft. If they do not sell 1,500 aircraft, the loans will be forgiven. Consequently, all Airbus has to do is to set an unrealistic forecast and they will never have to repay the loan. Clearly, the A380 will not ever make 700 sales let alone 1,500. That is pure socialism.

  • On 29 July 2006 at 05:21, by Freddie Replying to: When Trade is not only about Economics: Airbus vs Boeing

    What a BS article. Complicating the simple matter using complex word like capitalism. The EU and airbus has the raw issue of poor ( extreme) corp governance. With the CEO and EADS senior stealing money from shareholder by cashing in stock option before business call. Also duplicating the management layer by the duo head. The Airbus is basically 1) using shareholder and tax payer money to compensate the mistake and the poor work from the useless management team ( also the French and German related government department.) 2) Create unfair trade advantage to Boeing.

    I cannot, in anyway, believe that EADS do not receive the similar subsidies from other Europe government and indirectly transfer those goodies to Airbus.

    The issue is not how the European government subsides airbus. The issue is why European show help such a bad company with no transparency on how to do a good work.

    Boeing has done such a good job by focuing on the root problem, giving good transparency to shareholder, make good plane.

    Airbus should be granted with any help from governemt. And should simplify its management team, find some good people to run the company. Like what Boeing did.

  • On 29 July 2006 at 13:56, by Valery Replying to: When Trade is not only about Economics: Airbus vs Boeing

    Yes, it’s great, isn’t it ?

  • On 22 August 2007 at 15:11, by Pietro De Matteis Replying to: When Trade is not only about Economics: Airbus vs Boeing

    Well Freddie, any issue can be seen at various levels. You are free to stop your analysis at the most superficial one...

    It is clear that such a big project had, and is still having, promblems in “taking off” (i.e. in fact the A380 will start flying only next october). Nonetheless there are several other issues which your basic financial assessment do not show.

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