Government Support for Airbus Historically, United States companies such as Boeing (www.boeing. com) and McDonnell Douglas global aircraft industry. Founded in 1916 in Seattle, Boeing had many years to develop the critical mass necessary to become the world's leading aerospace manufacturer. During World War l and the subsequent Cold War years, Boeing received many lucrative con- tracts from the U.S. Department of Defense. No single country in Europe possessed the means to launch an were the dominant players in the Since the 1940s, European governments have pursued public poli- cies based on democratic socialism. Under this system, Europeans became accustomed to government playing a significant role in guiding economic affairs. Airbus has benefitted enormously from government support. The firm has received tens of billions of euros of subsidies and soft loans from the four founding country governments and the European Union (EU). Airbus must repay the loans only if it achieves profitability. Government aid has financed, in whole or part, every major Airbus aircraft model. European governments have forgiven Airbus's debt, financed R&D for civil aircraft projects, and provided infrastructure and huge equity infusions. Airbus is currently a stock-held company jointly owned by the British, Germans, French, and Spanish. It is based in Toulouse, France, but has R&D and production operations scattered through- out Europe. European governments justify their financial aid to Airbus on several grounds. First, Airbus R&D activities result in the development of valuable new technologies. Second, Airbus provides jobs to some 55,000 skilled and semiskilled Europeans. Third, its aerospace company capable of challenging Boeing. Manufacturing commercial aircraft is complex and capital-intensive and requires a highly skilled workforce. In the 1970s, the governments of France, Germany, Spain, and the United Kingdom formed an alliance, sup- ported with massive government subsidies, to create Airbus S.A.S. (www.airbus.com). By 1981, the four-country alliance succeeded in becoming the world's number-two civil aircraft manufacture launched the A300, among the best-selling commercial aircraft of all time. The Airbus A320 received more than 400 orders before its first flight, becoming the fastest-selling large passenger jet in aviation history. By 1992, Airbus captured roughly one-third of the global commercial aircraft market. Airbus surpassed Boeing in orders for Airbus new aircraft in most of the 15 years through 2015 CHAPTER 7 GOVERNMENT INTERVENTION AND REGIONAL ECONOMIC INTEGRATION 193 value-chain activities attract massive amounts of capital into Europe. Finally, Airbus generates enormous tax revenues. The U.S. government gave Boeing more than $23 billion in indirect government subsidies by means of R&D funding and other indirect support from the Pentagon and NASA, the nation's space agency Boeing is at liberty to use the knowledge acquired from such proj- ects to produce civilian aircraft. The state of Washington, Boeing's Complaints about Unfair Government Intervention Boeing and the U.S. government have long complained about the massive subsidies and soft loans that were responsible not only for primary manufacturing and assembly location, has provided the firm Airbus's birth, but also for its ongoing success. The outcry became with tax breaks, infrastructure support, and other incentives totaling louder in the 2000s, when Airbus surpassed Boeing in annual sales, billions of dollars. becoming the world's leading commercial aircraft manufacturer Boeing has argued that Airbus never would have gotten this far without government support. The U.S. government has brought several complaints to the World Trade Organization (WTO). Among these are charges that EU member states have ap and soft loans to Airbus. The U.S. alleged that financial aid for the Recent Aircraft from Airbus and Boeing A350, A380, and earlier Airbus aircraft qualified as subsidies under the WTO's Agreement on Subsidies and Countervailing Measures (ASCM) and that the subsidies constitute unfair international trade. Under the ASCM, subsidies to specific firms or industries from a gov- ernment or other public bodies are prohibited. Airbus had applied airplane with an upper deck extending the entire length of the to the governments of France, Germany, Spain, and the United fuselage and a cabin that provides 50 percent more floor space Kingdom for aid to launch its model A350. In 2012, the WTO ruled that EU aid to Airbus had caused Boeing to lose market share in Asia and other markets. EU officials argued that government subsidies to Airbus were permissible and that it was up to individual EU countries to decide whether to provide them. However, the WTO also ruled that Boeing received more than $5 billion in U.S government subsidies in the development of the 787 Dream liner. The EU also has a case at the WTO regarding Boeing's relations with Japanese business partners. Boeing entered an alliance with Japan's Mitsubishi, Kawasaki, and Fuji to build the 787 Dreamliner The Japanese firms provided billions in soft loans, repayable only if the aircraft is commercially successful. ed billions of dollars in subsidies In 2011, Boeing successfully launched the 787 Dreamliner and is ahead of Airbus in launching innovative and fuel-efficient aircraft About the same time, Airbus launched the A380, an innovative than Boeing's largest aircraft. The A380 can seat between 555 and 853 passengers, depending on the seating configuration. It has a maximum range of 15,000 kilometers (8,000 nautical miles). The total cost to develop and launch the A380 reached 15 billion euros (U.S. $21 bilion), partly supported by funding from European governments. The government of China is developing its capacity to produce jumbo jets, part of its quest to challenge Boeing and Airbus in the global aircraft industry. China Commercial Aircraft Company was established in Shanghai amid forecasts that China's domestic market for commercial aircraft will increase fivefold by 2026. Government Support for Boeing The EU argues the United States government has indirectly subsi- dized Boeing through massive defense contracts paid by tax dollars. AACSB: Reflective Thinking Skills, Ethical Understanding and Reasoning Abilities Case Questions 7-4. Where do you stand? Do you think EU subsidies and soft loans to Airbus are fair? Why or why not? What advantages are gained by Airbus from free financial support from the EU gov- ernments? Are complaints about EU subsidies fair in light of Europe's history of democratic socialism? 7-5. Do you believe U.S. military contracts with Boeing amount to subsidies? Have these types of payments provided Boeing with unfair advantages? Justify your answer 7-6. Assuming that Airbus cannot compete without subsidies and loans, is it likely that the EU will discontinue its financial sup- port of Airbus? Is it in the EU's interests to continue supporting Airbus? Justify your answer. 7-7. If the WTO rules against Airbus and tells it to stop accepting subsidies and soft loans, how should Airbus management respond? What new approaches can management pursue to maintain Airbus's lead in the global commercial aircraft industry? Sources: Doug Cameron and David Kesmodel, “Warning Is Issued About Plane Glut,” Wall Street Journal, February 23, 2012, pp. B6-B6; Corporate profiles of Airbus and Boeing at www.hoovers.com; Deloitte, 2015 Global Aerospace and Defense Industry Outlook, www.deloitte.com; Matthew Dalton, “EU Files Complaint with WTO About Boeing” Wall Street Journal, December 22, 2014, retrieved from www.wsj.com; K. Epstein & J. Crown, “Globalization Bites Boeing.” Business Week, March 24, 2008, p. 32; D. Gauthier-Villars and D. Michaels, “Airbus Buyers Get French Aid,” Wall Street Journal, January 27, 2009, p. B4; Max Kingsley-Jones, “Throwing Down the Gauntlet,” Airline Business, October 2011, pp. 28-30; Pilita Clark, Joshua Chaffin, and James Politi, “WTO Rules that Boeing Received $5.3bn in Aid,” Financial Times, April 1, 2011, p. 19; “China to Make Jumbo Jetliners, Trim Roles of Boeing, Airbus,” Wall Street Journal, May 12, 2008, p. B4; “How Airbus Flew Past Its American Rival,” Financial Times, March 17, 2005, p. 6; Mavis Toh, “Rising in the East,” Airline Business, April 2015, pp. 32-35; Stephan Wittig, “The WTO Panel Report on Boeing Subsidies: A Critical Assessment,” Intereconomics, May 2011, pp. 148-153. Note: The authors acknowledge the assistance of Stephanie Regales with this case.
