Government Intervention at Airbus and Boeing
In the 1960s, United States companies such as Boeing (www.boeing.com) and McDonnell Douglas were the dominant players in global aircraft manufacturing. Boeing was founded in 1916 in Seattle, and had many years to develop the critical mass necessary to become the world’s leading aerospace manufacturer. During World War II and the subsequent Cold War years, Boeing was the recipient of many lucrative contracts from the U.S. Department of Defense. In Europe, no single country possessed the means to launch an aerospace company capable of challenging Boeing. Manufacturing commercial aircraft is complex and capital-intensive and necessitates a highly skilled workforce. In 1970, the governments of France and Germany formed an alliance, supported with massive government subsidies, to create Airbus S.A.S. (www.airbus .com). The governments of Spain and Britain joined Airbus later. By 1981, the four-country alliance succeeded in becoming the world’s number-two civil aircraft manufacturer. Airbus launched the A300, among the best-selling commercial aircraft of all time. Airbus also created the A320, receiving more than 400 orders before its first flight and becoming the fastest-selling large passenger jet in aviation history. By 1992, Airbus had captured roughly one-third of the global commercial aircraft market.
Government Support for Airbus
Since the 1940s, European governments have pursued public policies based on democratic socialism. Under this system, the government plays a strong role in the national economy and provides key services such as health care, mass transit, and sometimes banking and housing. Most Europeans are accustomed to government playing a significant role in guiding the national economy. In this context, Airbus has benefited enormously from the support of various governments. The firm has received tens of billions of euros of subsidies and soft loans from the four founding country governments and the 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, provided huge equity infusions, dedicated infrastructure support, and financed R&D for civil aircraft projects. 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 throughout Europe. European governments justify their financial aid to Airbus on several grounds. First, Airbus R&D activities result in new technologies of considerable value to the EU. Second, Airbus provides jobs to some 53,000 skilled and semiskilled Europeans. Third, its value-chain activities attract massive amounts of capital into Europe. Finally, Airbus generates enormous tax revenues.
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 Airbus’s birth, but also for its ongoing success. The outcry became louder in the 2000s, when Airbus surpassed Boeing in annual sales, becoming the world’s leading commercial aircraft manufacturer. Boeing has argued that Airbus never would have gotten this far without government support. In 2005, the U.S. Trade Representative brought its case to the WTO. The case arose because EU member states approved $3.7 billion in new subsidies and soft loans to Airbus. The case alleged that financial aid for the A350, A380, and earlier Airbus aircraft qualified as subsidies under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) and that the subsidies were actionable because they caused adverse effects to international trade. Under the ASCM, subsidies to specific firms or industries from a government or other public bodies are prohibited. Airbus confirmed that it had applied to the governments of Britain, France, Germany, and Spain for launch aid for its model A350. In 2010, the WTO ruled that EU aid to Airbus was illegal. In total, the WTO found that Airbus had received some $20 million in preferential subsidies from the European governments.
EU officials have argued that government subsidies to Airbus were permissible and that it was up to individual EU countries to decide whether to provide them.
Government Support for Boeing
The EU argues the United States government has indirectly subsidized Boeing through massive defense contracts paid via tax dollars. 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 projects to produce civilian aircraft. The state of Washington, Boeing’s primary manufacturing and assembly location, has provided the firm with tax breaks, infrastructure support, and other incentives totaling billions of dollars. The EU also has a case at the WTO regarding Boeing’s relations with its Japanese business partners. The new Boeing 787 Dreamliner is built in an alliance with the heavy-industry divisions of Japanese MNEs like Mitsubishi, Kawasaki, and Fuji. They have provided more than $1.5 billion in soft loans, repayable only if the aircraft is a commercial success.
New Aircraft from Airbus and Boeing
In 2007, Airbus launched the A380, an innovative airplane with an upper deck extending the entire length of the fuselage and a cabin that provides 50 percent more floor space 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 of developing and launching the A380 reached 15 billion euros (USD $21 billion), partly supported by funding from European governments. Boeing successfully launched a test version of its Boeing 787 Dreamliner in 2007 and is several years ahead of Airbus in launching innovative and fuel-efficient aircraft. Airbus is developing a mid-sized A350 model, due for delivery in 2013, to compete against Boeing’s 787. In 2008, the government of China established a company to make passenger jumbo jets, part of its quest to challenge Boeing and Airbus in the global aircraft industry. China Commercial Aircraft Co. was established in Shanghai amid forecasts that China’s domestic market for commercial aircraft will increase fivefold by 2026.
Global Financial Crisis
The recent global financial crisis has adversely impacted Airbus and Boeing. Both companies were forced to reduce output and laid off more than 10,000 workers each. Following sharp drops in passenger traffic, airlines grounded planes and cut routes. Many airlines cancelled or postponed new aircraft orders. Following cuts in U.S. military spending, orders for military hardware also declined. Longer term, Airbus is reorganizing its global operations, outsourcing more manufacturing, and selling all or part of six factories. Airbus and Boeing are generating new business from emerging markets. Recently, India signed a $2.1 billion deal with Boeing to purchase military aircraft.
Where do you stand? Do you think EU subsidies and soft loans to Airbus are fair? Why or why not? What advantages does Airbus gain from free financial support from the EU governments? Are complaints about EU subsidies fair in light of Europe’s history of democratic socialism?
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.
Assuming that Airbus cannot compete without subsidies and loans, is it likely that the EU will discontinue its financial support of Airbus? Is it in the EU’s interests to continue supporting Airbus? Justify your answer.
Visit the Web site of the WTO (www.wto.org) and enter the keywords aircraft or civil aircraft in the search engine. Summarize the current status of the dispute before the WTO between Airbus and Boeing.
In the event 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?
