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Flying the Subsidized Skies

The WTO rules against Airbus.

12:00 AM, Sep 16, 2009 • By REUBEN F. JOHNSON
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After a long and tortuous path of allegations of illegal subsidies and analysis of financial records, the World Trade Organisation (WTO) ruled last week that the European Airbus consortium has been receiving illegal assistance from the relevant governments. The target of the ruling, which runs over 1,000 pages in length, appears to have been the financial aid given for the launch of the Airbus A380 jumbo jet.

The WTO ruling is the result of a process that began roughly five years ago when the U.S. Government originally filed a case over what it said were unfair trading practices by the European Union. The decision, the details of which are still unknown, has been portrayed as a victory for Boeing, but the tangible benefits--as well as the lack of any enforcement mechanism in the aftermath of the ruling--makes any "victory" more moral and symbolic than anything else.

Complicating matters, the EU has filed a counter-complaint against Boeing--claiming that the military and NASA contracts that Boeing receives from the U.S. Government are subsidies under a different name. However, there are three basic problems with the Airbus argument:

One is that, like the legal process in the United States, the deliberations that the WTO engaged in took so many years that by the time they issued their ruling the aerospace market and the dynamics of the government-industry relationships had altered completely. Since the time that the case was brought before the WTO, Airbus has designed and built another aircraft, the A350, which competes with another program, the Boeing 787 Dreamliner, that did not exist when the dispute was first initiated. Military business or not, it does not seem to affect the ability of Airbus to continue to compete with Boeing and vice versa. Whatever the final ruling is in the 1,000 pages of findings by the WTO, it may be more of a snapshot in time than anything else -- and of little relevance to today's market

Another is that the cyclical nature of defense spending and the changes in how technology has evolved in recent years. This makes the Airbus argument that military contracts can be a boost for commercial aircraft programs a spurious one. After the WTO ruling, the parent company of Airbus, the European Aeronautic Defence and Space Company (EADS), lost no time in making the argument that one man's subsidies are another man's government contract. The military contracts received by Boeing and the work it receives from NASA for support of the Space Shuttle and ISS missions have been deemed as "opaque subsidies" by Louis Gallois, CEO of EADS.

But the reality of Boeing's business is that the military aircraft division of the company is a poor cousin to the commercial aircraft business. Today's economies of scale in the aircraft manufacturing business are such that the military production lines at Boeing's St. Louis plant could not continue to operate without the steady business of the commercial aircraft lines out in Everett, Washington. If there are any subsidies in Boeing's business it is the commercial division supporting the military business unit--not the other way around.

Perhaps the best illustration of the fact that the Boeing military aircraft business is not the fountain of gold that Airbus would have us believe is the history of the infamous and long-running competition to recapitalize the U.S. Air Force's fleet of aerial refueling tankers. There are thus far no winners in this series of competitions, cancellations, and protests, which included a 2003 freezing of the competitive process over Boeing having received insider information on the Airbus bid from a former USAF civilian executive. The bottom line is that Boeing cannot sell an airborne tanker version of one of its passenger aircraft and be competitive. So much for the military being a big boost to Boeing's fortunes in the commercial sphere.

In any case, Airbus executives are throwing stones from a glass hangar. The consortium is currently developing a military cargo aircraft, the A400M, which is designed to compete with the Lockheed Martin C-130J. The difference is that the European aircraft costs around $50 million more per unit than its American analogue, which makes it look like, well, a military subsidy for Airbus's various production units.