Subsidy spat
October 22, 2010
Tom Enders, the CEO of Airbus, gave a candid assessment of the six-year battle between Europe and the US, saying "both are guilty" of receiving subsidies that that contravene World Trade Organization rules and which the trade watchdog says distort competition.
"Let's be honest about it, the simple truth is, in the aerospace or aeronautic business, none of us, none of the companies that play a role in it, has been growing without any government support," Enders told attendees of an Aviation Club lunch in London. "So let's accept reality."
In addition, the Airbus chief said, the fight over subsidies could "accelerate the ascendancy" of aircraft manufacturers from countries such as China, Russia and Brazil, who are working on releasing new models that could pose direct threats to the current duopoly.
"If we talk about China, if we talk about Russia or others, does anyone in this room believe that they will step back and say: 'Now we understand the WTO rules, we will play exactly by the rules'?" he said. "Absolutely not, so this is why I call this an absurdity."
Long quarrel
Europe's Airbus and Chicago-based Boeing, the globe's first and second largest aircraft manufacturers, have been arguing their cases before the WTO since 2004. The United States initiated WTO dispute procedures then about subsidies to the European aircraft industry. In response, the EU launched similar proceedings against the US.
Since then, the trans-Atlantic dispute has become bogged down and a swift resolution does not appear to be on the horizon. In a ruling at the end of June, the WTO did fault Europe over aid to Airbus, saying the company has received subsidies in the form of loans from European governments at below market-rates and without maturity dates.
However, Airbus responded by saying the WTO had thrown out several of the other charges brought by the US. In a counter claim, Airbus accused Boeing of getting tax breaks from Washington as well as money from NASA research funds and argues that much US defense research, funded by the Pentagon, is of a dual technology nature and ends up being transferred over to the US civil aviation sector.
It is likely that any resolution will only come after years of appeals by both sides.
"It's hard to see how it ends right now," Paul Sheridan, an aviation analyst at London-based Ascend Worldwide, told Deutsche Welle. "You could take the WTO report about Airbus and take Boeing's response and switch the names and it would probably look pretty similar. They seem to be both accusing each other of the same thing."
New guys in town
In the meantime, a group of new players is arriving on the scene, ready to release products that could go head to head with Boeing and Airbus' headliners.
One big worry in Chicago and Toulouse, Airbus' home base, is the Commercial Aircraft Corporation of China Ltd, or Comac. Its 919 model, due to come on the market in 2016, will directly compete with the Airbus A320 and Boeing's 737.
"Airbus and Boeing should be very worried about Comac as a rival to their duopoly" Sheridan said. "Comac is state-owned and once the Chinese government demonstrates a willingness to do something they usually follow through with it."
Other manufacturers, such as Canada's Bombardier, Brazil's Embraer or Russia's Sukhoi are seeking to gain a foothold in the lucrative civil aviation market. Bombardier's single-aisle plane is due to enter service in 2013 and will also pose a threat to the A320 and 737.
"Airbus is saying to Boeing that they need to resolve this whole issue," Zafar Khan, an aviation expert at SG Securities, told Deutsche Welle. "While we're squabbling, Enders is saying, those other countries are all subsidizing their industries."
Enders said there will probably be five or six commercial aircraft manufacturers in the next 10 years, which means the industry will be faced with new questions about consolidations, partnerships and mergers.
Subsides and the future
Subsidies, although disliked by the WTO, are almost a given in the aviation industry, experts say. That is partly due to the expense of producing the product, but also from the benefits governments see from having a successful aerospace player.
"When it comes to the aerospace industry, everyone is looking for help from governments because these are major, major undertakings and governments clearly see them as strategically important businesses to have," Khan said.
In a related development, negotiators from the European Union and other countries, including the US, Japan and Brazil, are meeting in Canada to talk about financing planes in each other's home markets - and specifically, how much government assistance is allowed.
The old rules saw an aviation deal dominated by the US and Europe. The current picture is a lot more complicated with a new batch of players wanting a piece of some very lucrative skies.
Author: Kyle James
Editor: Sean Sinico