Superjumbo risks new subsidy war

Date: 18/05/2000

By Bruce Barnard

THE EU and US are squaring up for a re-run of the bitter Airbus-Boeing subsidy row which poisoned transatlantic trade relations in the late 1980s and early 1990s.

But things will be different this time around. For a start, Airbus is no longer an upstart trying to break into an American-dominated business, but rather a head-to-head competitor with the US company. It sold more planes than Boeing for only the second time in its history in 1999, grabbing 55% of all orders for jets with more than 100 seats. And thanks to a 50-plane, €4-billion contract from Los Angeles-based International Lease Finance Corp. last week, it is leading its American rival by 191 to 186 orders so far this year.

The stakes are much higher today as the row centres on Airbus' planned A3XX superjumbo, which is aimed at ending the Boeing 747's money-spinning 30-year monopoly of the global market for very large passenger jets.

Boeing claims that the A3XX is not financially viable because there is not sufficient demand for a superjumbo and that only European government subsidies will make the sums add up. The American firm suspects that Airbus has already breached the 1992 EU-US agreement controlling government launch aid for commercial aircraft on several occasions, and fears that the A3XX project will blow a big hole in it.

Boeing was given the ammunition to support a future trade complaint to the World Trade Organisation in mid-March when the UK government gave €887 million of A3XX launch aid to BAe-Systems, Airbus' British shareholder and builder of its plane wings. Madrid, Paris and Berlin are expected to provide a further €4 billion of launch aid for their national Airbus partners: Construcciones Aeronautics (Casa) of Spain, Aerospatiale-Matra of France and DaimlerChrysler Aerospace (DASA) of Germany. The Airbus partners have already spent more than €600 million on the A3XX project.

Boeing is expected to ask US Trade Representative Charlene Barshefsky to initiate a complaint to the WTO on subsidies for the A3XX any time now. But it may decide instead to wait until the other Airbus partners get launch aid.

The two sides are dusting off arguments which are little changed since the original Airbus dispute. The US is disgruntled that European governments have not provided details of a "critical project appraisal" to prove that the A3XX project conforms to the 1992 agreement and the European Commission will be updating figures to support its claim that Boeing's big subsidies from the US defence department and NASA feed through to its commercial aircraft projects.

The Europeans reckon that they have more evidence to fight the forthcoming battle. BAe insists that the A3XX launch aid is a loan, not a grant, and that it will be repaid with interest. It has already given back the €419-million loan which the UK government provided for the Airbus A320 programme in the 1980s with interest, and is still making royalty payments. The loan has yielded €2 for every €1 invested.

The Commission is not investigating the A3XX loan as it does not fall within the scope of the EU's state aid rules.

The real battle between the A3XX, which will carry between 481 and 656 passengers, and the 400-seater Boeing 747-400, will be fought in the market place and not in the stuffy meeting rooms of WTO headquarters in Geneva.

The A3XX presents a huge gamble by Airbus, with the estimated €15-billion development costs almost equal to the value of the company itself and not far adrift of its 1999 revenues of €18.4 billion. But Boeing took a similar risk when it launched the 747 30 years ago.

Airbus reckons that there is a market for around 1,500 planes in the A3XX category, including cargo versions, over the next 20 years and it expects to nail at least half of these sales. Boeing, however, says that the market will be less than a third of Airbus' forecast.

These conflicting predictions reflect fundamentally different analyses of how the airline market will develop.

Airbus believes that congestion at major airports such as London Heathrow and Tokyo Narita will worsen dramatically as the number of aircraft flights doubles over the next 20 years to cope with an explosion in air travel, and that the only solution will be more massive investment in infrastructure or bigger planes.

Boeing, by contrast, claims that deregulation is opening up more lower-volume routes which will require smaller planes.

It points out that two-thirds of the US planes flying the Atlantic today are smaller Boeing 767s and 777s, while only a third are jumbos.

Boeing is sticking to its forecasts but it is also hedging its bets with its own superjumbo, the 747X, on the drawing board. If Airbus decides to proceed with the A3XX, Boeing is sure to roll out its own 600-seater.

That day loomed closer this month when fast-growing Middle East airline Emirates became the first launch customer for the A3XX, placing an order for five 555-seater versions for delivery in 2006 and 2007. Airbus hopes that when negotiations are finalised later in the year the total Emirates order will rise to ten passenger planes and two freighters.

The Emirates' move was a breakthrough, raising hopes that Singapore Airlines and Cathay Pacific will soon place orders. This would lay the foundations for some of the other 19 carriers advising Airbus on the A3XX specifications to follow suit. Europe's top three airlines, British Airways, Air France and Lufthansa are tipped to place orders after their Asian rivals.

Airbus chief executive Noel Forgeard expects shareholders to approve the launch of the A3XX programme by the end of this year if there is a clutch of firm orders. He was even more bullish after Airbus signed up its first Asian risk-sharing partner, Taiwan's Aerospace Industrial Development Corporation, paving the way for other Asian firms to enter the project.

Meanwhile, Airbus' four shareholders are in sight of a long-awaited agreement to transform their loose consortium into a single corporate entity responsible for design and production.

In addition, the Spanish, French and German partners who hold 80% of Airbus Industrie are merging to form the European Aeronautic Defense & Space Co. (EADS), which is scheduled for an Initial Public Offering on the Frankfurt and Paris stock exchanges in July. They are also trying to persuade BAe to merge its Airbus operations into EADs to complete its transformation into a 'normal' company.

The fact that the Airbus partners are now privately-owned firms means they will not give carte blanche to the high-risk A3XX project unless they think there is solid demand for a superjumbo - or, Boeing fears, if they get massive subsidies.

The EU and US are squaring up for a re-run of the bitter Airbus-Boeing subsidy row which poisoned transatlantic trade relations in the late 1980s and early 1990s.