Little sign of end to Boeing-Airbus battle

By Stewart Fleming

Date: 14/10/04

THE American government's decision to take US aircraft giant Boeing's confrontation with its rival Airbus to the World Trade Organization (WTO) has turned a dispute that has been festering in the shadows for years into a public confrontation.

But Washington's motives for abrogating the 1992 EU/US agreement on government subsidies to large commercial aircraft projects and throwing the case at the WTO are far from clear.

The WTO itself does not offer any prospect of speedily resolving the issues dividing the two sides, both of whom have for years been bending the vaguely drawn rules of engagement set out in the 1992 accord. The EU wasted no time filing a counter suit with the WTO, claiming Boeing, too, benefits from non-WTO compliant state aid, not to mention the cross-subsidies which come from its massive defence businesses. But much of these would fall outside the WTO's jurisdiction.

Were the conflict to be pursued seriously through the WTO's disputes panel procedure, a WTO official in Geneva says that so complex a case could take up to three years to resolve. By which time the government support for the launch of new Airbus jets, which Boeing wants to block, would presumably have been provided.

Boeing officials dismiss the idea that the launch of a WTO case was politically motivated, a way for the Republican Party to demonstrate, ahead of next month's presidential election, that it could be tough on 'unfair' trade.

What is certain, however, is that both companies had been transformed since 1992 and are at a critical phase in their development. Airbus has become a competitive threat. And Boeing bought McDonnell Douglas for &036;13 billion in 1997, dramatically boosting its military business and so opportunities for cross-subsidy.

Any new rules will not only help to determine whether Airbus builds on its newly found leadership of the market for big jets. Given the technologies that are crucial to the aviation industry - electronics, computers or new materials - they could also have an impact on the competitiveness of important industrial sectors outside the aviation field.

Airbus and Boeing are national champions in technological, as well as commercial terms. This explains why both are getting billions of dollars and euros of direct and indirect government help.

The EU says Boeing has had &036;23bn since 1992. Boeing says that without &036;15bn of subsidies Airbus would not have prospered.

Boeing, as the only US manufacturer of large commercial jets and with more than half of last year's &036;50.5bn sales revenues coming from its Integrated Defence Systems divisions, is a US strategic asset. Its financial health is of interest not only to shareholders on Wall Street but also to the Pentagon.

Its commercial jet business has been having a tough time recently, however, triggering Trade Commissioner Pascal Lamy to remark that the US case at the WTO was simply "an attempt to divert attention from Boeing's self-inflicted decline".

In 2003 its profits plunged, partly in response to lower than expected commercial airplane deliveries. Net income for the company was only a quarter of the 2000 and 2001 levels. Boeing noted signs of recovery on the commercial jet side in its second quarter statement in July, but the financial trauma which the US airline industry is suffering suggests tough trading conditions for the next few years. Several top US commercial airlines, including US Airways and United Airlines, have had to seek protection from creditors in Chapter 11 bankruptcy. This has curbed their appetite for new planes.

Boeing's reputation has suffered, too, as a result of a procurement scandal which led Congress this month to reject a &036;23.5bn (19.1bn euro) Boeisng bid to lease and sell 100 air tankers to the US Air Force. The contract, for which the company can submit a new bid, would allow Boeing to keep open its 767 production line.

Now, under a forceful new chief executive, Harry Stonecipher, the company is in the process of launching an expensive medium-sized long haul aircraft. The 7E7 Dreamliner is Boeing's big hope for regaining its leadership of the skies.

But it faces the threat of having to cede to Airbus's new A380 its longstanding dominance, through the 747, of the market for the biggest jets. It also fears that Airbus will get government subsidies to launch its direct competitor to the 7E7, a market that it thought it had largely to itself.

Washington and Boeing are pressing to resolve these issues, which have far- reaching implications for both companies, but Airbus is showing no signs of being in a rush to settle them.

The different histories, financial structures and intense rivalry between the two companies and the global nature of the subsidies game (Boeing is getting aid from Japan, for example) will make drawing up a new agreement difficult. Especially since Boeing wants all future government launch aid to Airbus halted.

Such a move would fundamentally change the successful Airbus business model, forcing it to turn to the financial markets for funds for new projects. Airbus, too, must worry about increasing competition and the threat that another slump in the dollar and a surge in the euro could weaken its position.

Manufacturers, such as engine suppliers, who sell to both firms, are looking on anxiously as the confrontation escalates and spills over into the political arena.

"The suppliers are sitting on an uncomfortable fence," says an industry lobbyist. "They are worrying about the unforeseen consequences of this confrontation."

The WTO is ill equipped to handle such a huge and politically charged commercial confrontation. Were it to be required to, it would itself not emerge unscathed.

The United States Government's decision to take US aircraft giant Boeing's confrontation with its rival Airbus to the World Trade Organization (WTO) turned a dispute that had been festering in the shadows for years into a public confrontation, article says.