Airbus and Boeing. America flies to war

The long-running row over subsidies to Airbus and Boeing has gone to the World Trade Organisation

THE rumbling of a trade war over state aid to Europe's Airbus has been in the air for months. On October 6th, after unsuccessful talks between the European Union and America, the United States Trade Representative, Robert Zoellick, filed a formal complaint to the World Trade Organisation (WTO) alleging that billions of dollars of “unfair” subsidies were paid to Airbus. Within an hour, the EU said that it would file a counter-claim over equally large sums of unfair aid going to Airbus's rival, Boeing.

Boeing has been smarting ever since Airbus snatched the lead in the civil jet market last year by delivering more aircraft for the first time. Airbus is still in front this year, with 224 deliveries to the end of September, compared with Boeing's 218. The Americans' beef is that Airbus, which is 80% owned by EADS, a European aerospace group, and 20% by BAE Systems, still gets soft loans from the governments of Germany, France, Britain and Spain.

This finance comes in the form of repayable loans, known as launch aid, for the development of new aircraft. Some $3.7 billion of it enabled Airbus to launch its new A380 super-jumbo, which will eclipse Boeing's venerable 747 when it enters service in 2006. Boeing complains, quite reasonably, that nowadays Airbus is a profitable, successful company and as such should no longer receive this help.

An earlier trade row was settled in 1992 with a bilateral agreement that limited Airbus's launch aid to 33% of the development costs of a new plane, while indirect support to Boeing (from the Pentagon and NASA) was restricted to 4% of its turnover. Now Boeing and the American government want to replace that deal with a new agreement that bans all state aid.

Boeing's chief executive, Harry Stonecipher, has been itching to have a go at Airbus. He was brought out of retirement at the end of last year to run the company after it lost its two top executives in a row about improper dealings with the Pentagon over defence contracts. Previously, as number two at Boeing, he was always pushing for a more aggressive line against Airbus subsidies.

But there is more to it than that. First, the Bush administration is being attacked for the loss of manufacturing jobs, and Boeing's home base for its civil jets is around Seattle in Washington state, a key battleground in next month's presidential election. And Airbus is likely to come up with a new aircraft that could spoil the market for Boeing's latest product, the 250-seater 7E7. The Europeans plan to unveil such a rival, dubbed the A350 for now, before the end of the year.

According to Boeing, Airbus can only make such rapid moves in the marketplace because it can count on launch aid. Mr Stonecipher points out that the European company has been able to roll out five new products in the past decade, while Boeing, with an eye to shareholders and its bottom line, has managed one.

It is true that the big attraction of state-provided launch aid is that if a product flops, the money does not have to be repaid; so the risk is borne partly by European taxpayers. But Airbus now has to continue paying royalties long after the loan and interest have been repaid. Nor is it clear whether Airbus will ask for launch aid for its new plane, since it is basically a new version of an existing wide-body model, the A330-200.

Motes and beams

The odd thing about the timing is that Boeing's newly aggressive approach emerged only after it was revealed that it had learned a trick or two from Airbus about landing subsidies. It persuaded the state of Washington to provide a tax break worth, according to the State University of New York, Buffalo, $3.2 billion. This was in return for doing the final assembly of the new 7E7 in its home state. It hawked the project around alternative sites and Kansas came up with an interest-free bond worth $200m to fabricate noses and cockpits. And the Italian government is putting up a subsidy worth $590m for the manufacture of the rear fuselage by its partly owned aerospace firm, Alenia.

But the grandaddy of aid going to Boeing comes from Japan. This emerged last November when Airbus persuaded the EU to investigate a $1.5 billion subsidy that the Japanese government is, in effect, putting into the 7E7. A consortium of three companies, the heavy industry parts of Fuji, Kawasaki and Mitsubishi, will make the wings and fuselage wing box for the 7E7. This is the heart of any plane, and the fact that Boeing has decided to outsource it to the Japanese is highly significant.

Boeing has always resisted Japanese requests to get their hands on important aircraft-making technology in return for Japan's airlines buying from Boeing. But to win a big launch order for the 7E7 and get financial help, it has had to let the Japanese become key suppliers. All this makes for a tangled web of claim and counter-claim for the WTO to get to grips with, even before it affects other trade issues.

The long-running row over subsidies to Airbus and Boeing has gone to the World Trade Organisation.

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