WTO penalties on the tanker? Let’s talk about this

For all the spin back-and-forth Monday (Jan. 31) on the final, but still confidential, ruling on illegal subsidies to Boeing, little was said about the long-running (and overly-politicized) effort by Boeing and its supporters to have Congress force the USAF to take into consideration the previous WTO ruling on illegal Airbus subsidies for the KC-X competition.

Before we start our discussion today, let’s remind readers of our long-standing position that the USAF can’t do so for a variety of practical reasons and one major one: countries can only do so after the WTO authorizes sanctions, and unless the USAF postpones a decision on the tanker contract (or, more likely, screws it up yet again), the award date will come years before any WTO authorization is granted. We need not recount all our reasons nor the process; we’ve done this many times and a search of our Archives will yield postings from recent times on this.

Having stated this disclaimer, one of our reasons for opposing the effort by Boeing and its supporters was that the final Boeing decision had not yet been issued.

The decision is done, even if it is yet confidential for a few more months pending translation. However, with a final decision, the US Trade Representative could share a definitive ruling with the USAF for calculation.

Again, setting aside all the objections, here’s the interesting part that nobody has yet focused on, including Boeing (and this is really inexplicable):

  1. Alleged subsidies for the Boeing 767, on which Boeing’s KC-767 is based, were not part of the EU’s complaint against Boeing and therefore there is no valuation to assess against the Boeing tanker;
  2. Airbus claims the true subsidy valuation for the A330-200, on which the EADS KC-45 is based, is $54m, not the $5bn claimed by Boeing and its supporters. Just as the absence of hammering home Point #1 is inexplicable, so is Airbus hammering home Point #2.

For all the coverage we’ve given the subsidy issue on tankers, we don’t remember Boeing or its supporters discussing Point #1. We do now recall being briefed previously by Airbus on Point #2 but in the absence of repetitive messaging by Airbus, we forgot about it while Boeing has been extremely effective in touting the $5bn figure. But this figure is not in the Airbus WTO report.

There have been, through December 2010, 1,104 A330s orders. If $54m in illegal subsidies is all that is identified in the Airbus WTO report, this amounts to a mere $48,913 per airplane. If true, let USAF figure this in–who cares?

And Boeing gets $0.00 figured in because the alleged illegal subsidies for the 767 predate the period covered by the WTO-Boeing case.

The underlying questions are: Why hasn’t Boeing touted the 767’s status and why hasn’t Airbus and EADS (1) undertaken an aggressive campaign to set the record straight (as they see it) and (2) if all we’re talking about here is $48,913 per airplane, concede the assessment and move on.

Once more, this underscores the entire silliness of the WTO complaints with respect to the tanker issue.

And, of course, our readers know well that we think the WTO itself is meaningless; it has no enforcement powers and any sanctions ultimately authorized don’t have to be placed on the offending products or industrial sector–they may be placed on entirely unrelated industries. And this, more than anything else, is why we have disdain for the World Trade Organization.

29 comments on “WTO penalties on the tanker? Let’s talk about this

  1. A Penny or a Pound :
    for working this into an alleged moral failure doesn’t make a difference.
    Not to the people that can be made to care.

    For the same group Boeing is a cornered by fanged communists innocent ;-)

    This is not open to reeducation just like a bunch of other
    historic “fact” that never was true.

  2. … AS I’ve previously posted many times, not only is the above a true compilation of the WTO subsidy game, but lest we forget, Congresscritters made it a no -no to consider subsidy issues in military contracts, and the GATT92/WTO rules also forbid consideration of subsidy issues for military. Granted, it was not clear about ‘ conversion” of civilian LCA to military use, even though then and now several versions on both sides have been so convedrted, 707,767, etc.

    And buried deep in my prior posts on this and realated issues is the old CVD ( Countervailing Duty Petition) that Boeing stifled in 2001-2002. What few knew at that time was that commerce dept was quietly waiting for someone qualified, such as employees to file against Airbus. Duties on the order of 12 to 15 percent on A-300 series were pretty well agreed on . . .

    But Boeing didn’t just shot itself in the foot by sandbagging the CVD, they used the nuclear option with the help of Rudy de leon, Mike sears, Darleen DBeen therryun, and a host of others.

    Been there, got the t-shirt

  3. Leehamnet, Is there a specific reason you “assume” the $54m number rather than the $5bn – something you know that you can share with us?

    • $54m is what Airbus says is in the WTO-Airbus report. Boeing says its $5bn but this figure isn’t there. It’s all a big “load,” in our view, but as we pointed out in the article, why hasn’t Airbus taken an aggressive counter-campaign and if that’s all it is, why not just concede the point. Our cynicism didn’t seem to come through sufficiently.

  4. I don’t believe WTO’s judgment against EU/Airbus allows the US to take any countervailing action. It’s worth taking a look at the summary conclusions alongside an explanation of the terms used by the WTO.

    WTO terms are very precise. They don’t use the word “illegal”, but they did find one “prohibited” subsidy for the A380 (because it was tied to export performance). A slew of other subsidies were “specific” (Airbus got an unfair advantage) and “actionable” (the subsidy needs to be removed), to the extent that they harm the interest of the United States. In this context, the subsidies constituted “serious prejudice” which is actually the lesser harm. The plaintiff is forbidden from taking countervailing action unless the subsidies cause a more serious “injury”. The WTO explicitly rejected this claim in section 8.4 of the document I linked.

  5. This is again a very good analysis.
    I think tha the answer to Point #1 is certainly linked with who is making the subcomponent of the 767 (Wings and fuselage).
    Airbus is not using this arguement for the same reason as for the 787 and Boeing can’t go public in admitting that the US content for the 767 is minimal wrt airframe

  6. I have a couple of questions:

    Boeing have previously stated that if they lose the tanker deal they will be exiting out of the tanker business (I think that is correct). If so, how true would that be and how much would that affect Boeing in the future in terms of revenues, etc.

    Also, why does EADS want the contract so bad (why does Boeing for that matter)?

    Boeing does have other K767 tankers to deliver and there will be more tanker contract competition in the future as well.

    • The KC-X contract has a value of $35bn through 2027 (exclusive of maintenance, etc.), or simplistically $2.7bn a year from 2012 (there actually will be ebbs and flows, but for our purposes, let’s use a straight-line). This is total revenue; the net to Boeing depends on the margin priced into the bid but let’s assume a net margin of 10%, or $270m a year. This, however, doesn’t actually account for the payouts to suppliers (we don’t believe it does, anyway), so the net-net to Boeing could be far less, per year.

      If Boeing loses the contract, these are revenues and earnings not received out of annual revenues in 2010 of $64.3bn and net earnings of $5bn (4.2% and 5.4% respectively). It’s certainly not chump change but it’s not make-or-break money, either.

      As for EADS, it’s a huge, long-term contract for EADS North America and its ambition to build $10bn/yr is DOD business (currently at about $1.1bn). It also provides Airbus with a US assembly site (which helps on the Euro-dollar issue) with the future potential to shift more airliner production to America (and create more jobs in the process).

      Boeing has two or three more tankers to deliver to Italy.

      The USAF plans a KC-Y and KC-Z competition in the future. KC-Y would be replacing the remaining KC-135s and KC-Z to replace the KC-10s. At least that’s the current plan.

      • Thanks very much for the reply!

        Ostensibly, directly, this seems like a “big deal” for EADS/Airbus more so than it does for Boeing.

        That being said, I believe it will “hurt” Boeing not just in terms of future revenues (no matter how small they would be), but also as you mentioned, it “hurts” Boeing indirectly as it gives EADS/Airbus much more potential opportunities. I see why EADS/Airbus is interested and why Boeing is concerned.

        While I’m not longer a shareholder in Boeing, if I was a current shareholder in Boeing, I would like to see Boeing “pull out all the stops” to get the contract for the various aforementioned reasons.

        Sometimes a “victory” is by preventing one’s opponent from advancing.

        I do understand Boeing has its hands full and can divert resources to other uses/projects, but I believe Airbus/EADS is basically in the same situation-yet they are “gung-ho” about getting the contract. Something has to be up…IMHO of course.

        Given how much of a fiasco the KC-X has been, I shutter to think what comes of a potential KC-Y and KC-Z competition.

        Regards…

    • About this statment that Boeing will be “out of the tanker business” if they don’t win this competition: If the KC-10 was designed and built (last one delivered in 1987) by McDonnell Douglas, the last KC-135 was delivered in 1965, and the KC-767 was first developed in, as far as I can tell, 2003, then Boeing itself had actually been out of the tanker business for 32 years when it “merged” with MD. MD itself had a gap of at least 15 years between the last delivery of the KC-10 and the developement of the “5th generation fly-by-wire” boom (i.e. a 5th generation boom that has 1st generation fly-by-wire technology)for the 767.

      It seems like Boeing had already been out of the flying tanker business.

      A question: IF the original B-29 boom was the first generation, the KC-135 the second and the KC-10 the third, what is the 4th generation boom?
      Or do I have the first 3 generations wrong?
      KC-135TopBoom!?)

  7. Jacobin777 :
    Thanks very much for the reply!
    Ostensibly, directly, this seems like a “big…..
    While I’m not longer a shareholder in Boeing, if I was a current shareholder in Boeing, I would like to see Boeing “pull out all the stops” to get the contract for the various aforementioned reasons…

    Be careful what you ask for ? The last time boeing pulled out all the stops, they found out the stops were there to keep the ‘ boat’ from sinking in the judicial sea !

    Other than a VERY sharp pencil- there is not much more they can do. They have burned so many bridges, and messed up credibility so much, that even when they are honest and ethical ( as proven by annual signatures of all grunts – or else – on a piece of paper saying so ) most remain cynical .

    Lets just hope they do NOT find another way to snatch defeat from the jaws of victory

    • One would hope Boeing has learned. Also, this is a new Boeing management so one can’t really blame the current management for the “sins” of the previous management.

      Though my postings are almost always “Pro-Boeing”, if Boeing can direct resources to more profitable ventures aside from the KC-X then I’m all up for it.

  8. Does either company truely have the resources….engineering or production to pull this contract off in timeframe USAF wants it in? There will be much scrunity on this program even after an award. Which ever company wins this contest may struggle in their other airplane programs. Be careful what u wish for. Any thoughts?

    • From said article, “The Boeing briefing document states that the Air Force altered the criteria to assume the larger EADS plane would use bases not in the original IFARA model because it was too big for those facilities.” If this statement is indeed true, then the Air Force and this competition is in big trouble.

      If they decide to drop IFARA though, how long do you think it will take for EADS to launch, and win, a protest?

      I don’t know much about COngressman Levin, but if he has that much clout, then his statement about the USAF not having yet convinced him that the mixup did not give EADS an advantage is ominous. As far as I understantd though, his only protest free option would be to force cancellation of the competition and cause round 4(?) in this saga.

      As far as I am concerned, the concerns of and statements from Boeing, the “pro-Boeing lawmakers” and the “Boeing supporters” is merely partisan hot air. Which unfortunately might be taken seriously. To me that quote I have included is the most important part of this article.

      • See, the reasoning for why the AF seems to have introduced diffentiated base access is from the honorable Loren Thompson.

        I would wait for the AF to come out with the reasoning for the probably true deviation from process.
        Mr. Thompsons interpretation imho falls on its face : denying bases to the A330
        would be a loss not a gain.
        But not _having to use_ certain bases due to better performance requiring less staging forex would be a major gain for the A330.

      • I think the critical point is when they altered the IFARA rquirements. If it was before the current round request for bids was sent out, the DoD should be in the clear.

        Boeing obviously want to spin any change like this as deliberate bias in favor of their opponents. I imagine the DoD would argue that the revised model was more realistic. If larger planes can operate effectively from bases that are a bit further from the front line, then that’s a flexibility that’s worth having.

      • If I recall corectly, the issue was to do with runway length. Fully laden, the A330 requries a longer runway than the B767 fully laden. But as the 767 carries less than the A330,the A330 requires a shorter runway than the 767 for the same weight of goods. In practice, if the A330 has to use those bases it can do so at no detriment on runway length, compared with the 767.

    • wasn’t this one of the complaints made to the GAO by Boeing last time around?. is this truly a new complaint or did some journalist dig up some old data?

  9. Best and Final will probably be price only and the gap between bidders should be more than 1%, however we shall see? Stand-by for Protests, battle stations and may the Wind be with you!

    • I disagree partly. Yes there is a price componant, but there is a reasoning behind the prices offered.

      If you go back to the intention of this exercise. Replacing the KC-135. The USAF being the client in this bid, has set her requirement. It contains, if I have understood it correctly, a minimal requirement bill that has to be met for entrance in to the bid. If passed, both bids will be entered in the IFARA model. This is a model to check the performance of each bidder in perspective of the clients requirement. When these results are available each bidder can adjust its price according to its IFARA score. And then the USAF chooses a bidder that has the best combination of IFARA and price.

      If correctly assumed on my behave, this sounds like a economically most valuable bid bidding process(I don’t know the correct English term for this). Basically a less performing but cheaper product can compete against a more expensive but more capable product, because the performance score cancels the expensiveness out or the other way around. This is a very transparent bidding process if the requirements are formulated according SMART methods.

      What I suspect is that Boeing confirmed that for this bid, Airbus has the better product according to the IFARA requirements(I believe it was in the press not long after both parties got both IFARA scores). Boeing probably realized at that point that they have to go really low with their price, to compete with the IFARA performance advantage of Airbus. Airbus has to guess how low Boeing will go and adjust it price to its to just win it by a small margin(More than the 1% but it would be useless to go way to low and miss profit). Nothing out of the ordinary for biddings, this still would be the case if the IFARA wouldn’t have been known by both parties but than without the knowledge of how good your opponent is. So the tax payers benefit from this mishap, as prices are lowered further because of the availability of the IFARA scores.

      As I assume there is a significant difference in IFARA scores(advantage for Airbus), the argument of airbus receiving subsidies become less valid as it turns out that the performance weighs more in the final decision. So Boeing is losing because it is offering a inferior product according to the USAF requirement.Un less offcourse it can go really low on the price.

      So the remaining question is; Are the requirement of the USAF reflect what they want? If so they apparently wanted what Airbus has to offer.

  10. Meanwhile:

    Chief Executive Tom Enders said on Saturday the European planemaker’s parent company EADS would not improve its bid to build a fleet of U.S. Air Force aerial refueling planes. “It is not our style to make hectic corrections at the last minute,” Enders told Reuters in an interview on the sidelines of a security conference in Munich. Enders said EADS had made a very good offer for the contract, that also made economic sense, whereas competitor Boeing Co (BA.N) had announced “last changes” to its bid.

    http://www.reuters.com/article/2011/02/05/us-airbus-us-interview-idUSTRE7141O320110205

  11. And while we are waiting for the outcome of this competition, we can always listen to J. S. Bach.

    Lewis Thomas, the noted biologist and physician, on how the people of Earth should communicate with other civilizations in the universe: “I would vote for Bach, all of Bach, streamed out into space, over and over again. We would be bragging, of course, but it is surely excusable to put the best possible face on at the beginning of such an acquaintance. We can tell the harder truths later.

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