Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Odds and Ends: A350 launch aid; strike at Bombardier biz jets; Embraer demand off; EADS-BAE
A350 Launch Aid: The US Trade Rep says it has the documents outlining $4.5bn in launch aid for the Airbus A350, according to a Reuters story. Predictably, Boeing and the USTR have gone in to overdrive. The A350 was excluded by the WTO from the long-running trade dispute because it wasn’t included in the original complaint filed in 2004–which is kind of obvious since the program didn’t surface until 2006. But Airbus contends that launch aid wasn’t ruled illegal in the WTO findings, just how it was implemented. Airbus contends that any launch aid for the A350 is structured in compliance with the WTO rulings of the 2004 case. The US contends launch aid itself is illegal. Whether it is or it isn’t, we don’t like launch aid or any other form of corporate welfare (see Boeing 787) and we don’t think a solvent company like Airbus (or Boeing) should be getting any.
Bombardier strike at Lear Jet unit: Machinists voted to strike at Bombardier’s Lear Jet unit. BBD hardly needs this. With cash flow demands peaking as the CSeries development enters the final stretch, and with demand for regional airliners off, this is an unneeded headache.
Embraer Demand: Wall Street analysts were pretty unhappy following the Embraer investors day last week. EMB gave no signs of willingness to cut production next year. There are 100 slots and only about 75 orders, with few in sight. Backlog is shrinking. EMB is hoping to land big orders from either Delta Air Lines or American Airlines for the E-Jet, but we’re not aware of any Delta campaign (and in any event, the airline favored the CSeries in the aborted campaign of a year ago). American is in such disarray there is no telling when, or if, it will pursue an order.
EADS-BAE: Bernstein Research doesn’t think this merger should happen. The excerpt from a note issued today:
We believe that it would be best for both companies if this proposed merger does not happen. But, we see the merger as worse for EADS than for BAE. Both companies describe scale as an advantage (e.g. better leverage of R&D), but we have never seen scale in itself as an advantage. Specific issues are:
– Shareholder interests. EADS shareholders typically own the stock as a play on commercial aircraft OE growth through Airbus. Increasing the scale of defense assets, with some in particularly challenging markets, is likely to take some investors out of the stock. We find BAE Systems shareholders as generally focusing on the high dividend. The combination with EADS, which does not pay a high dividend, places the current BAE Systems dividend level at risk in 2014. The disclosure of merger discussions also raises questions about the sustainability of cash flow and the divided, as we have found investors questioning why BAE would accept the EADS offer if its cash outlook were robust. BAE Systems CEO Ian King has countered this by stating (with EADS CEO Tom Enders) that this deal is “borne out of opportunity, not necessity”.
– Synergy potential. We view the potential synergies between EADS and BAE Systems as low given very little overlap between their businesses and restrictions in technology transfer from US programs. From an EADS standpoint, we expect that this combination would result in a stronger international marketing organization, provide some limited cost savings in indirect personnel and sourcing, and provide some improvement for the defense electronics portion of EADS’ Cassidian business (only about 2 billion euros in revenue). But, given the limitations in capturing these synergies and their relatively small size, we do not see them as justifying a merger of this scale. For EADS, this is particularly true, since it would pay a premium for BAE shares and be buying into some particularly difficult market exposure (e.g. US Army equipment, defense IT/services). In addition, we see disruption as inevitable in a deal of this size, as it could lead to a loss of some key personnel, changes in government relationships, and problematic integration steps (e.g. IT Systems), even though the overlap is relatively small.
Did the US file the compliant just after the 787 launch?
The US filed the complaint in 2004, which was indeed after the Dec 2003 launch of the 787 but conventional wisdom is that the move was more related to the emerging tanker competition. The A350 V1 hadn’t been announced at that point.
Corproate welfare has a much different meaning in the EU than the US, since some member “states” own part of EADS/Airbus. They only see something wrong with “launch aid” and “corproate welfare” if it is given to a competitor to the European ownership of the company.
But, I agree, Scott, launch aid on the scale that Airbus, or Boeing enjoys is just wrong.
EMB is looking to fill their production slots any way they can, even if they need to sell airplanes at a loss. Embraer does enjoy some “corproate welfare”, too, since it is still partially owned by the Brazilian Government.
Not that I am the world spelling bee champion, Scott, but you did spell Embraer two different ways in your story, above, “Embarer” and “Embraer”.
BBD needs to get their house (labor issues) in order, just as Boeing does.
Ownership does not correlate all that well with aid. Boeing is private and gets aid. GM and Chrysler were private and got aid. VW and Renault have partial government ownership but get no aid. It’s not quite as simple as you make it sound.
Actually, thysi, both GM and Chrysler are about 1/3 owned by the US Government. We didn’t really give them “aid”, we bought the companies, and still own somewhere between 30% and 35%.
Typo on Embraer. Fixed.
It would be nice to make sense out of all the claims and counterclaims regarding the WTO cases. Did you ever do an analysis Scott?
Whatever the truth, I can’t help thinking it is a bit dumb of EU governments to support OEM product line development whilst simultaneously increasing taxation on airlines.
Airlines certainly don’t need to be taxed to encourage them to take up more efficient technology – only have to look at neo/MAX/A350/787 sales for evidence of that. However, they do need profits if they are to be able to plan for the future and to secure affordable financing.
Just a reminder,
Airbus,got most of the state subsidies in the form of repayable loans, an instrument that in principle the WTO has declared legal. The WTO however found that the interest rates charged on some of the loans provided by the UK, France, Spain and Germany amounted to a subsidy, as they were not competitive with market rates.
The subsidies Boeing got according to the same WTO are totally different. Not repayable to start with.
Just to prevent we feel Airbus “got” 18 billion. Its more “borrowed”.
So, what’s the difference keesje? Airbus gets E18B in low/no interest “loans”, Boeing gets $2.8B in tax breaks and research information? Both are bad……
RLI show that you can as a government push a desired effect _and_ in the long run make a profit with launch aid.
Boeing really fears that their government might take up this nice idea and give Boeing the “cold turkey” symtoms of money gift withdrawal.
And the WTO treaty says that is fine as long as the loans are ON COMMERCIAL RATES AND TERMS, which Airbus’ launch aid was not.
Howard is correct: the WTO found the launch aid per se was OK but the terms and conditions weren’t. Why Boeing and USTR continue to insist launch aid itself was illegal is pure PR BS.
The question now remains whether A350 launch aid complies with the WTO finding; Airbus and the EU says it does.
@KC, previous to the bail-out they were private. And the US government bailed out private companies (yes, the end result was government ownership, but that was the effect, not the cause).
Unfortunately you both are incorrect. The US Government took over a private company, (read: nationalized) voided all stock in the company and cancelled all outstanding debt (i.e. bond holders of hundreds of millions in loans). The facts are that they were private and were then nationalized by the government. None of the original owners or debt holders gained anything. They lost their entire investment. The government has and is now selling their new stock in GM and Chrysler in order to get back the money it cost to nationalize them. The only “bailout” that existed was to the unions who were given large amounts of stock that they are selling at 100% profit.
Bernstein are beancounters by heart.
In my book “Synergy” is not what you get from creating redundancies.
Synergy is joining capabilities and effecting more advantage than just the plain summ.
From Wikipedia:
“Airbus is given reimbursable launch investment (RLI), called “launch aid” by the US, from European governments with the money being paid back with interest plus indefinite royalties, but only if the aircraft is a commercial success”
European governments are ready to partially absorb any failure in order to keep Airbus afloat indefinitely.
And if you disagree, feel free to log into your Wiki account and change it. It is hard to take a Wikipedia quote seriously on such a controversial and hotly debated topic.
So, exactly how much money did the EU countries loose of the A-310, A-340-500, and A-340-600 (A-345/6 sold a combined 120 airplanes) to keep Airbus afloat? The moderetly successful A-310-200/-300/MRTT/CC-150/KC-310 only sold about 250 airplanes, even though it was just a shortened, yet longer ranged version of the A-300B4. That is less than about half of the B-767-200/-200ER/-2C/KC-767/E-767/KC-46.
KC: The logic of the WTO finding against Airbus was an interesting one. They said that Airbus subsidies were necessarily “specific” (which people refer to as illegal) because Airbus would have been unable to compete against Boeing without them. Boeing was “damaged” by this competition, which it would otherwise not have to face. The implication is that incumbency is so powerful in the airliner manufacturing industry that you cannot break through unless you rig the market.
This raises a dilemma for those who oppose subsidies but also believe in competition. Of course you can argue that Airbus is now an incumbent and it doesn’t need subsidies now (nor does Boeing). You could also defend the massive subsidies to COMAC for the same reason.
So you are only happy with WP if they show (your) partisan “facts” ? ( Or did I missunderstand you quip ?)
IMHO that WP cite is absolutely factual. On average the EU-investors made quite a nice buck.
On the other hand government money handed to Boeing is never seen again.
“but only if the aircraft is a commercial success”… AFAIK that part is actually wrong.
I believe the entire original loan plus interest is to have been REPAID IN FULL at the end of the agreed term (around twenty years) whether or not the programme reached break-even.
The quote is a nice bit of spin, since it’s true that “indefinite royalties” will not apply if the programme is a commercial failure – so in a strictly grammatical sense the quote holds up… but it reads like “the money” will not need to be paid back. Sneaky.
Good question KC135TopBoom,
the A300/310 program sold just 800 something,
the A320 passed its breakeven point nearly 2 decades ago and royalties keep streaming back from at least 3000 A320s in the backlog.
the A330/340 program I’m not sure.. 1700-1800 so far and royalties still streaming in.
The A350 and A380, I think will be produced for at least another 20 years so, 300, 500 sold sofar, probably another profitable operation for the financing countries.
Naming less succesfull subtypes is decepting.
The EU said they’ll change the loans to comply with the WTO and said they expect the Us to do the same. Looking at the WTO finding on the US-Boeing support that seems highly unlikely, IMO because the scale and public-industrial complex makes the EU loans seem child play. Everyone involves knows but accepting/admitting is out of the que$tion. But that’s for another post I guess.
I thought the royalties stopped after a predetermined number of aircraft sold? I am just asking.
No, they continue to the end of production per frame sold.
IMHO _the core_ feature of RLI Boeing has to “destroy” to stay in giftland.
The WTO findings were that Boeings asserted damages were self afflicted or nonexistant. ( The real losers were the lesser
US manufacturers anyway. But their demise was imho in the same way self afflicted by way of boondogle projects )
IIRC, the original arrangement was indeed that payments were capped and that this had to be changed at some point. It’s about ensuring a balance of risk. If there’s a risk of a program going pear shape there needs to be an upside cost if the program is successful. While launch loans aren’t exactly commercial, it’s reasonable for Airbus to focus on minimizing risk rather than boosting profits.
I would like to see the total. I think Airbus has repaid to the EU more than the EU had given as loan to Airbus … It is my guess, but if anyone knows the truth …
Airbus has been open that this is the case with the royalties.
No idea if this helps:
http://trade.ec.europa.eu/doclib/docs/2010/september/tradoc_146485.pdf
From 1992 to ???? : €3.7b received, €6b returned.
I’m slightly surprised to see Embraer has such a low backlog. They entered the 100 seat segment after Fokker, Donier and BAE left and came out victoriously, dominating the segment with the E190 for more then a decade. Apparently sales didn’t keep up in recent yrs. The larger CSeries, Japanese, Chinese showing up and Embraer having to announce a NEO probably didn’t filling slots in the next few yrs. I think they were late going ahead with a NEO. Embraer is busy with the Miliairy transport but I guess they can’t affort to have the E series cash stream running iddle.. exciting times..
You misunderstood. I’m neither agreeing nor disagreeing with the Wikipedia quote itself, just doubting the wisdom of using this source to add clarity on such a debated and divisive topic. You realize what you read on Wikipedia for a topic such as this could easily be written by the PR branch of the companies involved, let alone their pundits.
As for calling me partisan; I have never commented once on this site (or elsewhere) regarding my opinion of the WTO’s rulings or my view on legal and illegal subsidies. It is highly ironic that you, of all people, would call me partisan, given your demonstrated polarity on this site.
OK,
formerly one could check http://en.wikipedia.org/wiki/WikiScanner for edit sources.
( Which were quite enlightening in some cases )
Anyway WP is more of an aggregator than anything else. Info in articles should have referenced sources ( sometimes not complete). so if you feel unsure just follow the source, Luke!
On partisanship. What especially US citizens may perceive as partisan position may
actually be less partisan. ( in a majority of cases even the plane factual truth ) than what they see as factual.
That’s exactly it. If in doubt about wikipedia information, check the citations. (And if there are none, you are right to doubt that particular article.)
Indeed, I am an American. As such, you have suggested (without a stitch of evidence to point to) that I am uniquely blinded by my nationality (“especially US citizens”). In your view of the world, I am unable to be objective in understanding a Euro/American conflict and cannot fairly evaluate where the truth resides.
You, on the other hand, with a long documented history of Euro-centric and anti-American rhetoric on this site, on virtually any and all topics, are now claiming a unique ability to discern fact and truth. You would make a great cult leader! 🙂
Bias is one thing, and every honest person concedes it exists within them. Delusion is something entirely different and you just gave us a beautiful demonstration of it.
“You would make a great cult leader!”
How did you find out about my night job?
“without a stitch of evidence to point to”
well what about that snide remark about WP data .. without a point of evidence.
“that I am uniquely blinded by my nationality ”
I was careful to not make this a personal attribution.
Recently I had a discussion with an (educated,conservative,religious) person from the US who
thought that the 30years war was back to back to WWI and Hitlers ascend a day later.
Nothing worthwhile was ever invented in Europe and without the US we’d still be chipping arrowheads. That image with variations is not a rare position, hard learned by rote as the only truth possible.
Its seems opposition against the possible BAE-EADS merger is getting up to steam. Organizing their direct environment to launch a barrage of doubts, fears, risks, critique from many mouths via even more channels, aimed to create discomfort around the idea. It took some time but now we are progressing. It’s how it works these days, let others say from many directions in many ways.
Not a snide remark at all. I find WP quite useful for matters of history (the not-so controversial parts) and science. However, it is just a reality of WP’s clever design that it is not an ideal source for debated contemporary topics. For this reason, most academic institutions will still reject it as a reference on any topic. This peer-reviewed study (http://dl.acm.org/citation.cfm?doid=1316624.1316663) has some interesting data on WP accuracy, vandalism and repair. Among other things, it concludes…
Every society has its idiots…………
The fact you met an American fool says no more about America as a whole than me talking to his Euro counterpart. Neither represents their respective cultures well, nor (thankfully) their society as a whole.
I have often seen this interpretation of the WTO’s findings, but it does not match my recall or what Scott said in the article. That is that the WTO found that launch aid would be illegal if it was not offered on commercial terms. This could include interest rate, although in the current rate environment, that mayu not be the most important difference between subsidy and loan. By my understanding, It also could include the Terms and Conditions of the loans.
Based purely on a layman’s reading I took this to include the terns that made, for example, repayment only necessary if the financed product was a commercial success. I have certainly read that launch aid was offered on that basis, although that does not make it so. If it is the case, though, wouldn’t that be a much bigger deviation from the terms of commercial credit than a simply lower rate?
I’m sorry for posting a comment that is so far behind the conversation. Caught off guard by browser cache, I’m afraid.
OK, listen up, Everybody. Our Reader Comment rules are that we don’t get off into nationalistic, jingo-istic discussions. All this stuff about World Wars and Hitler and so on is way off topic and not what these forums are supposed to be about.
Shape up or I will close Comments.
Hamilton
Godwin’s Law invoked… thread dies! 😉
Too much talk about subsidies, either on one or the other side of the Atlantic!
With two near totally different cultures, it makes no sense to compare them
anyway, because what we call subsidies in E., is no more than part of their
social structure, like Un. Health care and many other “Benefits” paid by the E.
Governments, from Tax revenue we cannot even comprehend!
And, what about subsidies in the US, most people here are not even aware of,
like US Farm Subsidies, which really hurt small farmers around the world, or
subsidies to the US oil industry, while they make Billions in profit every year!
At any rate, as far as I know, in 1992, after having had a good opportunity to
recover from war damages and misguided individual attempts in several URO
countries to reestablish their Aviation Industries, they signed an agreement
with the US, which allowes Government financing of commercial aircraft by
BOTH Governments, for up to 33% of the development costs of a new com.
aircraft, but under strict commercial rules, meaning, with interest payments.