This is the seventh in a series of reports from the EADS media day and the Paris Air Show.
It is becoming increasingly clear that Airbus is almost certain to tap launch aid from its member states (France, Germany, Britain and a miffed Spain) of $4bn-$5bn for launch aid for the A350.
The prospect has already got Boeing criticizing the idea as “illegal,” a recurring theme from the effort that began in 2004 to cast all launch aid received since 1992 as illegal under rules of the World Trade Organization. The US renounced the 1992 GATT agreement and filed a complaint against Airbus with the WTO; the European Union retaliated by filing a complaint with the WTO over “illegal subsidies” Boeing received via NASA, the Department of Defense and various tax breaks.
Regular readers of this column know that we’ve long felt both complaints to be pish-posh (a substantially toned down version of what we really think). The 1992 GATT agreement was clear and until renounced permitted launch aid to Airbus and certain flow-through benefits to Boeing from DOD and NASA. Airbus and Boeing each get tax breaks (which we oppose in any event as corporate welfare). In the end, we believe both sides will likely be found “guilty” of pushing the envelopes too far and in the end, no penalties will be imposed.
A WTO decision on the Boeing complaint is expected as early as next month. The Airbus complaint decision may follow by about six months.
This is all about politics on the US side to give Boeing and Members of Congress talking points in the KC-X program, which in 2004 was at one of its peaks when the US filed its complaint. Boeing partisans have been using this complaint and the as-yet unproved allegations against Airbus ever since to argue against awarding the KC-X contract to the Airbus-based KC-30 advanced by Northrop.
The complaint also served to put the squeeze on Airbus at a time when it was immersed in the costly A380 development and Airbus had to figure out how to respond to the Boeing 787. The A380 delays were costing Airbus billions of dollars in additional production funding and billions more in deferred cash flow and profits (such as the latter might have been projected at the time). If billions in launch aid could be cut off, development of the A350 would be slowed.
Both tactics were brilliant strategy, with the additional note that Boeing actually convinced itself the launch aid has been illegal. We think the basics were legal under the 1992 agreement and, more relevant to this column, we think the A350 is the last Airbus airplane to qualify. This airplane was announced before the US renounced the 1992 GATT agreement.
Having said that, we also believe it’s time for Airbus to move on.
At the EADS media day, EADS CEO Louis Gallois and Airbus CEO Tom Enders defended the prospect of launch aid.These themes were repeated at the Air Show during sessions we skipped because we had heard this all just days before.
We talked to both during breaks at the media day. They carried the same message: the 787 is “the most subsidized airplane ever” (a point with which we agree on the basics if not the “ever,” considering foreign government subsidies of the 787’s industrial partners), so launch aid for the A350 is not only acceptable but “levels the playing field.”
Furthermore, Gallois said there is no shame in getting the launch aid. He and Enders point out that Airbus has repaid launch aid received in the past and will repay launch aid for the A350. Finally, given the capital current market crunch, Airbus needs to turn to the member states for funding.
It is this last point that most resonates with us vis-a-vis the Boeing complaints. For all the flow-through money from DOD and NASA, and for all the subsidies by foreign governments to the 787 industrial partners, The Boeing Co. still has to raise its own capital in the commercial markets, current credit squeeze notwithstanding.
Airbus can complain all it wants about foreign subsidies of the 787 industrial partners, but it did not include any of these in its complaint to the WTO. Airbus most particularly pointed to the Japanese government support of the so-called Japanese Heavies working on the 787 program. At the start, this figure was pegged at $1.5bn. (Who knows where it is today following two years of delays.) We’ve never seen a figure attached to the Italian subsidies to Alenia.
We think Airbus has a PR point, but since it did not include the facts in its WTO case, we also believe Airbus has largely forfeited its credibility to make this point.
We also believe that Boeing’s financial model in off-loading the up-front financial risk for the 787 was a prudent fiscal ploy. The industrial partners don’t get paid until the airplane is certified, so they have to absorb their share of the delay-induced costs. Certainly Boeing hasn’t gotten off entirely–it’s added billions of its own dollars to funding the delay costs. But the up-front cash required has been billions less than otherwise.
Airbus, which has a different production model in place, is moving toward the 787 model for the A350. But having seen the 787 problems, Airbus believes it can avoid them. For one, the company won’t use Alenia, an official told us at the Airbus Innovation Days we attended in May in Hamburg. For another, Airbus will provide more oversight than Boeing did on the 787 program, much to its regret (and admission that it screwed up on this).
Boeing has to rely on the commercial markets while benefitting from the industrial partnership subsidies. Airbus should do the same.