Launch aid for the A350

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.

14 Comments on “Launch aid for the A350

  1. The facts don’t matter here.

    Boeing was far too late to the party in protesting Airbus subsidies. For more than a decade they stood mute, instead preferring to uphold Boeing’s global free trade image.

    Then the price got to high. But by then a raft of free trade agreements had been inked, and the United States made the tragic decision to trade soverignty for a massive trade deficit, and submit to the WTO.

    Anf the WTO is never, NEVER, going to rule against Airbus. Sure what Airbus does in more blatant, but there are matters of degree involved .By allowing “foreign partners” to recieve government subsidies, Boeing waived the moral high ground from which to complain. They can’t slap at Airbus with dirty hands.

  2. The interesting question is whether Boeing actually wants the US to impose sanctions on Airbus on a guilty verdict. The retaliation will just make Boeing aircraft more expensive in Europe. Great!

    Apart from helping their official case on the replacement tanker and a possible slowing of development of the A350, I’m assuming the main aim of renouncing the 1992 agreement is to renegotiate on more favourable terms.

    On Japanese subsidies, it’s worth remembering that the EU/Airbus isn’t in dispute with Japan and its companies. Their dispute is with the US/Boeing, who initiated this particular spat. Their only possible complaint against Boeing in this context, is over where Boeing decides to do its shopping.

    Having said that, subsidies to contractors are absolutely relevant to the market distortion issue. Quite simply, these subsidies make the plane cheaper. I’m guessing any new agreement will have to take contractor subsidies into account.

  3. Remember that sanctions do not have to be imposed on the offending party or the industry in which the party is a part. Under WTO rules, sanctions may be imposed on any industry of the country involved.

    So, for example, if Airbus were found guilty, French wines could be the target of sanctions. If Boeing were found guilty, Washington State apples (a big industry here, with exports) could be sanctioned. It doesn’t make sense to us, but dem’s da rules.

    Bear in mind, too, that even if Boeing and Airbus were both found guilty, no sanctions at all might be imposed. This was the case in a similar WTO dispute between Brazil (Embraer) and Canada (Bombardier). Both sides were found guilty of improperly supporting their airplanes yet neither side imposed any sanctions.

    The engine maker-suppliers to Airbus and Boeing (GE, PW and RR) have been none too happy about this whole case because in their own ways they also benefit from Defense (or in the case of RR, Defence) R&D and GE and PW have in the past relied on NASA work as well. Tax breaks abound for all parties.

    We think that if Airbus is found guilty, this will be used more to score political points in the tanker case than to expect the US to push for sanctions–because if this is done and Boeing is subsequently found guilty, you can bet the EU will retaliate in kind.

  4. All righty then! Conspiracy theory time here. Could this whole recompete delay be part of a plan to wait until the WTO rules on the U.S. vs EU
    case (assuming the EU is found “guilty”) and then choose the Boeing offer before the WTO rules on the second case. The U.S. gets can then have their “objective” competition, choose Boeing and not give Aurbus much room to complain.

    Just a thought.

  5. Sorry about that last sentence.

    Should read, ” The U.S. can then have their….”

  6. There is an exclusive piece in the Financial Times
    of today.
    The seven partner nations of Airbus A400M agreed over the weekend 20.-21.06.2009 during a meeting of defense officials to a further delay of at least one month. During this time, a common position among partner nations will be sought, regarding the future of the project.
    Development of the A400M is now more than 3 years behind schedule.
    There will be a deal about costs. Presumably EADS must pay the budget raise of 20-25% alone, but the partner nations will uphold their A400M contracts with EADS, despite their right to leave them as the expiration date was April 1st 2009.
    The original contracts for the A400M were signed in 2003 and envisaged the delivery of 180 aircraft to seven partner nations starting in 2009. But the €20bn project has been hamstrung by technical problems.

  7. Rene:
    Can you clarify, please? You say that EADS must agree to pay 20-25% of the “budget raise”? Does this refer to the €20bn? If so, that would almost wipe out half of their cash position.

  8. @Aurora:

    Good question.
    The answer is no, €20bn was the total volume of all seven A400M defense contracts (development and production of 180 aircrafts).
    Development costs are much lower, only a part of it.
    Nontheless, EADS budget overruns are now at €2.3bn, and they might increase to €2.5bn until first flight.
    Someone has to pay for this, and as it looks now that someone will be EADS.

  9. Sorry for neglecting: If the budget overruns are at €2.3bn now, and this corresponds to 25% of the total development budget, we can conclude that the original devlopment budget was around €10bn.
    But this is only a conclusion; most probabely there doesn’t exist such a sharp division between development and production costs and the amount above already includes a lot of expenses (tooling, molds and so on) which will be essential later on during production.

    • You are correct: military programs are categorically exempt from WTO actions.

      While on the subject, we checked with Airbus on the entire “timeline” and grandfathering theory after Boeing suggested to us that our recollection of the A350 timeline was incorrect.

      Airbus says the entire timeline argument is irrelevant. It says that if it seeks launch aid for the A350, it will comply with all international rules, including those of the WTO. Not especially informative since the response wasn’t detailed as to what rules apply, etc., but that was the response. We would have posted this sooner but the 787 news this week diverted our attention.

  10. I am always confuse with Airbus argument that Boeing recieve R&D subsidies from NASA & other US government agency… but doesn’t EADS have the same kind of R&D subsidies? Afterall, most of these subsidies for Boeing actually goes to Boeing Military division, which is a seperate identity within Boeing group… so Boeing Commercial division often need to redo a lot of the same research due to government security restrictions… So if Boeing is benefiting from the R&D subsidies… shouldn’t Airbus be accountable for subsidies given to EADS… afterall EADS own Airbus… So I really don’t understand the argument… does USA spend that much more money on R&D when compare to the European Union?

  11. You are correct: Airbus did receive R&D support and it was found illegal, which is why Airbus believes Boeing’s NASA and DOD R&D support will be found illegal. Airbus says the amount in its case was $200m and the amount in Boeing’s case is $14bn. We shall see.

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