Boeing goes to Congress on KC-X

Update, May 13:

DOD refuses to give award date

Senators blast award process

In case anybody wonders, the effort to force DOD to add $5bn (the amount found Airbus illegally benefited on the A330-200) to the KC-X contract price equals $28m per airplane.

11:00 AM PDT: We just received this statement from EADS North America:

“The Boeing Bill is one more attempt to avoid competing on the merits of the tanker.  Unlike EADS North America, Boeing doesn’t have a tanker that meets requirements, it faces tremendous technical risk in producing one and is therefore determined to take away the warfighter’s right to choose.  We believe our fighting men and women deserve the most capable system—and they deserve the right to select it.”

4:00 PM: More from the “So’s your old man” department, this one also from EADS North America:

1. All reimbursable launch investment loans for A330-200 aircraft development have been repaid – with interest.  In fact, since 1992 Airbus and EADS has averaged repaying $1.40 for every dollar received in reimbursable launch investment (this figure covers more than the A330-200).  Boeing has received over $16 billion in federal grants, $6 billion in state and local subsidies and over $2 billion in anti-competitive export subsidies already declared to be illegal by the WTO ($1 billion of which came after the WTO ruling) (Editor’s note: this refethis relates to a previous WTO ruling that Boeing illegally benefited from Foreign Sales Corporation [FSC] tax breaks).  In fact Boeing is the only company that has been formally sanctioned by the WTO for illegal export subsidies—including illegal support for the 767. (Editor’s Note:  FSC and the expectation that the 767 will also be a part of the pending WTO ruling against Boeing, due next month.)  No Boeing subsidies have been repaid and all should be considered in the context of Boeing bill introduced today.

2. Boeing also receives significant subsidies from foreign governments.  In fact, Boeing has moved the design and manufacturing of major components overseas to secure foreign government subsidies.  To date, Boeing has taken at least $1.5 billion from Japan and more than $500 million from Italy to put manufacturing jobs in those countries.

3. A very important issue is that this bill would put the US in the position of violating the WTO agreement.  It is illegal under the terms of the WTO treaty to act punitively before the WTO process is completed (it’s called “self help” in the treaty).  This is clearly a case of prematurely using WTO findings to justify punitive actions.  Article 23 of the Treaty forbids such action and the US could be found to be a treaty violator and subject to sanctions-all for the benefit of Boeing.

Original Post:

Boeing has gone to its supporters in Congress to introduce a bill to force the Pentagon to take into consideration the adverse WTO ruling in the Airbus subsidy case, according to this Reuters report.

Read the report carefully: there are several key points in it, among them:

US Sen. Patty Murray (D-Boeing/WA) has in recent times carefully inserted the word “foreign” every time she talks about an company receiving illegal subsidies. This is undoubtedly her out when Boeing is found guilty by the WTO of also receiving illegal subsidies. The Boeing decision is due next month.

Reuters writes, “Pentagon officials say they cannot consider the ruling in the competition because there is a countersuit against the United States by the European Union, and neither matter will be completely resolved before the contract is awarded.” This refers to the inevitable appeals that will be forthcoming by both sides.

Reuters also writes about another key point: “Any move by Washington to penalize one side before all appeals have run their course could be seen as an illegal tariff under the terms of membership in the world trade body, said one official closely following the issue.”

Boeing CEO Jim McNerney sent the following message to employees about the subsididy issue. Note the Boeing talking point in anticipation of an adverse ruling by the WTO:

What the ruling on Airbus subsidies means to us

The World Trade Organization (WTO) recently issued its final ruling in the U.S. Trade Representative’s complaint against European government subsidies to Airbus. While the details of the ruling remain confidential pending translation into multiple languages, members of Congress and other officials who were briefed on the results have made it clear in public comments that the final ruling — despite assertions to the contrary by Airbus supporters — is a broad and sweeping victory for the U.S. trade team and a welcome judgment for the principles of fair competition.

Boeing strongly supported the U.S. government taking this case to the world’s ruling body on trade issues. We have always believed that without many different forms of European government support, Airbus would not have developed a full family of commercial airplanes as quickly as it did, nor would it so rapidly have gained more than half of the global market. According to news accounts of the final ruling, the illegal subsidies powering Airbus’ rise caused economic harm (“adverse effects” in trade terms) that cost the U.S. billions in lost export sales. The practical impact of those lost sales was the destruction of tens of thousands of high-quality U.S. aerospace jobs.

The fact is that European governments paid 100 percent of the development costs for early Airbus products. Today, Airbus still receives from its four sponsor governments one-third of the upfront funding — known as launch aid — needed to start new airplane programs. This is despite European governments and Airbus having agreed in the early 1990s to progressively reduce government support and to begin funding new products like most companies do — either through profits or commercial loans with market-based interest rates and repayment terms.

To date, launch aid has always come in the form of low or no-interest loans, with Airbus making no repayments during the many years it takes to develop a new airplane. Repayments are instead tied to airplane sales.  That means loans are fully repaid only if the airplane is a commercial success. Industry experts predict that the A380’s $4 billion in launch aid will never be repaid due to slow sales. But even if the money is repaid, the non-commercial nature of the launch aid loans qualifies them as subsidies that violate trade rules.

While ending launch aid has always been our primary objective, the U.S. complaint documented many forms of government aid to Airbus that media reports indicate the WTO found in violation of trade rules. They include:

  • $15 billion of launch aid funding, including more than $5 billion for the A330/A340 and more than $4 billion for the A380
  • $2 billion for infrastructure (land and buildings)
  • Well over $1 billion in research-and-development grants

U.S. officials estimated these illegal subsidies saved Airbus approximately $200 billion compared to the interest and other costs they would have incurred by borrowing those funds on commercial terms. (That’s nearly six years of revenue from Boeing Commercial Airplanes!)

These subsidies provide Airbus a substantial competitive advantage. They lower the company’s risk because it can walk away from the government debt associated with a failed program. That safety net enables Airbus to take chances it would not otherwise take, shortens product development cycles, and protects the company from the consequences of poor decisions. Government supports also lower the company’s cost of capital — a distinct and unique advantage in a capital-intensive industry like ours.

Perhaps most important, government subsidies give Airbus a price advantage by lowering overall program costs — and the company’s aggressive pricing over the years helped fuel its market-share gains.

We believe this subsidized-price advantage tilts the U.S. Air Force’s refueling tanker competition in favor of Airbus’ parent, EADS. That’s why we have argued that Airbus subsidies should be accounted for in evaluating any proposals for A330-based tankers.  After all, we now know from reports covering the ruling that the A330/A340 family benefitted from $5 billion in illegal launch aid. And Airbus plans to take billions more to develop the A330’s replacement, the A350. Despite our repeated requests and the U.S. government’s reported major win on the trade case, the Air Force does not intend to account for Airbus subsidies in the tanker competition.

So, where do we go from here?

European trade officials undoubtedly will appeal the recent ruling. However, the appeals process has a set timeline that will conclude before this year is out. It’s incumbent upon WTO members themselves to comply with the organization’s rulings in order to preserve the integrity of the global trading system. Should Airbus and its sponsor governments choose not to comply with the ruling following the appeals process, the United States will have the option of implementing proportional trade sanctions.

While these steps in the process continue, we will stay intensely focused on providing low-cost, innovative solutions for our airline and government customers. And we will continue to support members of Congress and the U.S. Trade Representative as they press the case for a level playing field in both commercial and military markets.

One final note: In response to the U.S. case, European officials filed a counter complaint that alleges Boeing has also received illegal subsidies over the years. The suit claims, for instance, that NASA and Defense Department R&D spending are illegal subsidies to Boeing. U.S. trade officials have mounted a vigorous defense, pointing out, for instance, that NASA R&D spending is not product-specific (an important test under trade rules), and that NASA-funded research has been shared with Airbus and others to benefit the entire industry. In addition, every alleged subsidy Boeing has received — government contracts for R&D, state and local tax breaks and infrastructure support — are all items Airbus also has received (and on a greater scale) in addition to its billions in illegal launch aid. The panel hearing the European complaint has indicated it hopes to issue a confidential interim decision to the parties this summer.

Thanks,

Jim

18 Comments on “Boeing goes to Congress on KC-X

  1. It figures- by this action, with Boeing support, once again BA stands a good chance to snatch defeat from the jaws of victory !

    At the minimum, it would delay the award, and set the staqe for an immediate protest by EADS should BA win or BA should EADS win.

    The rfp was quite clear regarding WTO issues.

    IMO – far better for BA to simply file an equivalent of a judicial notice to the Govt contracting agency requesting an investigation into the effects of excessive launch aid on the A3xx series and the relationship to any pricing on the tanker. This BEFORE any contract award or bid due date.

    If this keeps up- the most liklely solution would be that which I and others suggested a long time ago. A split award to handle both sizes of tankers needed.

    After all, if we can afford to bail out Greece and a few EU countries, we might as well get some return for our monies . !!!!!

    • “After all, if we can afford to bail out Greece and a few EU countries, we might as well get some return for our monies . !!!!!”

      Where the heck do you get this idea from?!?

      Greece is being loaned 80 billion euro FROM EUROPEAN COUNTRIES with a 30 billion top-up loan from the IMF.

      • Uhhh tooolooose ? – The U.S belongs to IMF and thus must contribute 20 Billion or so to help correct not only Greece, but italy, spain, and etc ad nasauem !

      • Wrong! The *INTERNATIONAL* Monetary Fund is paid into by 186 member countries. The United States’ contribution is currently 16.74%

        So, even though the IMF is paying out from money already collected, AND IT’S A LOAN(!), the most you could argue is that the US is “bailing out” 4.5% of Greece’s debt – AND NO OTHER EUROPEAN COUNTRIES DEBT.

        Now compare that to the 18% that Germany alone is contributing to that loan… just ONE of the contributing European countries is loaning FOUR TIMES that which has been “loaned” by the US (when in fact the US has loaned nothing at all – it has contributed to the IMF fund and the IMF has decided to use that fund to give a loan).

  2. Why would Boeing go this route. They’re sure to at least annoy their customer.

    Are they afraid EADS could match their price for an fixed number of 330 vs 767, while the operational costs estimation model strongly favors the 767 and only the 330 will incur MILCON costs.

    Or, alternatively, are they only trying to widen their margin. Adding costs to the EADS proposal could be used to increase profit on the Boeing side. They only need to beat EADS’ price 1%.

  3. Can’t they just let it play out untill the contract award and just leave it be!!
    They should be talking up the airplane.

    I had an idea….would Boeing be willing to split the contract if EADS agreed not to build the plant in Alabama?

    I want Boeing to win the contract or at least part of it…but I got a bad feeling about it all.

  4. I fail to see how can Jim go from 18b$ in lauch aid to a 200b$ in savings.

    • 200b$ has just the right ring to it.
      see: 6 years of Boeing revenue,
      gushing stream of tears.

      So its
      don’t bother me with the facts
      I’ve got my prejudices 😉
      The targeted audience isn’t really
      excelling at arithmetic either.
      Anybody remember that “jobs created”
      analysis handed out recently?

      The factual difference here is
      Boeing has to peddle for credit
      while Airbus gets investment.

      (risksharing) investment is cheaper up front
      while it is more expensive in the long run due
      to the RLI mechanics of shared revenue.

  5. This whole thing sound like “You give your children more then we do, you spoil your children to much”, please, the US government and States all subsidize companies who are in this country and their states with tax breaks, free training, cut-rate infrastructure and just free money, get over it and move on, Do we have any adult supervision here?

  6. “…Any move by Washington to penalize one side before all appeals have run their course could be seen as an illegal tariff …”

    And then again, it might not be seen that way. Frankly, at this point I say go for it. Introduce the legislation. Let’s see which of those re-election obsessed “public servants” want to vote for airbus?

    Honestly, DOD brought this on themselves. NG gave them an opening; they should have left well enough alone.

    War without end.

  7. Has anybody read the Heinlein Novel
    “Job: A Comedy of Justice” ?

    With Alex the main character being
    the template for EADS going by past
    information and the fresh update.

  8. . . . tooo looose

    Check your math or facts . . “Greece is being loaned 80 billion euro FROM EUROPEAN COUNTRIES with a 30 billion top-up loan from the IMF ”

    its more like 300 plus billion and U.S is obligated to pay over 50 billion

    . . . Now that bailout appears to be nothing compared to the trillion dollar bailout for Europe which the IMF is funding to the tune of $320 billion. Yet no news organization even mentions that the U.S. taxpayer is on the hook for a minimum of $54 billion (17%). But because other IMF nations not honoring their commitments, the

    amount stuck to the U.S. taxpayers will now be closer to $80 billion. . . .

    http://www.standard.net/topics/opinion/2010/05/12/us-gets-stung-failed-economy-europe

    • Don, you should not mix Hollywood and reality.

      Please come back with data garnered from
      factual reporting.

    • Okay, instead of linking to some random blogger’s unsubtantiated opinion – here are facts according to slightly more reputable sources:

      http://news.bbc.co.uk/2/hi/8656649.stm

      “Eurozone members and the IMF have agreed a 110bn-euro (£95bn; $146.2bn) three-year bail-out package […] The EU will provide 80bn euros in funding and the rest will come from the International Monetary Fund (IMF).”

      http://www.imf.org/external/np/sec/memdir/members.htm

      (for the US’ 16.74% contribution of IMF funds)

      FYI I have *never* heard about any direct US involvement in any of this until your comment above.

  9. from the WSJ article on 11 may

    http://online.wsj.com/article/SB10001424052748704879704575236772278878254.html?mod=fox_australian

    By BOB DAVIS

    WASHINGTON—Within a month, the International Monetary Fund has moved from a euro-zone pariah to an essential institution whose blessing is necessary for euro-zone countries that need rescue packages. . . .

    . . . A powerful IMF role was a priority of U.S. Treasury Secretary Timothy Geithner, who lobbied his European counterparts in lengthy phone calls that IMF participation would give a European stabilization plan “credibility,” said a participant. Over the weekend, European ministers agreed to increase what was initially conceived as a €100 billion ($127 billion) contribution by the IMF to €250 billion euros, as the size of the planned European funding increased, too.

    The Europeans and the U.S. wanted to announce an overall number that was so large it would convince markets there were sufficient funds to handle any problem with European sovereign debt. In the end, the Europeans said they would chip in €500 billion and announced that the IMF would add another €250 billion. In dollars, the total was about $1 trillion. . .

    I note your article was dated 2 may

    My point re bailout is still the same
    Why should U.S taxpayers borrow money from China to support not only greece, but soon to come Italy, etc

    Ditto for the tanker . .!

    • You are going about it from the wrong side.

      Why, after US Banks have in the past knowingly
      aided Greece in substantial financial fraud is
      Mr Geithner strongly agitating for (US controlled)
      IMF imvolvement?

      Why do the (predominantly US oriented) rating agencies
      behave as they do?
      Effectively rating “trash” as AAA+++ in the past to get it
      out of country and derating (select) national credit
      standings in strategic moments to create political pressure.

      This is (undelcared) War.

    • As it is I could imagine how one can go from the
      wsj article ( which already gives more of an explanation
      than exposing the reason behind ) by assembling words
      similar to an oldstyle Ransom demand from newspaper
      snippets to the completely deranged and hyperventilating
      blurb composed by Mr. Jared F. Brown.

      Question: is this the same person:
      http://www.imdb.com/name/nm0113794/ ?

      I have to confess that my previous “hollywood” reference
      was a shot into the dark, a guess 😉

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