Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- 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
WTO vote watered down, meaningless
We’ve gotten a hold of the US House amendment that was approved in the matter of the WTO subsidy issue in the KC-X competition–which Boeing and its supporters touted as a key victory to ensure the subsidies found by the WTO to be illegal and which would be considered in the evaluation if the Senate goes along–and the final version, which as adopted is meaningless pulp.
The adopted language is far different than what was initially proposed.
Here is what Boeing supporters in the House suggested: Original Amendment.
Here is what what actually adopted: Approved Amendment.
The Original Amendment was a clear violation of the WTO rules, which provide that no complaining government can impose self-help prior to completion of the entire WTO process, including the issuance of the Final Report (which has been done in the US vs Airbus case), appeals (not done) and WTO authorization for sanctions (not done).
We are told by a source familiar with the situation that the USTR counsel even told the House that the Original Amendment violated WTO rules, hence leading to a complete rewrite of the Approved Amendment.
The Approved Amendment’s language is so vague, and without legally supported definitions in procurement processes, that the Defense Department wouldn’t be able to figure out what the House bill means; “unfair competition” is undefined; and DOD almost certainly doesn’t have the expertise to figure out any “unfair” competitive cost anyway and its influence, if any, on the EADS pricing. It took the WTO years to sort this out.
(We will note once again that all the launch aid has been repaid with interest and Airbus is now paying royalties on the airplanes. How does the USAF figure this in? Over what program life time would the launch aid be amortized? The break-even point? The current outstanding orders? The forecast of orders for the next xx years? The problems with this concept are legion.)
In other words, the Approved Amendment is meaningless. No wonder it passed the House 410-8, including EADS supporters.
Action now moves over to the Senate, where Sen. Sam Brownback (R-Boeing/KS) is offering an amendment. This is virtually identical to the Original Amendment offered in the House, and would therefore also violate WTO rules. This bill is here: Brownback Bill.
“It’s not only illegal self help in violation of part 23, it’s also totally premature, as the only enforceable WTO rulings there today or will be for some time to come are against Boeing (FSC rulings),” a lawyer familiar with WTO rules tells us. “Appeals that will follow release of DS316 (the US vs Airbus case) suspend any legal effect of the judgment.”
Although the WTO’s Final Report has been issued, the public release of the document referred to in the preceding paragraph isn’t expected until the end of this month or early July.
The WTO’s Interim Report on the EU vs. Boeing is expected to be issued at the end of this month. As with the Airbus Interim Report, it will not be a public document, it’s not to be released except to the trade representatives and lawyers on both side and it will instantly become fodder for leaks on both sides.
Boeing is already downplaying the violations it expects to be found guilty of and Airbus is already spinning that Boeing will be found more guilty than it was.
What’s next?
As noted, action moves to the Senate, where political machinations will be in full swing. If the Brownback bill gets adopted in its present form, or in any form that is different from the House Amendment, the two versions have to be reconciled.
If an Amendment on this issue is included in the Defense Appropriations act, the Act itself must pass White House scrutiny. Issues unrelated to the tanker have been included in the House version that may prompt Defense Secretary Robert Gates to urge a presidential veto of the entire bill. (The dual source engine for the F-35 fighter is included; we haven’t heard if Boeing will be successful in getting more production included for the C-17, but Gates wants this and the F-35 dual sourcing vetoed if they are, and this means vetoing the entire appropriations bill, including the KC-X amendment.)
If a KC-X provision does survive that somehow directly relates to the WTO, then EADS has recourse.
“There is always recourse,” a person familiar with the situation tells us. “But I do not believe this provision will stick, even if it is a benign reporting requirement. Ultimately, the contract decision will happen before this becomes law anyway. Also, I believe DS353 (EU vs Boeing] will be issued sooner rather than later — well before the bill would make it into law and assuming this weak reporting amendment stays in the bill.”
Only related:
How much money is going to be spent on lawyers on both sides in these WTO litigations
and where will that have been spent?
i.e. where are the WTO cases a laywer jobs programme ;-?
. . . if the Senate goes along–and the final version, which as adopted is meaningless pulp. . .
True – but why do you think that is unique or any different than the rest of the Pap and flapdoodle that is served up by both sides simply for the PR effect .?
Listing such examples would a) overload most servers, and b) be a significant diversion from this thread or subject matter.
I just don’t see the Senate adopting the House’s Amendment as it has been adopted by the House. It reads like an 8 year old wrote it. I guess that is what we can expect from the current Congress.
The revised text does seem more vague. Unfortunately, a biased reader might see this as allowing the USAF/politico’s more leeway.
Golly gee – it was written by my congresscritter – Jay Inslee. Used to be a lawyer for the Boeing legal ( attack ) defense firm.
A fair description would be a 5 watt bulb in a 100 watt fixture
Re my comment . . .”Used to be a lawyer for the Boeing legal ( attack ) defense firm.”
seems I got him confused with another legal type – altough he is a lawyer, and did work for a local firm, I cannot verify if that firm ever did work for boeing.
However, the firm I had in mind is counsel for the democrats . . and they have contributed to him ( jay ) in the past
Oh well – my bulb comment still stands – the rest is no doubt the first and only mistake I’ve made this decade . ;-PP
To avoid accidents the hoops you arrange for
jumping through need to be carefully aligned.
Boeing houselaws already seem to force Boeing
to tiptoe over possible entanglement:
http://www.flightglobal.com/articles/2010/06/07/342878/boeing-to-offer-italian-aw101-for-white-house-helicopter.html
Now is this sad or funny?
[consulting Delphic oracle…]
[transcribing prediction…]
[translating revelations from ancient Greek…]
“There will be no decision on the fate of the KC-X proposals until after 02NOV10;
the current Congress is much ado about nothing”.
of course the oracle of delphi was spaced out on excessive Co2 or some kind of gas coming up from the nether regions in addition to smoking or drinking some kind of weed.
Sort of like some recent legislators.
And it was good ole shakesphere ( francis Bacon ???) who said much ado about nothing. Bacon seems appropriate since we are dealing in pork
more appropoe IMHO are two phrases
There are more things in heaven and earth – horatio . .
And methinks thou ( congress ) doth protest a bit much.
And Mark Twain who is supposedly credited with
Lies, damm lies, and company PR
++++++ BREAKING NEWS ++++++
ILA Berlin Air Show: Today, Airbus has been unveiling a giant order by Emirates.
Most probably this is the largest single aircraft
order ever.
Emirates have ordered 32 Airbus A380 super
jumbos at once.
This order is worth US $11.5 billion (at list prices).
The number of A380 aircraft operated by
Emirates thus will climb to 90 airliners until
2017.
This order finally brings the Airbus A380 program
into net earning area. From 2015 onwards, it
will be profitable.
Uhm Evin Ormond, I think they mean that each A380 delivered from 2015 on will turn a profit. Up until now, each one delivered has been at a loss.
By 2015, they hope to have the customizing times, and hence costs, down so low, that they don’t lose on every aircraft delivered.
If I understand that correctly, the question would be, how much of a profit?
Alas, something most, if not all of us here will never know.
Your observation may be overly pessimistic.
When $/€ rate was at 1.4/1 break even was murmured to be
beyond 450/500 sales.
lets be gross and simplistic:
20b$ dev cost / 500 frames ~= 40m$/frame ( upper bound?)
200m$ per plane and a 20% dump in exchange rate ~= 40m$
increase in margin
No, Airbus predicts that the total number of firm orders in 2015 will exceed the number of aircraft required to break even for the programme as a whole.
Airbus will be making a net loss on each of the first fifty or so frames (30 already delivered). This means that from the middle of next year and onwards, Airbus should be generating an incremental profit on each new A380 they’ll deliver.
Comment:
It’s really strange. As soon as the euro weakens a
bit, everyone is starting to buy European products
like mad …
The Euro was way overvalued and the current attack
on the Euro by the greedy fixed that.
Hi Evin, the largest LCA order in history is the one made by Emirates at the Dubai Air Show in 2007.
–
http://www.bloomberg.com/apps/news?pid=20601085&sid=a10O091AiPJQ
Nov. 11 (Bloomberg) — Airbus SAS, the world’s largest manufacturer of commercial planes, won an order from Emirates for aircraft valued at as much as $31 billion, including 70 A350 airliners and 11 double-decker A380s.
Emirates, the biggest Arab airline, placed a firm order for 70 A350s and took options for 50 more, Chairman Sheikh Ahmed bin Saeed al-Maktoum said today at the Dubai Air Show. The carrier bought about $34.3 billion in aircraft today, including a purchase from Boeing Co., the No. 2 planemaker, worth about one-tenth of the Airbus order.
Uhh . . . all LCA (large commercial aircraft) are priced and sold in dollars.
Sure, but Airbus has major cost positions in Euros and accounts in Euros.
http://www.google.com/search?q=Airbus+profits+exchange+rate
http://www.ifw-members.ifw-kiel.de/publications/exchange-rate-misalignments-in-duopoly-the-case-of-airbus-and-boeing/KWP1488.pdf
( And don’t tell me the authors have been bought by Airbus 😉
Uhh ov-099 . . . “Airbus will be making a net loss on each of the first fifty or so frames (30 already delivered). ”
Must be the water in your area – or some french chef book cooking ..
For at least the last 3 decades or so, the ‘ breakeven” point for new LCA, at both boeing and Airbus has been in the hundreds – 300 or more.
Derivitives sometimes come in less.
Yet you claim that the A-380, will breakeven with 50 or 90 ???
The 737 , started in the late 60’s, took over a decade to breakeven, and a quantity of over 500 delivered. Into the early 80’s, the program was so marginal BA considered dropping it.
Methinks you dropped a zero, eg not 50 but 500
Reading comprehension?
no “net loss” is not “break even”.
ov-099 indicated that airbus had/has a negative margin for the first ~50 frames
and at current exchange rates the accumulated margin for the first ~250 frames
pays for devel cost ( inclusive of paying back basic RLI?), after that it is profits ( for Airbus and the RLI providers )
Ahh, a welcome change from the ‘tanker’ discussion!
Indeed, as Uwe pointed out, there is a difference between ‘Programme break even’ and delivering each unit at a profit.
Interesting quote:
=Leahy said Airbus managers are “targeting to break even by 2015” on the project.=
http://seattletimes.nwsource.com/html/businesstechnology/2012058947_apeugermanyairbusemirates.html
I think this is a welcome order particularly at this time. I would have thought EK would have waited till Farnborough to announce a deal of that magnitude, which makes me wonder what have Airbus held for that one!
Nice try Don, nice try 😉
But as Uwe and UKair already have indicated, the key words were “Net Loss” and “Incremental Profit”.
Rgds
Uhhh- Profit = The positive gain from an investment or business operation after subtracting for all expenses. A common defintion
So the repayment of loans, capital costs, and ‘ royalties’ as in repayment of subsidies are NOT considered ‘ expenses’ ??
Interesting accounting terms . IMO Ponzi and Madoff were pikers compared to EADS and its accounting.
Incremental profit ? as in ” we lose money on every unit, but hope to make it up in volume ” ?
So when I attach all my R&D&I costs to the first airframe, an accept a huge loss on that one, I can then claim each subsequent delivery at only production cost?
I’m no accountant, but I do understand there’s more to that particular brand of magic than “simple definitions”
Assuming you have a mortgage that’s higher than your income (if not, mine is), do you see your annual income as in increase of your wealth or a reduction of your debt?
Do you take holidays despite being in the red (I do)
Let’s see if I can nail down OV’s comment so even you can’t deliberately misinterpret it:
From about a/c 50, each successive aircraft will earn Airbus more money than it costs to build including the interest on any loans attached to the program. Therefore, from about a/c 50, Airbus can start paying back the loans, reducing the interest burden (resulting in an incremental profit – less interest, more repayment). At about a/c 250 or the year (not a/c) 2015 (original break even or leahy’s last comment), or the number of orders in that year or whenever the accountants decide, Airbus will have payed back all loans (except perhaps gov’t RLI), and all excess money they receive over and above the production costs for each a/c is no longer headed for loan repayment.
Since you like simple definitions:
(http://www.merriam-webster.com/dictionary/increments)
1 : the action or process of increasing especially in quantity or value : enlargement
2 a : something gained or added b : one of a series of regular consecutive additions c : a minute increase in quantity
3 : the amount or degree by which something changes; especially : the amount of positive or negative change in the value of one or more of a set of variables
maybe you should stick to pasting pages of CVD papers?
No, incremental profit as in ‘we make money on every unit.’ But this money may not be enough to repay the programme sunk cost and overheads. Incremental profit will lower the programme loss position, incremental losses will add to it.
It’s accounting 101, every programme in which more than one unit of something is produced is using this concept. If you did not benefit from that in your education, at least make an attempt to understand.
Or go back to cutting and pasting CVD papers, as suggested above.
As for the exchange rates, Airbus is not suddenly magically raking in money because the US$/€ exchange rate improved for it. They are almost certainly hedged at least 1-2 years out at current rates. They will be making some money from the change on the margins (e.g. where they can bring forward a currently unhedged delivery, or where they can increase their € cost base compared to what was predicted), but the real bonus will come when the re-hedges which they currently undertake will take effect. But at that time, EADS should make a mint, if they really managed to turn the company position into one where they needed a US$1.30-1.35/€ rate to be competitive.
All the best
Andreas
Perhaps a little more intersting news, Boeing is set to offer the Italian EH101 helicopter in ther offering for a presidential helicopter, despite having their own Helicopter design teams.
I guess it does make sense to propose the product that already won the competition for the re-run.
Why does that sound familiar… 😉
But really, Boeing does not have a product in their line-up from what I can see, and if they were to develop one from scratch they could as well save themselves the effort.
All the best
Andreas