Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Bjorn’s Corner: New engine development. Part 4. Propulsive efficiency April 19, 2024
- 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
Go to commercial markets for A350
Update, July 8: This just moved from Bloomberg: The release of the WTO’s Interim Report on the EU complaint about “illegal” subsidies to Boeing has been pushed from July 16 to September.
We cannot help but be skeptical about this. Every time this report was due, with timing happening to coincide with a key date in the KC-X tanker competition, the WTO mysteriously postponed its release date. Call us conspiratorial, but it seems that multiple “coincidences” are at work here.
Original Post:
With the WTO ruling that launch aid for Airbus is legal providing terms and conditions are done on a commercial basis, we see no rationale for Airbus to continue with “reimbursable launch investment” (RLI) from its European government owners and partners.
But Louis Gallois, CEO of Airbus parent EADS, says they’ll tap RLI from the governments anyway.
Legally, Airbus is apparently within its rights. Airbus says using government launch aid money at commercial terms is a matter of relationships, jobs and being supported by the governments who want continued influence over the company.
We say poppycock.
If there is no financial advantage for RLI, we don’t see any reason for governments to step up on commercial terms that cannot be obtained from the marketplace. If the governments want to support Airbus (and, by extension, parent EADS), let them order more A400Ms instead of reducing orders, launch the A319MMA (the maritime aircraft) and other A320-family military derivatives and buy more goods and services from EADS. Buy more KC-30s. Up the R&D funding on military programs, which would allow EADS to free up cash for Airbus. Military funding is not subject to WTO rules.
There are certainly less controversial ways to support Airbus than RLI.
We suspect, and this is all it is, that continuing to have the financial support of the governments, even if on commercial terms, provides a message to the commercial markets that might make obtaining financing from these markets easier. Also, for every dollar (or Euro) obtained from the governments is an equal amount of currency that doesn’t have to be obtained from the commercial markets.
Airbus, in its defense of RLI, likes to point out that it has repaid $1.40 for every dollar borrowed from the governments and that it is paying royalties on the A320 and A330 families. (We don’t recall if they are paying royalties on the A340, and certainly the A380 hasn’t crossed this threshold.) We would think that these 140% repayments, which amounts to usury, would be something Airbus would love to get out from under. The amount of money saved could easily go back into R&D. This kind of financing makes no sense to us–except if the money isn’t available in the commercial markets.
To us, continued insistence that Airbus wants to use RLI at commercial rates says that there is still more than meets the eye here.
To sum up:
- If the governments want to support Airbus, let them order the A400M, launch military derivatives of the A320 families and buy more EADS products;
- Buy more KC-30s; and
- Up government funding of R&D at EADS, freeing up cash for redirection to Airbus.
We don’t like corporate welfare. In any way, shape or form. Airbus should go to the commercial markets. Period.
I suppose that I am going to get ganged up on for suggesting that the US government, instead of buying itmes one does not require, provide RLI (in a WTO compliant manner), if they want to support Boeing.
Why should the EU governments not be allowed to use RLI, if it is provided in a WTO compliant manner?
What else is Gallois going to say or do? Give up the game right now? It took the US 6 years to finally give up on the Foreign Sales Corporation scheme and now the US wants the EU to “do the right thing” immediately. What hyperbole and hipocrasy!
Let’s face it. The US has its methods of corporate welfare as do the EU, as do China, Japan etc. For them to claim the high and holy road is a load of pungent fertilizer.
I agree with you on one point Scott, and that is that there is more here than meets the eye, and that goes for both sides of this dispute.
Regards,
John
“Allowed” is not the point. The point is, What is the point if there is no financial advantage? (That is, the RLI has to be done on commercial terms.) Go to the commercial markets. This is the point.
It is Boeings point. Not the EUs.
The Boeing way leads into a deindustrialised nation
with all the currently observable problems.
( to paraphrase: you can’t eat laywers )
No need to stoop that low.
I think this is the point.
If it is allowed why wouldn’t use it?
The financial advantage is a short sight; there is more than this.
Markets won’t finance 100% of project costs. The RLI from the government is an easy secure financing that allow Airbus to raise from from the market the remaining of the funding in better financial terms (as it has always been the case).
That is why that they won’t mind to pay higher rate on these 30 %
why is it preferable to “give” Ab more orders – certainly for the gov’s and taxpayers, RLI, even below market rates, is more interesting than spending money you have no hope of recouping?
and what are those “market rates” – would the Euro Gov’s need to use (US) moody’s or S&P indications on a company they partially own… I’ll bet the EU gov’s will rate EADS better than the market does, but is that “below” market rate’s or just based on “better” understanding and knowledge of the company in question?
“We don’t like corporate welfare. In any way, shape or form. Airbus should go to the commercial markets. Period”
Not industry is the sovereign but the population.
it acts by way of its elected government.
IMHO you regularly mistake guidance that can be applied via RLI to welfare ( It certainly applies to the gifted money Boeing extorts from its host nation though).
The WTO finding that Boeings ( and the US aircraft industry in general ) demise is self inflicted points to that fact.
Well, EADS is just going on with ‘business as usual’ are’t they? They want government sponsored RLI so they can continue the bribes they make on nearly every airplane they sell. If they used commerical loans for that, they would go to jail as embelizing funds, but with government money, the EU can look the other way, as they so often do.
Corporate welfare is corporsate welfare no matter how it is done, including BHO’s take over of GM, Chrysler, banks, etc. But in the case of EADS, they essentially ‘own’ the EU governments and hold them hostage with the threats of laying off citizens of the EU.
But those companies that have not taken US Government money, like Ford Motor Co., have seen record sales increases from the buying public who is discusted with all of this.
Uwe, exactly what ‘gifted money’ has Boeing received from the US? None. They do get contracts from the government, as EADS does from the EU, but usually only after a fair compitition, which we don’t see in Europe.
Careful, TopBoom. The allegation of bribery on nearly every airplane they sell is false and defamatory.
Note to readers/commenters: We’ll edit these kinds of references out in the future unless you have facts and links to back up yours statements. There are notorious, specific instances (which we think are the genesis of TopBoom’s statement) but these broad, sweeping statements are simply untrue.
You can’t write anything without a judicious
amount of [edited] language, right?
Any tax break is a gift. You get gifted the
amount payable under regular circumstances.
The last time the WTO decided in a like case
it took the US ages to comply.
And what is it with ownership.
Make up your mind man!
Either EADS owns the EU or the EU(states) own EADS?
To balance this:
Following US politics Boeing certainly seems to have a horde
of army ants in government and attached institutions.
Embelizing?!
As I previously pointed out, it took the US 6 years to face the music on the FSC scam (there is an example for you of the “gifted money” that Boeing had received, only stopped 4 years ago) and now all the “holy angels” in the US expect the EU to roll over and play dead before the appeals process has even begun.
It is also rather arrogant to claim that EADS is so heavily ethically tainted with all of those skeletons in the Boeing closet. Just because nobody has been caught in the last 6 years, does not necessarily mean the Boeing zebra has changed its stripes.
I don’t think there is much sense replying to TopBoom. On any forum I have seen him post he can be relied on to provide light entertainment with his particularly vitriolic branch of fact-free EU bashing. Plus ca change, ca change jamais, as they say in Alabama.
The facts are that the EU is not providing RLI to EADS/Airbus, but individual MS do, that the EU has an active corruption investigation office (Olaf), and that the lay-off threat seems to work as well for Boeing as it does for Airbus (witness the KC-X saga). I’d say that finance modalities play little role in it. Oh, and another fact is that both companies have faced business ethics challenges, to put it mildly. Again, nothing unusual in the defence/aerospace industry.
I thought the point of RLI was that it was repayable only if the product was successful. If the product is a flop, then no repayment occurs. If that is true then it certainly distorts the market by reducing the risk equation. All business cases leading to product launch consider scenarios and probability. RLI support of a 1/3 of the cost of product development limits the down side and would enable the launch of far riskier products – A380.
I also thought that repayment was deferred until a threshold of a few hundred aircraft was met. That allows the product to generate strong cash flow prior to initiation of RLI repayment.
No, the RLI must always be fully reimbursed at the end of the agreed period as far as I know.
I don’t claim to know the details of the system (picked most of it up around teh interwebs) but as I understand it the major advantage to Airbus is it allows for an initial period of allocating funds to early R&D etc. before repayments begin in earnest. This is where I wonder how you define “similar commercial rates” – does that mean the same amount of interest would be paid over the agreed term until full repayment, the whole term + continued successful production lifetime (which is when RLI actually costs Airbus more money than a normal loan would), the first five years… what?
And I agree with the others that you can understand Airbus would like to have multiple sources of funding (governments, banks, its own reserves) since this spreads out the risks – rather than having all your eggs in one basket.
I think you laid out the commercial advantages of continued RLI at market rates quite well. And those appear to be strong enough to me to make me understand why EADS keeps wanting this form of finance:
– de-risks the financing, thereby reducing lender margins (lower risk = lower interest), and leads to overall lower financing costs as a consequence (both government and commercial), in a positive feedback loop
– probably significantly longer tenors/grace periods than could be obtained from commercial banks, which are helpful in a long-term investment industry (note that this does not imply that there is distortion, price for the loan could be higher than that for shorter-term finance)
– probably easier to restructure if that should become necessary, and certainly more patient than commercial banks
– funding source diversification, which helps by spreading out refinancing
– maybe easier on the covenants attached to loans (note that this would not necessarily violate the commercial equivalency, since different banks have different approaches to covenants as well)
All the best
Andreas
Correct me if I’m wrong, but I doubt Boeing raises capital for new airplane programs from the markets. Instead, it uses current revenue to fund future programs. Airbus wouldn’t have been able to do this in the past because it didn’t have the revenue stream to support it. Therefore it had no choice but to go to governments to get funding, not necessarily on attractive terms.
They now have a good enough revenue stream to support development of new models, like Boeing. Which is Leeham’s main point.
Ironically, it’s probably in EADS interest to refinance loans for successful and de-risked programs like the A320 and A330, as they will get better terms commercially. Governments may however hold them to the original terms, which are lucrative to them.
Boeing seems to have been smart with its funding of the 787 by holding a competition amongst contractors for who could do the development at the lowest cost and risk (and generally big dollops of subsidy). The contractors have been left picking up most of the cost overruns. Probably Boeing can get away with this just once.
“The contractors have been left picking up most of the cost overruns. Probably Boeing can get away with this just once.”
That expounds a bit on why I think Boeing (or the US in general) is predominantly destructive in its efforts to not go under while they will
objectively not gain anything.
As observed in the WTO findings industry problems are a native philosophy
thing: i.e. shareholder value games instead of incorporating the available
innovations into competitive products. Multiple new Airbus product lines were
not complemented due to lack of (cheap) money but due to lack of seeing the
necessity : no ideas and no way to express those. This blindness mandates
the lament on unfair help available to all other market participants except the
poor US industry. This is patently wrong.
I may be prejudiced in this. Over the last three decades I found that US
located entities ( be it corporate or institutinal ) are a backstabbing bunch.
The lowest risk part seems not to have worked so well. Always more difficult to get right than lowest cost…
Boeing has gone to the bond markets at least once:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awbYVvmu2mtU
Since money is a fungible commodity, I’d say that they did use commercial finance to support their development programmes.
I seriously doubt that the companies could support development of new programmes solely from cash flows. On paper, yes, but in reality the timings may not match, and they might run the risk of running out of liquidity at certain parts of the programme.
All the best
Andreas
To clarify, I meant lowest financial risk to Boeing.
The 787 project intended a major technological advance, on an accelerated timetable, involving contractors who have never done this type of work before. I thought at the time, great, if they pull this off. There have been some grim moments along the way. But you know what? There’s really no doubt now they have more or less pulled this off. Partly they have done it by throwing money at the problems. But the fact they passed much of the risk to contractors no doubt softened the blow. So I agree with Jim McNerney, a modified version of the 787 program is the way forward for future aircraft development.
“To clarify, I meant lowest financial risk to Boeing. ” Seems to have failed as well, considering the charges they took, and the extra cost of buying out Vought, and the continuing problems they face with low-quality workmanship. They didn’t fix it ‘partly’ by throwing money at the problem, that was the only fix for what is an unworkable model.
There is considerable doubt in my mind as to whether a traditional design and manufacturing approach would not have been more beneficial. And the ‘modified version’ by McNerney is just corporate spin. They cocked this one up, very very badly. So they will have to try something different next time, not least because they will probably struggle to sign up many risk-sharing partners next time round, based on what happened this time. They’ll just call that ‘modified version’ and hope people don’t see the egg on their faces.
Sorry, I am deeply unimpressed with Boeing/Airbus clusterf*cks and their PR machinery trying to pretend that all is well in 787/A380 land, and by the way that the emperor does actually wear clothes (no really!)
@Leeham.net stated:
“Airbus, in its defense of RLI, likes to point out that it has repaid $1.40 for every dollar borrowed from the governments and that it is paying royalties on the A320 and A330 families.”
Well so what? It was “house money” to a certain extent to begin with.
If the Govt. gives me sub-interest loans and tells me:
“Jacobin777, here is some sub-interest loans, if you make money with it then you owe us returns on it for “x-amount of time”…might be indefinitely, we don’t know. HOWEVER, if you don’t make money with it, we might( but not necessarily) forgive the debt.”…
Sorry, but I don’t buy it….Unfair subsidies are unfair subsidies…IMHO….
Look at the financial drag the A380 program has been. Airbus management has stated that it won’t be returning net positive revenue on the program until 2015. IIRC, RLI for the A380 program has to be paid in 2017…anyone here thinks/believes if it was up to Airbus/EADS/EU they would pay the full $4 billion + in full by 2017??
“, RLI for the A380 program has to be paid in 2017…anyone here thinks/believes if it was up to Airbus/EADS/EU they would pay the full $4 billion + in full by 2017??”
How is that different from any loan? Given the choice, the borrower would of course prefer to not repay it. I can certainly say the same for my mortgage.
Have any RLI loans been forgiven to Airbus yet? I am not aware, but I am not following this closely.
All the best
Andreas
I’d like to second that question – anyone has any indication that Airbus was ever “forgiven” RLI amounts.
What one finds is “Airbus received launch aid on every project”.
That brit reference i posted recently differentiated
between outlays and returns received. nothing about waived RLI. ( what Airbus project could up to now be seen as a total failure? none imho )
Some fodder on the side:
The Airbus-Boeing Launch Aid Dispute-
a Game-theoretic Analysis.
Richard John Fairchild
University of Bath
School of Management
Working Paper Series
2008.07
http://www.bath.ac.uk/management/research/pdf/2008-07.pdf
I believe (but am happy to be corrected) it is not the question of whether it is a total failure, but of whether the numbers set as predicted sales triggering RLI repayment were reached. This only applies to A300/A310 at the moment, as these are the only lines closed, and one would need to know what the numbers were. It will eventually also apply to A340-500/600, I am certain (these I see as total failures, by the way). For the A340-300 it depends on whether RLI was provided specifically for the model, or for the family. If for the model, again it could mean that Airbus might be forgiven the RLI under the terms of the agreement, right? They would still have to pay the royalties on each unit I guess though, so it won’t be total forgiveness.
Searching for “Airbus RLI waived” returns nothing relevant.
My guess is that even RLI for A340-500/-600 will be repaid but
no royalties will be forthcoming.
There isn’t even talk about waiving anything around the A400M!
Misc stuff:
http://trade.ec.europa.eu/doclib/docs/2007/july/tradoc_135386.07.2007.pdf
I never stated that the RLI would be forgiven…I only stated that it “might” be..
Also, given that the A345/A346 $4 billion (I don’t have the source off hand for that number, but it was $4 billion)-when does Airbus expect to pay that off?
Forget about royalties.
$4b ?? That would be the complete devel cost of the A345/A346 (in 2009 dollars?
$2.9b in 1997) RLI would have been less than 30% of that summ i.e. less
than $870m.
There are a lot of numbers bandied around which seem to be less than factual.
“I never stated that the RLI would be forgiven…I only stated that it “might” be..” And pigs might fly. 😉 So what? The only debt forgiveness I could find was from the German government to Deutsche Airbus for DM7.7bn in 1998 (it’s in the WTO report), but I have no idea what the loan was for in the first place.
Uwe is of course right that development cost is not the same as RLI. 🙂
“DM7.7b waived”
the tit for tat starts in ENGLISH/wtds316r-01.doc p74++ item “G.”
afaiu this DM7.7b “gift” is a smoke and mirrors fantasy item
conjured up by the US claim,
the WTO panel finds on p715++ and rejects the claim.
( looks like they tried to drag restructuring from the past (1989) into
the litigation timeframe. language is on occasion well over my head 😉
if that part is any measure the whole thing is not about “fair trade” but
all about trying to smear your opponent for an unfair advantage.
well, nothing new there either ?
@EWE
Yes, I should have been clearer-about $4 billion for total costs.
So yes, it would be 4800-$900 million-but its still a significant amount of money which needs to be repaid-and I’m skeptical the program has returned a profit given its lackluster sales.
@Andreas-
Ok, so if debt wont’ be forgiven, maybe Airbus/EADS will need to “put up or shut up”.
Launch aid was sometime in 2000-2001 (at the time of industrial launch).
According to this wikipedia quote:
“The aircraft’s configuration was finalised in early 2001, and manufacturing of the first A380 wing box component started on 23 January 2002. The development cost of the A380 had grown to €11 billion when the first aircraft was completed.[10]”
http://en.wikipedia.org/wiki/Airbus_A380#cite_note-SeattlePIoverview-9
RLI IIRC has to be paid back in 17 years. That would be in about 7-8 years from now. The tune of >$3.5 billion isn’t “chump change”…
The A380 program according to EADS won’t start making positive cash flow until 2015-so unless Airbus gets some commercial loans, sells stocks, and/or pays from its cash flow, its going to take a large hit on earnings….there is no other way it can be done (unless the debt is forgiven).
Add the $800 million + RLI for the A345/A346 program which needs to be returned in the not-too-distant future, and now one can see how expensive of an endeavor this has become.
“Break even” tends to be defined as having recouped all up front cost.
As the $3.5b RLI is part of the developement outlay that will have been
recouped too. Aside from that I assume that A320 and A330 family
production makes a bit of small change available too.
paying back RLI is not an extra after break even,( though the continuing
royalty payments are )
( Anyway , and completely OT: what is so difficult in copying a/my name? )
1)Apologies about the name “copy paste”…my bad.
2)Maybe Airbus should release figures as to how much (if any) of the RLI has been paid for both the A34NG and A380 program. Does anyone know? Maybe there can be more transparency and accountability.
2:
A torrent of shiny expectant faces. ( know the lit ref? )
Regardless, I think people have a right to know. If I was a shareholder of EADS (which I once was), then I definitely have a right to know.
Hmm, if I go by the information diseminated in the
WTO case as made by the US the density of detail
would lead me to guess that this is publicly available
information. ( But where to look? 😉
Maybe you can point to us “where to look”…;)
Start from here:
http://www.wto.org/english/news_e/news10_e/316r_e.htm
report + annexes as pdf packed in a zip file:
http://www.wto.org/english/tratop_e/dispu_e/316r_pdf_e.zip
Thanks, but I think I need a summary instead..hahaha…:-)
don’t be shy man!
There is that:
http://www.wto.org/english/tratop_e/dispu_e/316r_conc_e.pdf
http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm
leehams update 8.july:
once is chance
twice is happenstance
thrice is enemy action
Bond, James Bond!
Which Bond movie was that from?
Goldfinger, the book. I mixed up the order:
via Google:
‘Thrice is enemy action’ (which is actually a small misquote from the original
“Once is happenstance.
Twice is coincidence.
Three times is enemy action”
by the author Ian Fleming from the book Goldfinger).
IMHO the same applies for inept, accidental or “dumb” actions
that “missfire” but lead down a certain well defined path.
( US foreign policy is an outstanding example here, imho,
be it “bringing democracy” or “furthering fair trade” )