Odds and Ends: EADS faces unhappiness over BAE merger; EU rejects US WTO compliance claims; SPEEA Update

EADS unhappiness: In the weeks after the merger with BAE Systems was announced, it’s clear that the proposed merger with EADS hasn’t ben well received by shareholders or the EADS governments. This Reuters story details the reluctance from the German government. Even the head of BAE has been quoted saying the union won’t proceed if BAE’s US defense business is jeopardized. Boeing, after initially saying it sees no impact, now wants a full US defense review and plans to undertake its own evaluation. Some suggest Boeing will try and bring the WTO subsidies issue into the case.

Our take is that Boeing’s initial reaction was based on the largely non-competitive defense lines of BAE and EADS but belatedly realized the strength the combined companies would have to be future competitors across from Boeing’s lines.

But the larger issue seems to be the future role of the French and German governments in the new company. Their shares will be diluted and governance influence will eliminated under the proposed merger. The government influence has historically meant Airbus, the dominate EADS subsidiary, has had to carefully split jobs between France and Germany rather than being free to make commercial decisions without political considerations.

As readers know, we have advocated for years that the governments need to get out of Airbus’ hair.

The Washington Post has this story, aptly characterizing the “blood fued” between Airbus and Boeing.

WTO Claims: It’s absolutely no surprise that the European Union rejected claims by the US it is now in compliance with the WTO ruling that Boeing received illegal subsidies. The tit-for-tat continues.

Airbus issued this statement today:

The WTO final verdict had called in March for: 

  • Withdrawal of “at least $5.3 billion” of federal subsidies already received by Boeing.
  • Elimination of an additional $2 billion in illegal state and local subsidies due in the future under existing illegal schemes.
  • Termination of all U.S. Department of Defense (DOD) and NASA research grants to Boeing, including funding, Boeing use of government facilities and the illegal transfer of IP rights to Boeing

The EU’s requested 12 Bn annual penalty is justified by the WTO panel confirmation that the effect of the subsidies is significantly larger than their face value in light of their “particularly pervasive” nature.  For example, according to the WTO, Boeing would not have been able to launch the 787 without illegal subsidies.  Today’s request belies Boeing’s argument that the WTO’s findings will have no relevant consequences for Boeing. 

SPEEA Update: Seattle Times has this update on the SPEEA-Boeing situation.

18 Comments on “Odds and Ends: EADS faces unhappiness over BAE merger; EU rejects US WTO compliance claims; SPEEA Update

  1. It is funny that Airbus is claiming the B-787 couldn’t be launched without subsides when they themselves used government subsidies in the A-320, A-330/-340, A-380, and continue to ‘demand’ low interest government ‘loans’ for the A-350.

    The two WTO cases settled nothing.

    It is interesting to see the cracks appearing in the proposed BAE/EADS merger.

    • Ultimately, at the end of the day there will need to be a negotiated settlement between the US Government and the EU. All of this is Kabuki Theater until the show’s over and the deal is done back stage.

    • The original accusation by Boeing was that Airbus received unfair subsidies whereas Boeing didn’t. Airbus didn’t deny receiving subsidies but claimed that they were fair and in any case Boeing also received subsidies. Boeing’s argument was that their subsidies were OK, but the Airbus ones weren’t – because they largely tied to launch aid

      Arguably Boeing has lost out in the WTO exercise as that organization has rejected Boeing’s distinction between launch aid and other forms of subsidy and has concluded that Airbus and Boeing subsidies are broadly equivalent.

      This would seem a sensible moment to negotiate. However, I think Boeing was motivated by a real sense of grievance when they had Airbus brought before the WTO. It wasn’t just a tactical manoever.

      • Carly Simon : You are so vain.

        Was Boeing really so trapped in their feelings?
        Poor beasty.
        My guess then is the EU commision is trying to deal death by apoplexy 😉

        What really irks Boeing is seeing “Government investment” ( and RLI is exactly that ) turning a significant profit. That has by example the potential of taking a broadsword to Boeings lifestyle ( swung by the US government ).
        But don’t fear. Obama has been neutered/neutralised.

  2. Re: SPEEA With the settlement of the NFL Referee lockout/strike we see another agreement that accepts 401ks for new hires as substitute for Pension plan. What is seen as a “takeway” is now becoming a standard in industry.

    The SPEEA vote will definitely be negative but was a strategy to show strength and the hard earnest negotiation will begin afterwards. I still believe there are grounds for satisfactory compromise and the parties can get there if reasonable. There is little to gain by a strike

    • Yes, the shift of retirement risk from institutions to individuals has become standard in industry. It is still a takeaway when it happens.

      • Matt B It does not affect any of the individuals currently working. It is only for new hires. Verizon, Chicago Teachers Union and the NFL Officials are but a few adopting this approach

  3. “The WTO final verdict had called in March for:
    ….. Termination of all U.S. Department of Defense (DOD) and NASA research grants to Boeing, including funding, Boeing use of government facilities and the illegal transfer of IP rights to Boeing”

    Non-sense indeed. It would lead to a total restructuring of the US #1 exporters & strategic suppliers R&D. Aint going to happen.

    • “It would lead to a total restructuring of the US #1 exporters & strategic suppliers R&D.”

      Correct keesje! To comply would also reduce the R&D resources that DOD relies upon for future fighter and large aircraft research, thereby eliminating competition they want and need in building the aircraft. The US has a problem now in that all new fighter eggs (F-22 & F-35) are in one basket.
      The part of the WTO subsidy ruling that I don’t understand is why when the majority of the DOD and NASA R&D contracts were competitive, they related to military and space research and some even required contractor “investment”, how that is a subsidy? The contracts weren’t gifts, not something another company couldn’t receive and often the fruits of the R&D went to competing firms. Also how does this differ from the R&D that Airbus receives as a result of their military divisions?

      • The European defense and space spending is many times lower then the US’s. The assumptions these R&D programs were competitive contracts and the knowledge was not used for commercial airline programs proved opportunistic and not what is really happening. And it isn’t a few billion.

        To be honest I’ve always been amazed by how convinced the US and Boeing are / were in condemming the subsidies Airbus gets. Seemingly unaware, blind / unwilling to see how the R&D of their own militairy-industrial complex is financed and organized.

      • In reply to Keesje.

        Why should it be that the U.S. commercial sector should not benefit from greater U.S. investment in defense R&D? This is a serious – not rhetorical – question. I just don’t understand your oft-stated grievance.

        By your logic, it seems to me, that Tonga should be able to create a commercial aerospace industry and then be entitled to support from all of the countries with greater defense spending to bring its commercial aerospace sector onto a level playing field.

        What am I missing? I for one would be very disappointed to believe that the U.S. aerospace industry did not benefit from our greater defense expenditures. After all there is a large corresponding drag on our entire economy from the burden of those expenditures — and this has a very real off-setting negative competitive effect on all U.S. industry. (Related to the pensions discussion above, I think this drag arises primarily from the retirement and medical costs that are pushed out of the realm of government by defense expenditures and onto the private sector.)

        No-one, myself included, proposes that either Tonga or the EU should compensate the U.S. for that competitive drag. On what level does it make sense to you that the U.S. should be disallowed the benefit of those investments in the sector where the investment is made?

    • keesje, I indeed have first hand knowledge that the vast majority of R&D contracts let by DOD are competitive. You assertion is totally wrong. As to weather the knowledge gained is transferable to commercial aircraft, the only thing I can say is you can’t unlearn something. As for the amount of R&D, what is you authority for saying it was more than a few billions? That is just your opinion.
      The fact that the EU defense and space spending is many time lower than the US is the choice the EU countries make and it was evident in Lybia. Your countries choice cannot be my constraint. Since Airbus gets the same benefits of military R&D that Boeing gets, all be it smaller, how is that a subsidy for the US but not for the EU?
      I guess you will have to explain to me how the military industrial complex is financed and organized that makes it bad in the US but okay in the EU? But I do agree with you that it is not likely to change nor should it. As a government, you don’t limit your sources of R&D because another country decides to spend less on theirs. Airbus has every opportunity for duel use technology as Boeing does.

  4. WRT Delaney and the Speea thing… look where he comes from and you’ll figure out why this is so mismanaged.

    • Howard To the contrary..this has been very carefully managed by both sides. All is fair in love, war and labor negotiations

      • Sure, you keep telling yourself that. I’ll observe from my own catbird seat, thanks. Thanks for trying to sell your coal here in Newcastle, but we’ve plenty.

  5. And what exactly is the argument for getting governments out of Airbus, I mean besides that tired slogan the government is always bad? I think over the years Airbus fared very well, so why suddenly change that arrangement?

    I think it is in fact good Airbus has shareholders whose primary concern is to keep the firm running, keep the employees happy, continue with R&D, and the next quarterly results are only secondary. It makes the firm focus on technological innovation rather that on picking costly fights with employees or inventing ways how to get rich fast without real effort by outsourcing and other “clever” tricks.

    Not to mention that both Airbus and Boeing are key aerospace firms with utmost importance to EU and US. It’s bizarre to pretend they are just another not particularly significant firms, when in fact they are big conglomerates already heavily interviewed with the economies and governments, which will fall over themselves to help those firms should any problem arise. That governments have own shares of EADS is just reflection of the reality that states have real and significant interests in it.

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