US, EU ignore Chinese, Russian subsidies

Nov. 15, 2016, © Leeham Co.: Government subsidies to commercial aircraft companies appear to be increasing despite the 12-year disputes before the World Trade Organization between Europe and the US over Airbus and Boeing aid.

Yet the US and Europeans appear to be doing little to try and curb the subsidies to new competitors.

China and Russia

A report from the Zhuhai Air Show by AINOnline that the Chinese and Russian governments once again announced collaboration on a wide-body COMAC C929 (for

COMAC-UAC C929. Photo via AINOnline.

COMAC-UAC C929. Photo via AINOnline.

the third time) raises questions about government support for the program.

China and Russia make no pretense about government funding for this program. And unlike caps for government support outlined in WTO rules, neither Russia nor China appear to have any intention of abiding by these rules despite both countries being members of the WTO.

“The Chinese have, of course, unlimited resources to throw at this program and have been expending them at a considerable rate,” said a representative from one of the component companies that comprise UAC (United Aircraft Corp of Russia), wrote AINOnline.

Likewise, Russia seems similarly unconstrained.

Wide-body competition

Russia, of course, developed aircraft for decades as the Soviet Union. While the airframes were considered sturdy, engines were unreliable and thirsty.

The Soviets developed narrow- and wide-bodied aircraft, including the giant Antonov freighters that even today provide specialized cargo transport.

With the break-up of the Soviet Union, commercial airliner production and development ground to a halt. The Sukhoi Super Jet regional airliner and the Irkut MC-21 160-220 passenger mainliner are the first attempts to resurrect the industry.

The JV between UAC and COMAC is the next step, one that is inherently riskier because of the costs, technology and smaller market involved in this sector.

The C929 will compete with the Boeing 787-9, Airbus A330neo and A350-900. Entry into service is now targeted for 2027.

Subsidies for narrow-bodies

China and Russia are likewise competing with vast government subsidies in the narrow-body market. The COMAC C919 and Irkut MC-21 are state-funded aircraft that take direct aim at the Airbus A320 and Boeing 737.

While few expect either aircraft to make a dent in Western sales, home market orders nevertheless impact Airbus and Boeing. There are more than 500 orders and options for the C919 from Chinese lessors and airlines.

The MC-21 doesn’t quite measure up to the C919 sales: it has not quite 300 orders and options. The difference probably can be traced to the tighter control the Chinese government has over its home market than Russia is exercising over its airline and leasing industry.

Even though few Western sales are expected for these airplanes and how they will perform economically and with reliability won’t be known for years, there is no doubt these aircraft are only the beginning of a new generation of aircraft that will follow.

Yet neither the US nor the EU are filing complaints with the WTO.

Bombardier CSeries

Bombardier’s financial turmoil during the development of the CSeries nearly bankrupted the company. Financial investments by the Quebec provincial government and a quasi-private pension fund of more than $2bn gave BBD the necessary breathing room to bring the CSeries to delivery and carry it to break even by 2020.

Another $1bn was requested from the federal government. Negotiations have been difficult and while it was thought there might be an announcement this week on an agreement, it now appears the deal isn’t quite done.

Embraer, Bombardier’s rival, cried foul over the new government investments, which it claims violated WTO rules. BBD, of course, says the transactions comply.

The Brazilian government has made formal inquires at the WTO, reportedly with US support. The EU has yet to be heard from. But LNC understands that if the US formally becomes involved, the EU will, too.

Missing the threats

But going after Bombardier misses the threat. Certainly, the CS300 is a direct competitor to the Airbus A319 and the Boeing 737-7 and, yes, most expect BBD to launch the CS500 which will directly compete with the 737-8 and A320neo. But the weaker Bombardier can easily be beaten back by aggressive Airbus and Boeing pricing, sales tactics and the ability to offer “global” deals for wide-bodies and narrow-bodies.

Boeing officials long said that China is the next big competitive threat. Airbus officials, while not as vocal, agree.

But neither is willing to file complaints against China for fear of retaliation. The Chinese government doesn’t hesitate to use orders as political weapons. It’s already threatened to shift orders from Boeing to Airbus if President-elect Donald Trump starts a trade war with China.

The reluctance to pursue Russian subsidies is less understandable.


15 Comments on “US, EU ignore Chinese, Russian subsidies

  1. I do think Russia is in quite a different situation visa vie aircraft mfg than China.

    China has missive financial resources though maybe not unlimited (shrinking growth rates, military spending, infrastructure etc).

    Russia is more limited. With oil prices down and sanctions, its economy is in poor shape and there are starting to get to be cuts in the critical public supports areas that may lead to unrest.

    That would explain why they are willing to throw the dice on making the Wide body in China. Of course its the Stalin vs Hitler thing about who is going to do who in first. You know its coming and you can guess who gets the benefit.

    In his screwy way Trump has raised some of those question, if we are getting nothing out of WTO and the others who are members don’t play by the rules why have rules?

    So we go after BBD and ignore Russian (that is truly odd) and we know why no one wants to take on China.

    World looks to be developing into quite a bit bigger mess, time to shelter in place.

    • I´ve been saying for years that this is the reason to knock off the US/EU subsidy business. EU/US should be looking very carefully at the Russia/China widebody JV because this is going to bring Russian know how and Chinese financing and production together with the potential to seriously threaten A+B.

      Of course if the WTO rules don´t apply to Russia and China then the advantages shouldn´t either, however a full scale trade war mightn´t help, but it is definately time to work on the issue, economically China´s slow down limits the damage A+B would suffer if the issue is dealt with today.

      If Trump wants to start a trade war with China over it he might find he has plenty of like minded allies on the other side of the Atlantic these days.

    • “..Chicago-based airline is changing its orders for 65 Boeing jets from all 737-700s to four 737-800s and 61 737 Maxes.”- Witchita Eagle.
      That must be good revenue wise – in the long run- as the 700s were supposed to be sold at steep discount to freeze out Cseries. Pushing delivery back is a revenue hit for Boeing right now as it seems to leave unfilled production slots before full changeover to Max versions. Plus will they be larger Max 7s for United?

      • According to management, most of the airplanes will be MAX 8 and MAX 9. This really isn’t a “wobble”. The order was placed earlier this year when the company didn’t have a permanent CFO. Andrew Levy came in a few months ago and he’s imposing a new strategy with more capital discipline.

        I don’t see this as a problem for Boeing, though it will be interesting to see if there is any impact on production rates. But it was mainly selling these as a favor to a key customer that (at the time) wanted a bunch of small narrowbodies pronto. If Boeing can place even half of those slots with other customers at “normal” prices, it will probably come out ahead on the deal.

        • I would put it as trying to kill BBD C series and convenient for Boeing to fill the gap between 737 orders, line cut over.

          And as key part of that order to fill the gap that’s gone.

          SW has deferred, now United and its something to keep an eye on.

  2. “The reluctance to pursue Russian subsidies is less understandable.”

    This is not about (illegal) subsidies.
    This is about cutting at the legs of your direct competitor.
    Russia is no competitor. neither is China at the moment.

    Real Ethics is an unknown concept. But one can (try to) use it to advantage.

  3. Well here we go again- still. The whole subsidfy mess really stated in 92 GATT as a way to help (EADS-Airbus ) get a foothold in the commercial market. Prime govt subsidized ” loans” for reasearch and initial production costs. forgiveness if sales quotas/target dates were not met, and flaky definitions of what is really covered eg LCA ( large commercial aircraft ) which at the time probably excluded only the Piper Cub and Snoopys’ Sopwith Camel and what a subsidy really is.

    Of course arguments re the Ex-Im bank and NASA and ?? on this side of the pond do not help what with the glow-ball conspiracy theories, and other deflections such as glow-ball warming caused by ( pick your own reason- acid rain from nitrous oxide due to jet engine temperatures, CO2 ditto, and ad naseaum )

  4. I haven’t asked them, but I think the Chinese see this entirely different.

    They feel they have 1.5 billion people that potentially need air transport and while importing tons of foreign aircraft, like every country they prefer to build those themselves as much as possible.

    On subsidies Europe and US have no right to complain. Boeing got into civil aviation after delivering 700 B52, 1700 B47 and 700 KC135 big jets in a short period to the US government. After that, the 707 was an add on. And it didn’t stop there.

    Europe’s spread out government supported aerospace could never have consolidated without extensive support from Euro governments either.

    So now the west is having moral issues China supporting its own aerospace industry? Chinese have better memories, the US owes them big money & didn’t liberate them. Contrary.

    Welcome to the new world.

    • I agree with TWs comment above ethics. Look at China´s actions in the South China Sea, we are in a global economic/influence war here, maybe EU and US need to wake up to it because that is how China and Russia are thinking.

      • Have you looked at the map? How do you think someone from Brazil or egypt looks at the US claims in the South China Sea? Honestly?

  5. Wow, so, the US has 350 million people to keep gainfully functioning, EU has 500 million (?) and so we should not buy anything from China?

    Not that I am not ok with that but the US enjoys lower consumer prices they never asked me if I wanted our jobs sent there and lower prices (I do not)

    It has far more to do with prestige, they have not set the aircraft operation up as a direct part of Chinese government reporting to the government

    Granted the European nations did something analogous with Airbus, but they did not pour unlimited money into it, Airbus came up with a plan and then they got their Free Launch and they had to make it work.

    How you spin this into US owes China big money is twisted. Do I get my violin out?

    China willingly bought treasury notes etc from the US. That’s their decsio0ns.

    Its the one thing we can hang over their head, they get too our of line and we can cancel it. Good thing with their Imperialist ambition that reach into the Indian ocean and including Hawaii, not to mention that famous expedition to the US mainland that makes the US a part of China (by their logic)

    They forgot history about when someone has a huge obligation, that puts them in the drivers seat (should they choose to implement it)

    And we can go back in history to WWII where we spent billions defeating their occupiers (and indeed started WWII for the US over protecting China from Japan) .

    Never got a cent back form China or Russia (and Russia was lend lease).

    • US owes China big dollars but can print money to help pay for it, which is what they have been doing since the GFC. China wants to control it´s currency one way or the other so has no choice but to buy US debt. Looks like the smartest thing the US has done in ages paying off debt with printed money. A pity pensioners retirement funds are caught in the trap though.

      • Yes. The general public doesn’t understand what “quantitative easing” and “bond purchase programs” actually are. The next step will be “helicopter money.”

        And then, when inflation explodes, it will be blamed on Trump!

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