With tanker news dominating this week, there are a few Airbus items that haven’t received much attention: the A400M, future airplane program funding and the A350.
(Updated September 26.)
This disastrous program appears heading for some resolution. Aviation Week has this report. It looks like Airbus is headed toward a new agreement with the A400M customers (most of which are Airbus member-states) that will restructure the contract, terms and conditions in a program which has already cost Airbus billions of dollars in cost overruns. The program costs the company $100m a month, and it–along with the A380–has been a huge financial drag.
UBS estimated that the restructured contract could add 5bn Euros to the charges Airbus has already taken. We spoke with Airbus CEO Tom Enders earlier this month and he said the estimate is “completely unreasonable.” While he would not offer a “reasonable” number, published reports suggest a 3.5bn Euro figure.
The program has been a perfect example of political interference, notably on the engine selection at the start, which speaks more than ever why Airbus and EADS should divorce from ownership by the French and German governments.
The ever-candid Enders said the A400M should have stuck with the proposed Pratt & Whitney turbo prop rather than having a new design forged in Europe forced upon the airplane. “The choice was made under political pressure,” he said.
Update, September 28: DOD Buzz reports Boeing is going to offer two bids, one each for the KC-767 and KC-777. Here is the link. We think this is a brilliant move.
Here is the link to the RFP. We’ll add information after we’ve read it, which will take all weekend. One thing we did find right away: the USAF is asking for field performance data on runways 6,000 ft to 15,000 ft. This means the Boeing 777 isn’t zapped on this criteria; the 2006 RFP required 7,000 ft. runways. The Systems Requirements document does include a 7,000 ft. runway requirement. SRD document pg. 26, 188.8.131.52.1.
On another requirement from the 2006 competition: spare engines had to be transportable in the C-130 cargo plane. A 777 GE 90 wouldn’t fit; this requirement has been changed to the C-17. The C-17 has an 18-foot wide cargo bay; the GE-90 is slightly over 10 ft wide (bare engine, without nacelle). SDR pg. 40, 184.108.40.206.1.
Here is Boeing’s statement, issued upon receipt of the DRFP:
“Our next step is to conduct a detailed review of the document. We want to understand how requirements will be defined and prioritized and how the proposals will be evaluated. That information will help us decide which plane to offer or whether to offer both planes. We appreciate that there will be frequent, open discussion with the U.S. Air Force as we go forward. Both the Air Force and the American taxpayer will benefit from the tanker options we can offer. Boeing has a KC-7A7 ‘family of tankers’ available to meet the warfighter’s requirements. Whether it’s the agile, flexible 767-based tanker or the large 777-based tanker, Boeing will deliver a combat-ready tanker with maximum capability at the lowest cost.”
What is noteworthy is the reference to offering the KC-767 and the KC-777. This is contrary to stated DOD intent to buy only one airplane. This is something we suggested Boeing do for the 2006 competition on the theory it would checkmate the Northrop bid. While we think the 777 is too big for the KC-X competition, a dual-offer by Boeing simply cannot be matched by Northrop.
Northrop believes its KC-30 is the right-sized aircraft in the sweet spot.
Here is Northrop’s statement:
“Northrop Grumman applauds the Defense Department and U.S. Air Force for re-starting the effort to replace its Eisenhower-era KC-135 aerial refueling tankers, and the company is looking forward to competing for and winning the contract again.
“Northrop Grumman will review the draft RFP and provide the U.S. Air Force with comments on the draft in short order. We will defer further public comments until we have completed our review.”
Here is the synopsis as publish on the Business Opportunity website.
Here is a running update of the Pentagon briefing to reporters, 4pm EDT, 24 Sept.
William Lynn Deputy Sec Def:
The Draft Request for Proposal for Round 3 of the KC-X tanker competition isn’t even out yet and the procurement process is already perverted.
The DRFP is thought to be ready for release tomorrow (September 24). The USAF reportedly has scheduled briefings for Congress at 11 AM EDT.
In what is clearly an orchestrated effort spearheaded by Boeing, the political focus is entirely on the interim report by the World Trade Organization that Airbus benefited from illegal subsidies for its A-series commercial airliners, including the A330-200 on which the Northrop Grumman KC-30 is based.
Washington State and Kansas Members of Congress demand that the US Air Force include language in the DRFP that considers the launch aid–a reported but unconfirmed $5bn for the A330/A340 sister program–in evaluating the KC-X proposals.
We are back from a trip to Europe, where we had the opportunity to sit down with Thomas Enders, CEO of Airbus. We talked about (among other things) the WTO case and the implications for Airbus on funding for the A350. The story we wrote for Commercial Aviation Online is below the jump.
Here is a Reuters report that has some interesting back-and-forth between US Sen. Richard Shelby (R-Northrop/AL) and US Sen. Patty Murray (D-Boeing/WA) over the outcome of the finding of the WTO’s assessment of the US complaint about Airbus launch aid.
Here is a story from Kansas.com with more detail about Boeing’s ambiguity whether its tanker program will include Boeing’s Wichita facility. The only reason we care is because of how loud Kansas Members of Congress have been in support of Boeing’s tanker bid. Placing a question over Wichita’s role in the tanker is, we think, a politically embarrassing move on Boeing’s part.
Here is a story from Business Week taking a close look at the tanker competition and the impact from the WTO finding.
Update, Sept. 17: While looking for something else we came across this old item from Forbes magazine in 2004-5, when Boeing was temporarily led by the late Lew Platt following the fall from grace of former CEO Harry Stonecipher.
Platt, then the chairman and CEO, had this to say about the start of the KC-X competition then. It sounds like what we are hearing today:
Faces In The News
Boeing’s Platt Cheers Airbus, Says CEO Search Narrows
Chris Noon, 06.15.05, 1:49 PM ET
NEW YORK – Doers and doings in business, entertainment and technology:
Boeing (nyse: BA – news – people ) Chairman Lewis Platt plays hard, but fair. Despite the trans-Atlantic spat over subsidies, Platt doesn’t think Airbus should be frozen out of bidding for U.S. military contracts. “What I’m looking for is a level playing field. Part of that means they should be able to compete for business in the United States,” he was quoted as saying in The Associated Press. EADS, which owns about 80% of Airbus, may be disqualified from bidding on a U.S. Air Force contract for refuelling tankers because of a House of Representatives amendment barring the Pentagon from purchasing goods from any foreign companies receiving government subsidies. Brussels countered Washington’s complaint against Airbus subsidies last month with one of its own.
Aviation Week has a long story on the tanker that explains why cargo capability is desired.
Update, September 16: IAG has a 15 minute podcast with Boeing’s Bill Barksdale on the KC-7A7 program.
Separately, Sen. Patty Murray (D-Boeing/WA) and some 45 Members of Congress call on the USAF to consider the WTO findings in the competition for the KC-X contract, and Murray calls on President Obama to penalize Airbus and the KC-30 tanker for the WTO finding. The Members of Congress say the prospect of awarding the contract to Northrop Grumman (Airbus) would reward illegal action.
Don’t these guys get it? (Obviously not.) When (not if, in conventional wisdom) the WTO also finds Boeing benefited from illegal aid, what the devil will these Members of Congress say then?
As for Murray’s call for Obama to act now, Patty needs to read the WTO rules: Article 23 specifically prohibits premature imposition of penalties. Premature means before the case is over, and the case won’t be over until a final report is issued and any appeals are concluded. We know the EU will appeal and we fully expect the USTR to appeal findings on complaints that weren’t upheld. It will be years before these are completed. In the meantime, it would be illegal under WTO rules for the US to adopt any penalties.
On the one hand, Sen. Murray wants to slam Airbus and Northrop for illegal activities. On the other, she wants to do this before the WTO rules say you can, an action that would be illegal. Sen. Murray can’t have it both ways.
Update, September 15: Flight International reports that Boeing is considering moving its tanker finishing work out of Wichita (KS) in order to lower the price. We can’t help but wonder what US Rep. Todd Tiahrt (R-Boeing/KS) and Sen. Sam Brownback (R-Boeing/KS), two of Boeing’s most hyperbolic tanker supporters, might say about this.
Flight also reports in the same piece that Boeing is going to get very aggressive on pricing, having lost on this point to Northrop Grumman and the Airbus-based KC-30. This is going to be watched very closely by Northrop and EADS, because during the Round 2 USAF debrief, the companies noted that their pricing was shared with Boeing lawyers and they fear this sensitive information will put them at a competitive disadvantage in this round.
We had asked Boeing about this at the time, and Boeing’s tanker team told us the pricing information stopped with the Boeing legal team, precisely because of the proprietary nature of this information. Northrop and EADS aren’t convinced (they haven’t seen any proof on this point one way or the other) and could take action if they come to believe Boeing has an unfair advantage in this round.
Boeing is wasting no time kicking off its campaign to win Round 3 of the KC-X tanker competition.
This Reuters story says Boeing won’t get fancy in its proposed KC-777 or KC-767 (marketed, for the moment, under the generic name KC-7A7, until Boeing understands what the US Air Force wants and then decides which tanker to offer). Boeing won’t offer a tanker based on its proposed KC-767 Advanced Tanker, the so-called Frankentanker that was offered in Round 2 as a paper concept combining major components from the 767-200, 767-300 and 767-400.
Here we go, the first fall-out of the Airbus-Boeing trade Interim Report. Brazil (Embraer) complained to the European Union about launch aid by Canada to Bombardier for the CSeries and asked the EU to force Canada to cancel the package. Predictably, Canada invited Brazil to…do…something.
Update, Sept. 10: When the WTO Interim Report finding Airbus violated certain rules against certain subsidies under the WTO, Boeing supporters were quick and prolific to jump on leaked reports and briefings and some called for the US Defense Department to exclude the Northrop Grumman/EADS/Airbus bid from the KC-X tanker re-compete.
Airbus supporters were strangely quiet, we thought.
Today, Sen. Richard Shelby (R-Northrop/AL) made public a letter to Ron Kirk, the US Trade Representative, on the issue. The full letter may be found here. A key excerpt:
As we discussed, many press reports are not accurately describing the complete results of the report. In fact, on every Airbus airplane there was a claim against, the loan mechanism used was ruled legal under the WTO. It is also my understanding that Reimbursable Launch Investment or “launch aid,” was determined to be an acceptable funding mechanism by the WTO. Reimbursable Launch Investment was used on the A330-200, the airframe that will be offered for the tanker contract. The A330-200 was found to have received investment aid within the permissible benchmarks under WTO guidelines – meaning that the funding received was not found to be a prohibited subsidy. Most importantly, as you stated in our meeting, Boeing was not materially injured by any action taken by Airbus.
This Reuters report tries to make sense of the conflicting claims by the EU and Americans over who won what in the finding issued Friday by the WTO three judge panel.
Here is a somewhat different version of the Reuters report with additional detail.
Other stories of note:
Bloomberg has this report about the massive amount of aid the US pumped into various industries and how this might affect the Airbus WTO finding.
EurActiv.com provides this European perspective, including a suggestion that negotiations to settle the dispute could begin in March.
Metal Miner, a trade publication that follows the metals industries (of no small importance to airplanes), has this take on the WTO stuff, in the same format of our take below.
Below is our take on the whole matter.
A few days have passed and the initial frenzy over the WTO finding that Airbus benefited from illegal aid has died down. Still, since the finding itself has not been made public and we’re all reacting to leaks and “briefings” of partisan interests, trying to make sense of the finding is challenging at best.
Update, Sept. 6: There is a report out of Germany that the WTO found state loans to Airbus to be acceptable. The conflicting information and enigma goes on.
Update, 2:00pm: The New York Times says 70% of the USTR/Boeing complaint against Airbus was rejected by the WTO. The link is contained in the NY Times reference below in the list of articles.
News Flash, 11:35 AM: Reuters is now quoting EU sources that the WTO didn’t hand the US and Boeing the victories that have been claimed:
WTO did not rule Airbus aid illegal – EU sources
BRUSSELS, Sept 4 (Reuters) – Comments that the World Trade Organisation on Friday backed a U.S. complaint against European Union aid to plane maker Airbus are wrong and misleading, EU sources with knowledge of the WTO ruling said.
“The ruling is not a black-and-white case. It simply is not a great victory for the United States,” one source told Reuters on condition of anonymity.
“The claim that the WTO ruled that subsidies given (by the EU) to Airbus for their A380 plane were illegal is wrong and misleading.”
Reuters reported earlier from Washington, citing a person familiar with the case, that the WTO had ruled that billions of dollars in European loans to help Airbus develop civilian aircraft were an illegal subsidy under world trade rules.
Another EU source said aid given by Brussels to the European plane maker for its A350 aircraft was “not mentioned in the (WTO) report and so would not have to be repaid”.
He was speaking after the WTO issued a pivotal, but highly confidential, ruling on subsidies given by the EU to Airbus that stands to impact the global aircraft sector.
The Hill, Aug. 31: This specialty web publication follows Congress and has this long analysis of the prospect of the WTO ruling on the tanker competition, published in advance of the Sept. 4 report.
Key articles on the WTO dispute:
Reuters, Sept. 3: This one is a good recap of implications, reported in advance of the WTO staff report.
Financial Times, Sept. 3: Another good story in advance of the ruling about the broader implications of the US/Boeing win.
AP via Business Week: This story presents a good analysis on how the WTO ruling could hurt both Airbus and Boeing.
Reuters, Sept. 4: This is a great Fact Box recapping all the issues involved.
Reuters, Sept. 4: Boeing’s Defense unit says the Pentagon will have to decide what, if any, affect the WTO action will have on the tanker competition, according to this Reuters report.
The Economist, Sept. 4: Here’s a European take on the WTO trade dispute.
SkyNews (Europe), Sept. 4: As expected, the UK said it will go forward with plans to loan Airbus more than $500m for the development of the A350.
Bloomberg News, Sept. 4: This report says the WTO did find illegal subsidies were provided on the A380, conflicting with the Reuters report above.
Bloomberg News, Sept. 4: It didn’t take long for a Boeing supporter to tie the WTO report to the KC-X tanker bid. Note on comment on this issue below the jump at the end of our assessment:
U.S. Air Force Tanker Bid Should Consider WTO, Rep. Dicks Says
2009-09-04 19:22:06.212 GMT
By Gopal Ratnam
Sept. 4 (Bloomberg) — The U.S. Air Force must tailor its new refueling tanker bid by considering today’s World Trade Organization’s ruling that Airbus SAS received some illegal subsidies, Representative Norm Dicks, a Democrat from Washington state, said in a statement.
“It would be inconceivable for the Defense Department to issue its request for proposals for the new Air Force refueling tanker without including a provision which recognizes the ruling issued today by the WTO panel,” Dicks said in the statement.
“The U.S. government cannot reward illegal market actions that have harmed U.S. manufacturers.”
The Hill, Sept. 4: This specialty web publication follows Congress and has this long analysis on the possible effect of the WTO report on the tanker competition.
Aviation Week, Sept. 4: Reporter Robert Wall, one of the most insightful aviation journalists, is based in Europe and has this very good report on the WTO conclusions.
New York Times, Sept. 4: The NYT says the WTO found some but not all Airbus aid was illegal and that “most” of the financial aid to Airbus was legal.
Financial Times, Sept. 4: This London-based story has some specificity on the illegal launch aid attributed to the A380.
Reuters, Sept. 4: This article focuses on the affect of the WTO ruling on the pending KC-X tanker competition.
There won’t be any immediate practical affect from the World Trade Organization staff report that Airbus benefited from improper subsidies in the development of its entire line of aircraft. The immediate affect will be political and public relations points.