FLUG REVUE September 2004: Airbus/Boeing subsidy dispute unhealthy

US START DEBATE OVER AIRBUS SUBSIDIES

By Volker K. Thomalla

It seems as if civil aviation is finally in the process of overcoming the worst crisis in its history, despite the recent rise in oil prices. Air fares are slowly recovering, aircraft utilisation is climbing back to a normal level and total traffic volume is reverting to the levels of the year 2000. The airlines are ordering aircraft again, so that the manufacturers can plan higher delivery rates. But this growth is not inherently stable, as at any moment some apparently minor crisis could throw this recovery into turmoil for a prolonged period.

Against this background, some American politicians and Boeing's President and CEO, Harry Stonecipher, are raking up an old dispute about subsidies, which is the last thing that the industry needs at the moment. The argument concerns an agreement concluded in 1992 between the USA and the European Union about start-up finance for major civil aircraft programmes. It imposes an upper limit of 33 percent of the development costs on state subsidies and prohibits any direct state subsidies for production, marketing and sales.

The US Senator for the state of Washington, Patty Murray, raised the subject before the Senate back in May and intensified her attack during a speech on 15 July at the Woodrow Wilson International Center for Scholars in Washington. She called on the US government to announce the withdrawal from the agreement, “in order to see whether the Europeans are seriously interested in creating a level playing field.”

Murray also lashed out with an aggressive verbal diatribe, in which she claimed that a lot of Airbus's orders in the past had only been won as a result of bribes, promises of landing rights, price discounts, walk-away clauses in sales contracts and other “trade-distorting practices”. She claimed furthermore to have been briefed by several government intelligence services. Her allegations, she stated, were only the tip of the iceberg of what was really going on in the global market for large commercial aircraft.

Anyone tempted to dismiss the senator's speech as merely the rhetoric of a regional politician trying to do something for her constituency is very much mistaken, as Murray is an influential person. This is illustrated, for example, by the fact that Boeing CEO Harry Stonecipher is making the same arguments as Murray, and in the run-up to the Farnborough Air Show he was quoted as claiming that Airbus was not sticking to the provisions of the EU-US agreement.

Airbus countered that the company certainly does observe the terms of the agreement and that, for example, the loans it receives to fund development work have to be paid back with interest. Besides, some 40 percent of the value of every Airbus aircraft is supplied by the US aerospace industry, says Airbus.

Despite the verbal sabre-rattling, all the parties are continuing to be very circumspect, as no one knows the business practices better than they do. The discussion is being carried out in a glass house and therefore the stones they are throwing at each other are not yet very big. But for how long will this be the case? The exertion of political influence over the award of large contracts is something that goes on on both sides of the Atlantic, and without discounts it is unlikely that any of the big orders for civil aircraft over the last few years would have materialised. Only, the Europeans are a lot wiser today.

A trade war between Europe and the United States on account of Boeing and Airbus would be a disaster for the industry at this moment in time. But there is definitely a need for discussions. Even Senator Murray agrees on this point. She said that a trade case was not her preferred course. Rather, a trade war would be a kind of “nuclear option”, as it would be bound to hurt both sides.

From page 4 of FLUG REVUE 9/2004

Last updated 16 August 2004

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