Going into the Dubai Airshow in late 2017, aircraft producer Boeing held a healthy lead over its rival, Airbus, with more than 600 confirmed orders for commercial aircraft, compared to 300 for Airbus. At the Airshow, Boeing got an additional order for 225 aircraft from Flydubai corporation, and Airbus announced new orders for 430 planes from U.S. investors.

Historically, Boeing (www.boeing.com), McDonnell Douglas, and other U.S. firms had dominated the global aircraft industry. Founded in 1916 in Seattle, Boeing had many years to develop the critical mass necessary to become the world's leading aerospace manufacturer. During World War II and the Cold War years, Boeing received many lucrative contracts from the U.S. Department of Defense.

Manufacturing commercial aircraft is complex and capital-intensive, and requires a skilled workforce. No single country in Europe possessed the means to launch an aircraft company capable of challenging Boeing. Then, in 1970, the governments of France, Germany, Spain, and the United Kingdom joined forces to create Airbus S.A.S. (www.airbus.com). Heavily subsidized by the four-country alliance, Airbus soon became the world's number-two civil aircraft manufacturer. After launching the A300 and the A320, Airbus captured roughly one-third of the global commercial aircraft market and has surpassed Boeing in new aircraft orders in most years since 2000.

Government Support for Airbus

Most nations in Europe emphasize democratic socialism in which government plays a significant role in guiding national economic affairs. Accordingly, Airbus has benefited enormously from government support. The firm has received tens of billions of euros of subsidies and soft loans from the four founding country governmentsand the European Union (EU). Airbus must repay the loans only if it achieves profitability. Government aid has financed, in whole or part, every major Airbus aircraft model. European governments have forgiven Airbus's debt, financed R&D for civil aircraft projects, and provided infrastructure and huge equity infusions.

Airbus is based in Toulouse, France, but has R&D and production operations scattered throughout Europe. European governments justify their financial aid to Airbus on several grounds. First, Airbus R&D activities result in valuable modern technologies. Second, Airbus provides jobs to more than 75,000 skilled and semiskilled Europeans. Third, its value-chain activities attract massive amounts of capital into Europe. Finally, Airbus generates enormous tax revenues.

Complaints About Unfair Government Intervention

Boeing and the U.S. government have long complained about the massive subsidies and soft loans that have financed Airbus's birth and ongoing success. The outcry became louder in the 2000s when Airbus surpassed Boeing in annual sales, becoming the world's leading commercial aircraft manufacturer. Boeing argues that Airbus never would have gotten this far without government support.

The U.S. government has brought several complaints to the World Trade Organization (WTO). Among these are charges that EU states provided billions of dollars in subsidies and soft loans to Airbus. The U.S. alleged that financial aid for the A350, A380, and earlier Airbus aircraft qualified as subsidies under WTO rules and that the subsidies constitute unfair international trade. WTO rules prohibit subsidies to firms or industries from governments or other public bodies.

In 2012, the WTO ruled that EU aid to Airbus had caused Boeing to lose market share in Asia and other markets. EU officials argued that government subsidies to Airbus were permissible and that it was up to individual EU countries to decide whether to provide them. The WTO also ruled that Boeing received more than $5 billion in U.S. government subsidies in the development of the 787 Dreamliner. In 2016, the WTO ruled that the Airbus's A350 jet, which competes directly with the Dreamliner, could not have been developed without substantial subsidies. After fighting Airbus for 12 years in court, the ruling handed a giant victory to Boeing.

Government Support for Boeing

The EU argues that the U.S. government has indirectly subsidized Boeing through massive defense contracts paid by tax dollars. The U.S. government gave Boeing more than $23 billion in indirect government subsidies through R&D funding and other support from the Pentagon and NASA. Boeing uses knowledge acquired from such projects to produce civilian aircraft. The U.S. state of Washington, Boeing's main manufacturing and assembly location, has given the firm tax breaks, infrastructure support, and other incentives totaling billions of dollars. The EU also filed a case at the WTO on Boeing's relations with Japanese business partners. Boeing entered an alliance with Japan's Mitsubishi, Kawasaki, and Fuji to build the 787 Dreamliner. The Japanese firms provided billions in soft loans, repayable only if the aircraft is commercially successful.

New Jets and Alliances

Boeing and Airbus remain fierce competitors. Airbus's introduction of the A380, an innovative jet with a long upper deck and a spacious cabin, was soon followed by Boeing's launch of the 787 Dreamliner, an innovative and fuel-efficient jet. Development costs of the A380 exceeded $21 billion, partly funded by European governments. The competition provoked new complaints about subsidies and unfair competition. In 2017 Airbus acquired a majority stake in Bombardier's C-Series, 100-seat aircraft, which signaled Airbus's entry into the small jet segment long dominated by Bombardier and Brazil's Embraer. Responding to the Airbus-Bombardier alliance, the U.S. Department of Commerce announced punitive measures, including possible tariffs. The move prompted various European governments to threaten countermeasures.

Airbus opened an aircraft production plant in Mobile, Alabama in 2015, after receiving more than $150 million in subsidies from the southern U.S. city and state, and was producing about one aircraft per week there by 2017. Airbus developed the new plant partly in response to U.S. government efforts to impose steep tariffs on imports of small jet aircraft. In response, Airbus announced plans to establish production of the Bombardier C-Series at its Alabama facility. The new plant helped Airbus avoid the tariffs, and also created numerous high-paying jobs in the United States. Boeing earlier had received as incentive package from Alabama worth about $150 million when it opened a rocket production facility in Decatur, Alabama.

New Threats on the Horizon

In 2017, state-owned enterprises of both China and Russia announced formation of the China-Russia Commercial Aircraft International Corporation. The firm aims to develop aircraft that can compete with the most advanced Boeing and Airbus jets. Another Chinese state-owned enterprise, China Commercial Aircraft Company, began producing commercial aircraft in 2017. The company already has received hundreds of aircraft orders, mainly from Chinese firms. Airbus and Boeing must develop strategies and competitive advantages to combat rivals from China and Russia.

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Case Questions

1. 7-4.
2. Where do you stand? Are EU subsidies and soft loans to Airbus fair? Why or why not? What advantages does Airbus gain from financial support from the EU governments? Are complaints about EU subsidies fair in light of Europe's history of democratic socialism?
3. 7-5.
4. Do U.S. military contracts with Boeing amount to subsidies? Do such payments give Boeing unfair advantages? Justify your answer.
5. 7-6.
6. Assuming that Airbus cannot compete without subsidies and loans, is it likely that the EU will discontinue its financial support of Airbus? Is it in the EU's interests to continue supporting Airbus? Justify your answer.
7. 7-7.
8. If the WTO tells Airbus to stop accepting subsidies and soft loans, how should Airbus management respond? What new approaches can management pursue to maintain Airbus's lead in the global commercial aircraft industry?
9. 7-8.
10. What strategies and other approaches can Airbus and Boeing develop to meet new competition from state-owned enterprises in the aircraft industry in China and Russia