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CLOSING CASE Government Intervention at Airbus and Boeing Historically, United States companies such as Boeing (www.boeing. Government Support for Airbus com) and Mcdonnell Douglas were the dominant players in the global aircraft industry. Founded in 1916 in Seattle, Boeing had Since the 1940s, European governments have pursued public poli- many years to develop the critical mass necessary to become the cies based on democratic socialism. Under this system, Europeans world's leading aerospace manufacturer. During World War II and became accustomed to government playing a significant role in the subsequent Cold War years, Boeing received many lucrative con- guiding economic affairs. tracts from the U.S. Department of Defense. Airbus has benefitted enormously from government support. No single country in Europe possessed the means to launch an The firm has received tens of billions of euros of subsidies and aerospace company capable of challenging Boeing. Manufacturing soft loans from the four founding country governments and the commercial aircraft is complex and capital-intensive and requires a European Union (EU). Airbus must repay the loans only if it achieves highly skilled workforce. In the 1970s, the governments of France, profitability. Government aid has financed, in whole or part, every Germany, Spain, and the United Kingdom formed an alliance, sup- major Airbus aircraft model. European governments have forgiven ported with massive government subsidies, to create Airbus S.A.S. Airbus's debt, financed R&D for civil aircraft projects, and provided (www.airbus.com). By 1981, the four-country alliance succeeded in infrastructure and huge equity infusions. becoming the world's number-two civil aircraft manufacturer. Airbus Airbus is currently a stock-held company jointly owned by launched the A300, among the best-selling commercial aircraft of all the British, Germans, French, and Spanish. It is based in Toulouse. time. The Airbus A320 received more than 400 orders before its first France, but has R&D and production operations scattered through- flight, becoming the fastest-selling large passenger jet in aviation out Europe. European governments justify their financial aid to history. By 1992, Airbus captured roughly one-third of the global Airbus on several grounds. First, Airbus R&D activities result in the commercial aircraft market. Airbus surpassed Boeing in orders for development of valuable new technologies. Second, Airbus provides new aircraft in most of the 15 years through 2015. jobs to some 55,000 skilled and semiskilled Europeans. Third, itsvalue-chain activities attract massive amounts of capital into Europe. The U.S. government gave Boeing more than $23 billion in indirect Finally, Airbus generates enormous tax revenues, government subsidies by means of R&D funding and other indirect Complaints about Unfair Government Intervention support from the Pentagon and NASA, the nation's space agency. Boeing is at liberty to use the knowledge acquired from such proj- Boeing and the U.S. government have long complained about the ects to produce civilian aircraft. The state of Washington, Boeing's massive subsidies and soft loans that were responsible not only for primary manufacturing and assembly location, has provided the firm Airbus's birth, but also for its ongoing success. The outcry became with tax breaks, infrastructure support, and other incentives totaling louder in the 20005, when Airbus surpassed Boeing in annual sales, billions of dollars. becoming the world's leading commercial aircraft manufacturer. The EU also has a case at the WTO regarding Boeing's relations Boeing has argued that Airbus never would have gotten this far with Japanese business partners. Boeing entered an alliance with without government support. Japan's Mitsubishi, Kawasaki, and Fuji to build the 787 Dreamliner. The U.S. government has brought several complaints to the The Japanese firms provided billions in soft loans, repayable only if World Trade Organization (WTO). Among these are charges that the aircraft is commercially successful. EU member states have approved 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 Recent Aircraft from Airbus and Boeing the WTO's Agreement on Subsidies and Countervailing Measures In 2011, Boeing successfully launched the 787 Dreamliner and is (ASCM) and that the subsidies constitute unfair international trade. ahead of Airbus in launching innovative and fuel-efficient aircraft. Under the ASCM, subsidies to specific firms or industries from a gov- About the same time, Airbus launched the A380, an innovative ernment or other public bodies are prohibited. Airbus had applied airplane with an upper deck extending the entire length of the to the governments of France, Germany, Spain, and the United fuselage and a cabin that provides 50 percent more floor space Kingdom for aid to launch its model A350. than Boeing's largest aircraft. The A380 can seat between 555 In 2012, the WTO ruled that EU aid to Airbus had caused Boeing and 853 passengers, depending on the seating configuration. It to lose market share in Asia and other markets. EU officials argued that has a maximum range of 15,000 kilometers (8,000 nautical miles). government subsidies to Airbus were permissible and that it was up to The total cost to develop and launch the A380 reached 15 billion individual EU countries to decide whether to provide them, However, euros (U.S. $21 billion), partly supported by funding from European the WTO also ruled that Boeing received more than $5 billion in U.5. governments. government subsidies in the development of the 787 Dreamliner. The government of China is developing its capacity to produce jumbo jets, part of its quest to challenge Boeing and Airbus in the Government Support for Boeing global aircraft industry. China Commercial Aircraft Company was The EU argues the United States government has indirectly subsi- established in Shanghai amid forecasts that China's domestic market dized Boeing through massive defense contracts paid by tax dollars. for commercial aircraft will increase fivefold by 2026.AACSB: Reflective Thinking Skills, Ethical Understanding and Reasoning Abilities Case Questions Sources: Doug Cameron and David Kesmodel, "Warning Is Issued About 7-4. Where do you stand? Do you think EU subsidies and soft loans Plane Glut." Wall Street Journal, February 23, 2012, pp. B6-B6; Corporate to Airbus are fair? Why or why not? What advantages are profiles of Airbus and Boeing at www.hoovers.com; Deloitte, 2015 Global gained by Airbus from free financial support from the EU gov- Aerospace and Defense Industry Outlook, www.deloitte.com; Matthew emments? Are complaints about EU subsidies fair in light of Dalton, "EU Files Complaint with WTO About Bocing," Wall Street Journal. Europe's history of democratic socialism? December 22, 2014, retrieved from www.wsj.com; K. Epstein & J. Crown, 7-5. Do you believe U.S. military contracts with Boeing amount to "Globalization Bites Boeing," BusinessWeek, March 24, 2008, p. 32; D. Gauthier-Villars and D. Michaels, "Airbus Buyers Get French Aid," Wall subsidies? Have these types of payments provided Boeing with Street Journal, January 27, 2009, p. B4: Max Kingsley-Jones, "Throwing unfair advantages? Justify your answer. Down the Gaunttet," Airline Business, October 2011, pp, 28-30; Pilita 7-6. Assuming that Airbus cannot compete without subsidies and Clark, Joshua Chaffin, and James Politi, "WTO Rules that Boeing Received loans, is it likely that the EU will discontinue its financial sup- $5.3bn in Aid," Financial Times, April 1. 2011, p. 19; "China to Make Jumbo port of Airbus? Is it in the EU's interests to continue supporting Jetliners, Trim Roles of Boeing, Airbus," Wall Street Journal, May 12, 2008, Airbus7 Justify your answer. p. B4; "How Airbus Flew Past Its American Rival," Financial Times, March 7-7. If the WTO rules against Airbus and tells it to stop accepting 17, 2005, p. 6; Mavis Toh, "Rising in the East," Airline Business, April 2015, subsidies and soft loans, how should Airbus management pp. 32-35; Stephan Wittig, "The WTO Panel Report on Boeing Subsidies: A respond? What new approaches can management pursue Critical Assessment," Intereconomics, May 2011, pp. 148-153. to maintain Airbus's lead in the global commercial aircraft Nore: The authors acknowledge the assistance of Stephanie Regales with this industry? case
