Boeing vs. Airbus: It's Getting Ugly

The two planemakers are raising the volume of their spat over subsidies. Will the dispute go to the WTO?

What's Airbus up to now? On Sept. 6, Chief Executive Noel Forgeard hinted that the European planemaker may soon unveil plans for yet another new aircraft even before the doubledecker A380 takes its first test flight early next year. Studies on a new plane could start within weeks, Forgeard said, with industrial agreements signed by early 2006. "Airbus is bubbling over with new projects," he said.

Forgeard's comments followed weeks of rumors that Airbus is set to revamp its A330, a midsize widebody jet, to counter Boeing Co.'s (BA ) superefficient 7E7 Dreamliner, a brand new 215-seater that's scheduled to get airborne in 2008. Boeing is banking on the 7E7, its first new model since the Boeing 777's launch in 1990, to help regain the lead from Airbus in the global commercial-jet duopoly. A revamped A330 would probably use lighter-weight composite materials and next-generation engines developed by Rolls-Royce PLC (RYCEY ) and General Electric Co. (GE ) for the 7E7. Most analysts reckon such a plane could get onto the market before the 7E7's scheduled debut. And the startup would probably cost no more than $2 billion, which Airbus could pay out of cash flow even as it wraps up the $13 billion A380 project.

But will this idea ever fly? A reworked A330 might cost a little less than the 7E7's $120 million list price, but almost certainly couldn't match the fuel savings and operating efficiencies that are the Boeing plane's key selling points. Airbus could still opt to develop a new aircraft, but it wouldn't be ready for the market until at least three years after the 7E7 makes its debut.

You might think Airbus would want to clear up the confusion -- but you'd be wrong. The more Airbus can get airlines wondering what its next move will be, the more the airlines are likely to delay a decision on ordering the 7E7, says Richard Aboulafia, an aerospace consultant with Teal Group in Fairfax, Va. "Their objective isn't to build a plane, it's to undermine the 7E7 business case," he says.

Alas for Boeing, the psychological warfare may be working. No major carrier has announced an order for the 7E7 since last spring when Japan's All Nippon Airways Co. (ALNPY ) ordered 50. True, other Boeing models, including the highly profitable 747, were slow to attract customers. Boeing execs say two dozen airlines have shown strong interest in the 7E7, and they're confident of getting 200 orders by yearend. "Airlines are worried about not having the 7E7 because its lower cost structure gives it a 20% competitive advantage," says Mike Grady, a vice-president of Smiths Aerospace, a British avionics supplier.

But many industry watchers were surprised when Boeing failed to land any 7E7 orders at the Farnborough Air Show in Britain in July. Then on Aug. 25, Singapore Airlines Ltd. delayed indefinitely a decision on ordering the 7E7 or the A330. Boeing is counting on Asia for early 7E7 orders, since Asian airlines are generally stronger than their U.S. counterparts. And Singapore is seen as a trendsetter in the region, says Mark Tan, an analyst with UOB Asset Management Ltd. in Singapore. Now that the airline has decided to wait, other Asian carriers will be reluctant to order the 7E7 soon, he predicts.

As it fights to make the 7E7 a success, there's one way for Boeing to strike back -- by turning up the heat on a long-simmering trade dispute over European government aid to Airbus. At the opening of the Farnborough show, Boeing CEO Harry Stonecipher issued a blistering attack on a 1992 bilateral agreement under which Airbus has received billions in European government loans. Boeing argues the deal gives Airbus an unfair advantage and is doubly unjust now that the European planemaker commands more than 50% of the business. "They ought to be able to build [new aircraft] with their own funds. Why don't they go out to the banks to get it?" asks Stonecipher. U.S. trade officials agree and have requested a meeting in Brussels to ask that the pact be scrapped.

While the two rivals have sparred publicly over subsidies for years, Boeing has never pushed the issue to the breaking point for fear of alienating European customers, who included flag carriers of some countries providing loans to Airbus. This latest quarrel, though, looks serious. A European Union briefing paper obtained by BusinessWeek shows the EU plans to fire back with complaints that Boeing obtains billions in benefits and tax breaks in the U.S. and in foreign countries where Boeing suppliers receive government aid. If Airbus loses its government loans, says Ralph Crosby, the North American chairman of Airbus' parent, European Aeronautic Defense & Space Co., "there will have to be an equitable change on the other side."


In raising the subsidy issue, Boeing is playing its own brand of psychological warfare. It's trying to signal the markets that Airbus may lose its government loans, which since 1992 have covered up to one-third of the development cost of new planes, including the A380 and new versions of the widebody A340. The EU says $5.2 billion in such loans are now outstanding and Airbus has already repaid $6.5 billion. Boeing's gripe is that the pact lets Airbus avoid repaying the loans in full if sales of the aircraft that is being financed fall short of forecasts. Airbus says that has never occurred. Even so, Boeing contends the deal gives Airbus an advantage by lowering its commercial risk, making it easier to obtain financing.

Airbus is rich now: It posted 9.8% operating margins on $12.1 billion in sales for the first half of this year. That means it probably could mount a major new aircraft program without government loans -- possibly a rival to the 7E7 -- after the A380's launch in 2006. But Boeing figures that without the governments' implicit risk cushion, Airbus would have a harder time getting customers and suppliers on board -- and the 7E7 could steal a march on any rival project.

What's next? The White House wants to renegotiate the 1992 agreement. If negotiations fail, then the U.S. would have to bring a complaint on Boeing's behalf before the World Trade Organization, where resolution of disputes is unpredictable. "We'd prefer negotiations rather than litigation," the U.S. Trade Representative's office says. That still leaves plenty of room for mind games.

By Carol Matlack in Paris and Stanley Holmes in Seattle, with Paul Magnusson in Washington, and bureau reports

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