Look Up -- It's a Dogfight

With Boeing battling Airbus over financing, airlines may delay orders and plans for the latest jets could be stalled

After months of veiled threats, the fighters finally came out of their corners. On Oct. 6, the U.S. and the European Union both complained to the World Trade Organization that the other has broken trade rules in subsidizing its aviation industry.

Washington jabbed first, accusing EU governments of providing billions in unfair aid to help Airbus overtake Boeing (BA ) as the No.1 commercial planemaker. Brussels slugged right back, countering that Boeing is set to rake in billions in unwarranted U.S. aid to develop its latest jet, the 7e7.


  The showdown has the makings of a heckuva bout, with huge stakes for global trade, U.S.-Europe relations, and the companies themselves. Although a negotiated settlement is ultimately likely -- neither side really wants to risk going all the way to the WTO court -- both will clearly have to give up some government support to put the dispute behind them. And that could have a big impact on the financing and sales of the next generation of superefficient jets: the 7e7 and Airbus' yet-to-be-official A350.

Already airlines may be delaying orders for the new Boeing plane until they see how the fight plays out. "We've got time," says an official at one of Europe's biggest flag carriers. But Boeing clearly feels the price is worth paying: The U.S., in tandem with its WTO action, pulled out of a 1992 bilateral pact that has allowed Airbus to borrow up to 33% of the cost of new aircraft development in risk-free government loans.

Stopping those loans is Boeing's main goal. "You're delivering and selling more airplanes than Boeing," Boeing CEO Harry Stonecipher said of Airbus during a call with reporters on Oct. 11. "Why don't you go to the bank and borrow money?"


  No question, without those loans, financing the A350 will get much tougher. With its double-decker A380 set for launch in early 2006, Airbus probably could tap at least $2 billion from its cash flow between 2006 and 2008 to develop the A350, say analysts. But that money would barely finance a modest revamp of the current A330, which almost certainly wouldn't match the 7e7's promised fuel savings. To do that, Airbus might have to spend more than $6 billion.

Where would the extra money come from? Airbus would probably look for partnerships with foreign firms that can win state financial support. That's what Boeing is doing with the 7e7. By yearend, Boeing is set to sign contracts with Mitsubishi Heavy Industries and other Japanese companies that will build a third of the plane. The Japanese government is expected to lend the suppliers at least $1.5 billion, covering two-thirds of their development costs.

It will be tough for Airbus to line up similar pacts in Japan, since Boeing dominates the market. But Airbus is already looking elsewhere. On Oct. 9, the same day it closed a $26 billion aircraft sale to two Chinese airlines, Airbus signed a $100 million deal with state-owned China Aviation Industry.


  Even if Airbus secures financing, timing is a problem. Developing a whole new plane would take Airbus at least four years, meaning the A350 wouldn't get airborne before 2010, two years after the 7e7. That would give Boeing a head start as the airline industry begins pulling out of its deep slump. "This plane is going be successful on its merits," says Peter Gardner, vice-president of technical operations for Cathay Pacific Airways. "It's what the industry needs."

Yet the WTO skirmish could hurt Boeing's new plane, too. Airbus CEO Noël Forgeard has accused Boeing of "a massive campaign of untruths whose chief goal is to protect the enormous subsidies to the 7e7." Among other things, the EU is challenging a $3.2 billion tax break that Washington state has promised Boeing and its suppliers.

Stonecipher has hinted that Boeing might forgo some of the tax break if Airbus gives up the government loans. While Boeing says losing all or part of the break would have minimal impact, some analysts believe it could hurt profits.

For now, this fight is still in the early rounds, and it's far from clear who will prevail. But one thing is certain: The aviation-subsidies game is about to get a whole lot more complicated.

By Carol Matlack in Paris, with Stanley Holmes in Seattle

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