Air-to-Air Combat over Paris

Boeing and Airbus seem set to fight their subsidies battle to the end -- unless customers or the U.S. Chamber of Commerce can calm things

By Carol Matlack and Stanley Holmes

Airbus and Boeing (BA ) turned up the heat on their long-simmering dispute over aircraft subsidies, with tough statements at the Paris Air Show on June 14 suggesting that the U.S. and European Union remain on a collision course before the World Trade Organization.

Airbus CEO Noël Forgeard said at a press conference that the European planemaker would forge ahead with government financing for their new A350 jet by September unless the U.S. agreed to a list of demands to end what Airbus contends is unfair aid to Boeing.

He said Airbus' parent European Aeronautics Space & Defense Co. had delayed the formal launch of the A350 until September, "to give the maximum possible time for negotiation" that could avert a full-scale proceeding before the WTO (see BW Online, 6/13/05, "Airbus' A350 Gets a Lift"). But, he said, "This is the last [extension of time] that we'll give."


  Both the U.S. and EU have recently filed complaints with the WTO accusing each other of providing unfair aircraft subsidies. Airbus says if the case goes forward, it's likely to seek loans from European governments covering up to one-third of the A350's development price of about $5.4 billion.

Although both sides have said they still hope for a negotiated settlement, Forgeard and other Airbus executives were clearly in a combative mood at the air show. "We are willing to go for putting everything on the table, but everything means everything," says Philippe Delmas, Airbus' government-affairs chief (see BW Online, 6/13/05, "Another Turbulent Paris Air Show").

In exchange for Airbus giving up the loans it receives from European governments, Delmas says, Boeing would have to forego U.S. tax breaks, as well as indirect aid in the form defense and space research contracts that benefit its commercial-jet business.


  He also called on Boeing to give up aid that the Japanese government is providing local contractors that are supplying about 35% of the content of the new 787 Dreamliner aircraft. Airbus in the past has soft-pedaled its complaints about Japan's role in the 787 for fear of angering Japanese government and airline officials. In addition, Airbus called for an immediate end to a foreign-sales tax credit that the U.S. is gradually phasing out, which has benefited Boeing.

Those demands drew a quick response from Boeing Commercial Aircraft Chief Alan Mulally, who dismissed Airbus' claims that the U.S. company is subsidized. The tax breaks that some state and local governments are providing Boeing are "irrelevant" to the trade dispute, he says. "If Airbus or anybody else wants to come work in the state of Washington, they will get all the same advantages." He also denied that Boeing's commercial business benefited from government-funded space research, and he said the help it received from defense contracts were minimal.

While saying he still hoped for a negotiated settlement, Mulally in turn accused the Europeans of violating an earlier bilateral agreement over aircraft launch aid. That agreement, negotiated in 1992, allowed Airbus to finance up to one-third of aircraft development with government loans, but he says it set a goal of reducing the loans from 33% to zero over time. Says Mulally: "Clearly, the EU and Airbus chose to institutionalize launch aid and not reduce it to zero, so they violated the terms of the agreement."


  While the two planemakers traded barbs, some customers appeared to be losing patience. Steven F. Udvar-Hazy, chairman and chief executive of the Los Angeles-based International Lease Finance Corp. -- the biggest lessor of both Boeing and Airbus jetliners -- said in an interview that he wanted all government intervention in the aircraft business to end. "Our belief at ILFC is that free-trade philosophy and capitalism shall prevail," he says. "I hope in the coming years both Boeing and Airbus and the engine manufacturers will be less dependent on external aid and let the market forces decide how these aircraft are funded."

Also caught in the crossfire is the U.S. Chamber of Commerce, whose president, Tom Donohue, is to visit the air show on June 15. Although the chamber hasn't spoken publicly about the aircraft-subsidy issue, it has privately urged both the U.S. and the EU to avoid pursuing a battle before the WTO.

"We've told both sides we hope they'll reach a negotiated settlement," Scevole de Cazotte, the chamber's senior policy director for European affairs, told BusinessWeek Online. "This is a truly global industry," with Boeing and Airbus both making heavy use of foreign suppliers on their planes, he says. "It's silly to make a national war out of this." In the meantime, the fusillades fly.

Matlack is BusinessWeek's Paris bureau chief, and Holmes is a Seattle-based correspondent

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