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Boeing versus Airbus: The endless crusade for continuation of

subsidy!
(A case study)
Case reviewer: Angelica Sharma
*
Brought up in a family in which my parents were always ready to help anyone,
closely or even remotely related to them, but not without being duly satisfied about the
urgency, righteousness / desirability of assistance (mostly financial) that was asked for, I
have, overtime, come to view non-market incentives like subsidies, grants and tariffs
from a mind-set that I have found moulded in their company. I look upon my parents as
really great protagonists of market-economy without undermining their sense of
sympathy and concern for the hapless lot around them in that country, they proudly refer
to as India. hey always made a distinction between who deserved and who did not
deserve the favour that has been asked for. !nd also, they were particular to find out
when, in what form, how much and for how long the assistance, if any, was to be there.
"trangely, even to day, they remorsefully recall the few instances of having wasted their
scarce productive resources on individuals who, they later-on found, never wanted to be
on their own. But they did learn a lesson from these e#periences. I have grown in such
family environment of respect for merit, hard work and self-pride. It is endowed with this
sense that I intend to ponder over the Boeing-!irbus subsidy-related trade-rift and
comment on the perceptions, policies, arguments and counter-arguments of the two sides
and their respective governments in respect of the basic issues inherent in this
controversy. $et me first summarily describe the facts of this dispute, and the classical
dichotomous roles of the governments, on the two sides.
History of trade dispute between Boeing and Airbus: An overview
%ntil &'(), %" commercial aircraft industry en*oyed a de facto monopolistic
position in the world market, despite the +uropean-based !irbus Industry having come to
e#ist in 19!"
#
he %" dominant position, with two %" commercial aircraft
manufacturers, Boeing and ,c-onnell -ouglas together, accounting for more than two-
thirds of the world market share, continued till as late as the mid-&'')s. .ith Boeing
deciding to ac/uire ,c-onnell in &''0, it was e#pected that the position will improve
further. "urprisingly, this formidable position came to be challenged by !irbus, which
since &'(&, contrary to its initial perception of having been regarded as only a marginal
competitor, was progressively increasing its market share. By early 1)))s, !irbus was
consistently garnering a larger share of new orders than Boeing, and in 1))2, it even
surpassed Boeing for the first time in deliveries of aircrafts (2)3 deliveries by !irbus as
against only 1(& by Boeing).
4 he author5s review of the Boeing-!irbus trade-dispute is mainly based on the details
of the case specified in 6ill (1))3)
&
&
he phenomenal success of !irbus was not received well by many in the %" who
attributed it to the fact that it was due mainly to the huge subsidies it received from the
government. his was followed by a chain se/uence of accusations and counter-
accusations. "omehow, under an agreement in &''1, the two sides agreed to make some
allowances to each other. he agreement allowed !irbus to receive some launch aid from
+% governments (7reat Britain, 7ermany, 8rance and "pain), and Boeing to benefit from
government 9 : - contracts. %nder the agreement, direct government subsidies were
limited to 22 per cent of the total costs of developing a new aircraft with the condition
that such subsidies had to be repaid with interest within &; years. But the agreement did
not last long. In &'';, the agreement broke down when the +uropean %nion decided to
challenge the merger between Boeing and ,c-onnell -ouglas on the ground that it
limited competition. Boeing5s plea was that the merger was necessary to strengthen its
presence in the defense and space side of the aerospace business areas where ,c-onnell
-ouglas was traditionally strong. !fter the two sides listened to each other, the dispute
between the two appeared to have settled. But soon after, the !irbus e#ecutives, who had
initially stated that they had no ob*ections to the merger, gradually started opposing the
merger again and became increasingly vocal in their pronouncements. rade tensions
between them erupted yet again in 1))<. his time, the %" /uestioned the
appropriateness of !irbus receiving the launch aid even as it had consolidated its position
in the world market. o this the !irbus responded with the accusation that Boeing was
still benefiting from subsidies. =o break-through was seen in the dispute. o add fuel to
the fire, the British government decided to announce even a fresh dose of aid (> ;))
million) to the !irbus in mid-1))3. he %" dissatisfied with these developments formally
filed a re/uest with the .? for establishment of a dispute resolution panel. he +%, on
its part, /uickly reacted and filed a countersuit with the .? claiming that %" aid to
Boeing e#ceeded the terms set out in the &''1 agreement.
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$ain issues of contention and their %erit
$ooking back at the history of trade dispute between Boeing and !irbus, I may
summari@e and comment upon the main grievances, arguments and counter-arguments of
this case as followsA
he most convincing grievance of Boeing (which was consistently losing its
business to !irbus) was that !irbus received huge subsidies, between &';) and &''), in
the form of loans at below-market interest rates and ta# breaks which together amounted
to > 13.' billion. his benefited !irbus in two ma*or ways. ?ne, its 9:- became a
highly subsidi@ed, hence, a high-voltage innovative program with e#tremely favorable
cost and /uality implications, and thereby, a competitive edge in the market. wo, it also
provided a financial base to the !irbus which was strong enough to enable it offer its
aircrafts to its customers on highly attractive terms of credit B credit to the e#tent of ()
percent of the aircraft cost for a term of (-&) years, at appro#imately ; percent interest
rate. his was /uite in contrast as compared to the credit provisions in the case of Boeing.
he %" +#port-Import Bank supplied credit for purchase of Boeing and ,c-onnell
-ouglas aircrafts B 1) percent down payment, and credit against only <) percent of the
aircraft cost, the remaining <) percent to be financed by private banks at an average
interest rate of about (.3 percent for a period of &) years. !pparently, the two competitors
cannot be said to be on a level playing field with regard to the availability of credit
support to their marketing efforts. But there is other side of this issue, as well. a little
reflection on which would tilt the scale in favour of !irbus. .e will turn to it a little later.
$et us first see what the contention of !irbus was in this regard.
he main reaction of !irbus to the said ob*ection of Boeing was that its success
was not due basically to the subsidies it received, but to its state-of-the-art technology,
and strategic production and marketing vision. "trategically, it concentrated initially only
on market segments not served by new aircraft or not served at all. !s this position of
!irbus appears to be based on facts which are of ob*ective nature and verifiable, the
grievance of Boeing, e#pressed in the disguise of une/ual credit terms, is possibly the
e#pression of disgust over its failure to protect its market share and retain its hegemony
in the market. +ven otherwise, the main issue of trade rift between the two cannot be said
to be the government aid. If !irbus received subsidies, so did Boeing, too. If at all, the
blame with regard to the subsidy controversy lies with any one, it lies first of all with
Boeing, and then with the governments, on the two sides.
If we evaluate and compare the subsidies availed by !irbus and Boeing, there is a
ma*or difference between !irbus subsidy and Boeing subsidy. he !irbus subsidy has
been in the form of repayable loans with interest for aircraft development, which is legal
according to the .orld rade ?rgani@ation. he Boeing subsidy, on the other hand, has
been for aircraft production, which is prohibited by the .? and which is never re/uired
to be paid back. his fact is duly supported by a research conducted at the Canada-
%nited "tates rade Center in the %B -epartment of 7eography
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. If someone is to lose
the case on this ground, it is Boeing. Is Boeing ready to payback the subsidies and accept
self-financing arrangement to cover for the areas funded by subsidiesD
"econdly, it is /uite intriguing as to why government aid continues to be allowed
even after these giants have matured enough to be able to find out to stand on their own
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strength. o me no argument (in favour of any further continuation of aid) - employment-
based, or B?E-based, or even the one that derives its strength in the name of national
pride - is acceptable to me.
.atching this episode from heaven, 6amilton and $ist, would have wondered
over the wrong empirical side of the Infant Industry !rgument they put forward in
support of players competing on une/ual levelsF !ccording to the infant industry
argument, it makes sense to e#tend temporary support to such domestic industries which
are crucial to the general wellbeing of the people of the country and which cannot
compete with its giant competitors for want of level playing field. It is a historical fact
that the world5s three market economies - %"!, 7ermany and Gapan - all began their
industriali@ation duly assisted by their respective governments through various types of
trade barriers. his argument seems fine, highly plausible and convincing. ,any
governments have seen merit and conviction in this argument. But there are instances
when governments, both in developed and developing countries, have made its e#tensive
use to defend their, otherwise un*ustifiable, anti-free-trade policies.
Erotectionist measures, tariff or non-tariff, are *ustifiable only as a temporary
support. But e#perience has shown that in most countries, the shelter behind these
restrictive trade practices became mostly a perpetual phenomenon (look at the classical
case of agricultural subsidies in India). "ubsidies, beyond a particular stage, may do no
good if these fail to make the industry really competitive and self-reliant. +ven after
decades of basking under the comfort of subsidies, both Boeing and !irbus, and sadly,
even their respective governments, still continue to regard their continuation
indispensable.
he following are the main arguments that have been put forward in support of
continuation of subsidies, in this caseA
High development costsA he costs of developing a new airliner are
estimated to be between > 3 billion to > &3 billion for various categories of
aircrafts.
High break-even levelA 7iven such enormous development costs, a
company must procure a substantial market share to break-even. It has
been estimated that the break-even in the case of commercial aircraft
industry may not be e#pected before &3 years or so, given the demand and
production pro*ections.
Volatile demandA he commercial airline business is prone to cyclical
behaviour. !s e#perience shows, in the recent past, many ma*or airlines
suffered from falling demand and went bankrupt, although there were
other, less important, reasons, too.
Substantial experience curve levelsA In aircraft industry, a significant
e#perience curve e#ists on the manufacturing side. It has been estimated
that the positive economies, induced by e#perience and learning ac/uired
during sustained production tempo, produce a significant reduction in unit
cost B with doubling of accumulated output the company en*oys a unit cost
advantage to the e#tent of 1) percent. Conversely, it means that if a
<
company achieves only half of the market share re/uired to break-even, it
will suffer a 1) percent cost disadvantage.
here can be hardly any dispute with the merit of these arguments. But one thing is
not clear. If the two commercial aircraft companies are e#pected to be competitive and
profit-making in the long-run by their respective governments, and further, if they are
regarded worth developing through subsidies and other protectionist measures, why
should the government not leave them to the total care of the private sectorH why should it
assume any responsibility for itself, in this regardD o counter this suggestion, it may be
argued that the investment involved is on an enormous scale, and for a long period, and
above all, it is e#posed to the adverse effects of demand uncertainties. his argument
surely is not convincing. If at all, it implies any thing it is as followsA ?nly the productive
resources owned by the private sector have an opportunity cost, so do not let them be
wasted. he resources at the command of the government are no body5s money (the ta#-
payerF), so why care for their opportunity cost. ,oreover, the argument that private
investors take into account only the current returns in an industry and fail to take account
of the future prospects is not consistent with investor behaviour in advanced countries,
particularly where the latter are often observed to back pro*ects whose returns are
uncertain and lie far in the future. (Consider, for instance, the %" biotechnology industry,
which attracted hundreds of millions of dollars of capital years before it made even a
single commercial sale)
<
.
&eality of the situation
?n the strength of these arguments, one would tend to agree with the view of the
analysts in this area that the world market for commercial aircrafts can at the most
support the presence of three ma*or producers. In my assessment, recognition of the
oligopolistic nature of global commercial aircraft market must be accompanied by
acknowledgement of the self-defeating outcomes of individually-centered, non-collusive
strategies adopted by firms in such industry. his is what Boeing and !irbus has to learn
from Cournot5s model in which oligopolistic firms are portrayed behaving in an
e#tremely naIve, if not stupid, manner, and never learning from their past mistakes. !s a
result, they finally land themselves in a collectively disadvantageous position. In such
case, respect for mutual interdependence and acting in a coordinated way is in the interest
of both. ,ore or less, similar are the implications of other non-collusive behavior
models, for instance, "tackleberg5s model (the leader-leader case).
'onclusion
he substance of this review of the case, in /uestion, is that firms, such as Boeing and
!irbus, operating in an oligopolistic market environment should not be Jmisled to be
competitive5 by way of granting legitimacy to their clamour for subsidies, direct or
indirect. his is patently un*ustified. his amounts to frittering away scarce productive
resources for which policy makers owe an e#planation to the ta#-payers. he sooner the
two giants in the arena of global commercial aircraft market see the writing on the wall
and ad*ust themselves to the reality of the market scenario and assimilate its culture of
co-e#istence (in terms of leadership acceptance, or market sharing, or adopting limit-
pricing behaviour so as to keep potential entrants at bay), the better it is for them and
their countries. In no way, this perception may be construed to imply a competition-
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limiting approach. he fact is that in this particular case, any attempt of ac/uiring a
competitive edge by one side on the other is most likely to induce a chain se/uence of
actions and counter-reactions, arguments and counter-arguments. %ltimately, it is
detrimental to their own interest as well as to the interests of their customers. Both
Boeing and !irbus spend billions of dollars for buying aircraft parts and sub-assemblies
such as avionics and landing gears. "o, fre/uent trade war can be more deteriorating than
*ust affecting the airline customers. (n any dispute between two parties when
insinuations and allegations replace logic) when the %ediator *li+e grievances,
redressal %echanis% of the -T./ lac+s the necessary teeth to ensure co%pliance of
its nor%s and rulings) and when even the govern%ents lose ob0ectivity and vision)
solutions are not easy to see+" 1iven) sincerity of purpose and sagacity) the solutions
are not difficult) either"
%." should e#plore the options of e#panding its target market to other emerging
foreign markets like Kietnam and Iran
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. Current e#port controls in %.". prevent Boeing
from entering these markets. hey also affect !irbus sales through re-e#port constraints.
!irbus can lower the %." content by the introduction of 9olls 9oyce engines in place of
the manufactures Eratt and .hitney and 7eneral +lectric. he two companies should
look for ways of comparative advantage by looking at the use of cost effective and more
speciali@ed products and services produced by other country to bring in operational
efficiency through scale economies. 8or e#ample, .estern +urope holds a competitive
advantage with respect to .ind unnel capability.
&eferences
&. 6ill, Charles .. $. (1))3), International businessA Competing in the 7lobal
,arket Elace, ,cgraw-6ill.
1. httpA//ec.europa.eu/trade/issues/sectoral/industry/aircraft/inde#Len.htm)
2. httpA// igeographer.lib.indstate.edu/pritchard.pdf
<. Mrugman, Eaul 9. (1))2), International +conomics, Eearson +ducation, Inc.
3. 7lobal Competitiveness of %. ". !dvanced-echnology ,anufacturing
Industries- By -I!=+ Eublishing Company
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