Boeing Versus Airbus

On November 10, a Boeing 777 set a world record for the longest non-stop flight ever. The plane traversed 11,664 nautical miles from Hong Kong east to London in 22 hours and 42-minutes, a stunning display of the capabilities of America’s leading aircraft producer. At the same time, the company announced plans for a larger version of the 747 and a new 200-300 seat craft in production, the 787 Dreamliner. With over 300 orders on the books, the first of the new planes are to be delivered by 2007. In the meantime, the 737 remains Boeing's most successful commercial plane, measured by the over 400 orders it has attracted.

Yet, all is not well for Boeing. In July 2003, the Pentagon charged the company with procurement violations, stripped it of $1 billion worth of contracts and awarded them to Lockheed. Boeing, moreover, was forbidden to bid for rocket contracts for a 20-month period.

Far more serious for Boeing in the long run, however, is the growing competition it faces from Airbus, the aircraft division of the European Aeronautic Defense and Space Company (EADS). In January, Airbus launched its 555-seat, double-deck A380 to replace the 416-seat Boeing 747-400 as the largest commercial airliner. The A380 has 35 percent more seats and 49 percent more floor space than the 416-seat Boeing 747-400 so that it can accommodate bars, gymnasiums, and shops.

So far, Airbus has garnered 160 orders for the A380 at a price tag of $275 million each. China, where Airbus has a 34 percent market share, just bought 150 of the smaller A320s worth $10 billion.

As the world’s most dominant aircraft producers by far, Boeing and Airbus constitute what economists call a duopoly. With very strong demand for large commercial aircraft, particularly from Asia, EADS CEO Thomas Enders estimates that “both companies together might score around 1,500 new orders or more for passenger aircraft with over 100 seats.”

Regrettably, however, the two giant competitors are embroiled in a nasty dispute over government subsidization. Boeing has been protesting for years that Airbus was getting favorable government loans while the Europeans complained about federal, state, and local government aid for Boeing in the form of tax breaks and funding for research and technology.

The World Trade Organization (WTO) permits the Airbus subsidies for aircraft development in the form of repayable loans plus interest. The Boeing subsidies for aircraft production, however, are not to be paid back to the government and are therefore prohibited by the WTO.

In 1991 the European Union and the United States agreed to limit government support to one third of project development cost. They also recognized the fact that each side adhered to a different system of financial support for its aircraft manufacturers. After first promising to find a solution to the controversy outside the WTO, Boeing and the U.S. government have now reopened the trade dispute with Airbus in the WTO.

While the U.S. aircraft industry has been highly successful in its military and commercial production, the decline of Convair, Douglas, and Lockheed as producers of passenger jets seemed to justify the federal and state (of Washington) subsidies that helped assure the continuation of Boeing’s global lead in the manufacture of large commercial airliners. Americans obviously do not want to see Airbus overtake Boeing. The nonrefundable government aid to Boeing, however, makes it unlikely for the U.S. negotiators to prevail with their complaint at the WTO.

Most U.S. administrations since 1945 used to campaign for worldwide trade liberalization and against trade-distorting subsidies. Under present conditions, however, both Boeing and Airbus will remain indefinitely dependent upon taxpayer-funded aid.

If the governments of the free world were serious about their ideal of free and fair trade, one has to wonder why neither the U.S. government nor the European Union is asking both Boeing and Airbus to borrow the money they need in the private market.

Wolf D. Fuhrig	Home	12-11-05
Boeing Versus Airbus
On November 10, a Boeing 777 set a world record for the longest non-stop flight ever. The plane traversed 11,664 nautical miles from Hong Kong east to London in 22 hours and 42-minutes, a stunning display of the capabilities of America’s leading aircraft producer. At the same time, the company announced plans for a larger version of the 747 and a new 200-300 seat craft in production, the 787 Dreamliner. With over 300 orders on the books, the first of the new planes are to be delivered by 2007. In the meantime, the 737 remains Boeing's most successful commercial plane, measured by the over 400 orders it has attracted. Yet, all is not well for Boeing. In July 2003, the Pentagon charged the company with procurement violations, stripped it of $1 billion worth of contracts and awarded them to Lockheed. Boeing, moreover, was forbidden to bid for rocket contracts for a 20-month period. Far more serious for Boeing in the long run, however, is the growing competition it faces from Airbus, the aircraft division of the European Aeronautic Defense and Space Company (EADS). In January, Airbus launched its 555-seat, double-deck A380 to replace the 416-seat Boeing 747-400 as the largest commercial airliner. The A380 has 35 percent more seats and 49 percent more floor space than the 416-seat Boeing 747-400 so that it can accommodate bars, gymnasiums, and shops. So far, Airbus has garnered 160 orders for the A380 at a price tag of $275 million each. China, where Airbus has a 34 percent market share, just bought 150 of the smaller A320s worth $10 billion. As the world’s most dominant aircraft producers by far, Boeing and Airbus constitute what economists call a duopoly. With very strong demand for large commercial aircraft, particularly from Asia, EADS CEO Thomas Enders estimates that “both companies together might score around 1,500 new orders or more for passenger aircraft with over 100 seats.” Regrettably, however, the two giant competitors are embroiled in a nasty dispute over government subsidization. Boeing has been protesting for years that Airbus was getting favorable government loans while the Europeans complained about federal, state, and local government aid for Boeing in the form of tax breaks and funding for research and technology. The World Trade Organization (WTO) permits the Airbus subsidies for aircraft development in the form of repayable loans plus interest. The Boeing subsidies for aircraft production, however, are not to be paid back to the government and are therefore prohibited by the WTO. In 1991 the European Union and the United States agreed to limit government support to one third of project development cost. They also recognized the fact that each side adhered to a different system of financial support for its aircraft manufacturers. After first promising to find a solution to the controversy outside the WTO, Boeing and the U.S. government have now reopened the trade dispute with Airbus in the WTO. While the U.S. aircraft industry has been highly successful in its military and commercial production, the decline of Convair, Douglas, and Lockheed as producers of passenger jets seemed to justify the federal and state (of Washington) subsidies that helped assure the continuation of Boeing’s global lead in the manufacture of large commercial airliners. Americans obviously do not want to see Airbus overtake Boeing. The nonrefundable government aid to Boeing, however, makes it unlikely for the U.S. negotiators to prevail with their complaint at the WTO. Most U.S. administrations since 1945 used to campaign for worldwide trade liberalization and against trade-distorting subsidies. Under present conditions, however, both Boeing and Airbus will remain indefinitely dependent upon taxpayer-funded aid. If the governments of the free world were serious about their ideal of free and fair trade, one has to wonder why neither the U.S. government nor the European Union is asking both Boeing and Airbus to borrow the money they need in the private market.

Wolf D. Fuhrig

Home

12-11-05

Boeing Versus Airbus