Air war

March 18, 2005

BOEING CO. has been going through a troubled patch. It's now searching for its third CEO in less than two years, having recently lost one to an extramarital affair and another to various scandals. It's had a series of legal problems affecting military contracts, including a 20-month Air Force ban on bidding for rocket work. And it's lost about 20 percent of the world commercial aircraft market in the last five years to its only competitor, Airbus, which became the world's No. 1 plane-maker in 2003.

But at least when it comes to vying with Airbus, Boeing's problems are not entirely its fault. Airbus has had the unfair advantage of billions of dollars in extremely favorable loans from European governments. For 30 years, these direct subsidies were justified by the goal of competing with U.S. economic dominance. But that no longer holds. For years, frictions over these subsidies were considered too hot and too big to resolve. But now U.S. trade negotiators, wielding the threat of World Trade Organization litigation, are in talks with their European Union counterparts to completely eliminate government aid to Airbus.

The much-tougher U.S. stance is very welcome. At stake is a high-tech manufacturing sector in which America is a global leader, many thousands of U.S. jobs and, to some extent, the future strength of a major U.S. defense contractor. But as the U.S.-EU talks approach an April 11 deadline, analysts don't see many signs of progress. The United States must not yield- as it did in 1992, the last time the issue formally arose. And if need be, it must press ahead with its WTO claim.

Boeing's case is this: When Airbus wants to risk rolling out a new aircraft model, European governments provide it with low-rate loans that don't have to be repaid until Airbus actually sells the planes. In other words, it can't lose. By contrast, Boeing has to raise its own capital, literally betting the company each time it bankrolls a new model. That means the European firm can afford to roll the dice by developing the world's largest plane, the A380, and simultaneously indicate that it also will launch a medium-sized plane to compete with Boeing's planned new model. Boeing could never afford two such craft at the same time.

Boeing figures that Airbus has received $15 billion worth of government aid over the decades, and that without these subsidies, the firm would have $35 billion in additional debt. Airbus counters that Boeing gets lucrative local U.S. tax breaks and economic development aid plus subsidies from its Pentagon contracts. But Airbus is eligible for similar U.S. and European deals, and its parents - Britain's BAE Systems and French- and German-owned EADS - do even more defense work than Boeing.

At the Paris Air Show this June, Airbus likely will publicly debut the 550-seat, superjumbo A380 - at the very same airfield where Boeing 36 years ago premiered its 747, still the world's biggest commercial plane. The early buzz on the A380 is that Airbus may have badly miscalculated the demand for a plane of this size, which only four U.S. airports could accommodate right now. If the A380 turns out to be a flop, let's hope that this is the last time Airbus can take such a gamble without facing the full financial consequences.

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