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Originally published June 30, 2010 at 8:00 AM | Page modified July 1, 2010 at 6:54 PM

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WTO rules strongly against subsidies to Boeing rival Airbus

The WTO made public an unambiguous ruling against Airbus Wednesday, fueling congressional ire over the Pentagon's refusal to consider the subsidy issue when it evaluates bids for the Air Force tanker contract.

Seattle Times staff reporters

WTO: Airbus built on illegal subsidies

The benefits of illegal launch aid: "But for the provision of (launch aid), Airbus would not have been able to launch any of its existing range of (jets), that is, the A300, A320, A330/340, A340-500/600 and A380, as and when it did."

Without launch aid: Airbus "would not have achieved the market presence it did." It would have been a "much different, and we believe a much weaker, (large jet) manufacturer." The U.S. commercial-jet industry "at a minimum, ... would have had a larger market share."

Harm to Boeing: "Boeing suffered substantial lost sales during the period 2001-2006."

Harm to the U.S.: "The governments of France, Germany, Spain, and the United Kingdom have caused serious prejudice to the United States' interests."

Source: WTO ruling against Airbus

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An unambiguous ruling against Airbus published Wednesday by the World Trade Organization (WTO) is likely to stoke political fires between the U.S. and the governments of the European Union (EU).

The WTO ruled that Airbus received billions in illegal subsidies for every jet program it has launched since it entered the market 40 years ago.

That inflammatory conclusion comes as Airbus prepares to firm up similar government subsidies for its upcoming A350 jet that will challenge Boeing's 777 and 787 jets.

In addition, Boeing supporters in Congress will try to use the ruling to block Airbus' parent company, EADS, in its bid for the Air Force tanker program.

Airbus indicated it will likely appeal the WTO ruling and said it expects the dispute "to continue for a few more years." It also noted that in July the international trade body is expected to find Boeing guilty in a parallel subsidy case.

Indeed, the settlement process in each case could take several years to play out because of appeals and negotiations over remedies. Before reaching the trade sanctions that would be permitted at the end of that process, a negotiated settlement is likely.

But political fallout affecting the tanker competition and launch aid for the A350 will be more immediate.

The outline of the Airbus ruling had leaked out after the WTO issued an interim decision last September and gave its final ruling to the U.S. and European Union in March.

The hard-hitting sweep of its conclusions, however, became apparent only after the wording was released Wednesday.

It flatly states Airbus' success wouldn't have been possible without $15 billion in illegal launch-aid loans and $5 billion in other illegal support from European governments.

Distorted market

The huge subsidies distorted the commercial-jet market and harmed Boeing through lost sales and resulting lost production, the panel ruled.

"Even in the unlikely event that Airbus would have been able to enter the (large jet) market as a non-subsidized competitor, we are confident that it would not have achieved the market presence it did," the report said. It would have been a "much different, and we believe a much weaker, (large jet) manufacturer" and the U.S. commercial jet industry "at a minimum ... would have had a larger market share."

The WTO report described the EU aid as "unsecured loans granted to Airbus on backloaded and success-dependent repayment terms, at below-market interest rates."

Translation: Airbus got cheap, risk-free, upfront money to start every one of its jet programs.

The harm to Boeing came through "substantial lost sales during the period 2001-2006," the report concludes, citing big Airbus orders from 10 specific airlines: Emirates, Qantas, Singapore Airlines, EasyJet, Air Berlin, Air Asia, Iberia, South African Airways, Thai Airways International and Czech Airlines.

"That means lost production, lost profits and contributes to lost jobs" in the Pacific Northwest, an attorney with the U.S. Trade Representative's (USTR) office said in a teleconference call following the release of the report.

Boeing Chief Executive Jim McNerney urged swift action by the EU to come into compliance with WTO rules.

"This is a landmark decision and sweeping legal victory over the launch-aid subsidies that fueled the rise of Airbus and that continue to provide its products a major cost advantage," McNerney said in a statement.

On Airbus' latest and largest plane, the A380, the WTO panel ruled that certain subsidies for its export were "prohibited," the strongest category of illegal subsidy.

Boeing general counsel Michael Luttig asserted this means "Airbus must repay the $4 billion in illegal launch aid it received for the A380 or restructure the A380's financing to proven commercial terms" without delay.

Airbus hotly disputes that any repayment requirement is likely, as the WTO process typically addresses only protection of trade going forward rather than penalties for past behavior.

More immediate for both rivals is the question of subsidies for Airbus' next airplane, the A350.

The report should be "a strong signal to the European Union and the member states to refrain from future launch-aid disbursements," said USTR General Counsel Tim Reif in a teleconference.

Yet, setting a collision course, Airbus said that pending the expected appeal, it plans to go ahead with the A350 launch aid. It wants to move ahead with building the plane, and is close to finalizing the loans already agreed to in principle with France, Germany, Spain and the U.K.

The WTO ruling is also likely to affect the politics of the competition for a new U.S. Air Force aerial-refueling tanker, known as KC-X.

At a news conference on the grounds of the U.S. Capitol, congressional members from Washington, Kansas and Missouri, Boeing's main operations centers, directed some of their anger over the Airbus subsidies at the Pentagon, which has said it will not factor the subsidies into the tanker contract.

Rep. Norm Dicks, D-Bremerton, the presumptive chairman of the House Appropriations Committee — and thus the main gatekeeper of the Pentagon's budget — all but vowed the Air Force would not fly Airbus tankers.

Dicks noted the demise of Lockheed and McDonnell Douglas as well as Boeing's fall from the No. 1 perch in commercial aviation, events he attributed directly to Airbus' illegal subsidies.

The ruling concludes that without illegal subsidies the Airbus A330-200 tanker platform "could not have been launched when it was without significantly higher costs."

"What really frustrates me is that the Department of Defense refuses to take this into account," Dicks said.

Guy Hicks, spokesman for the North American unit of Airbus parent EADS, called on the Pentagon to continue opposing any attempt "to use the ongoing WTO commercial-trade dispute to derail the KC-X competition."

The WTO process forbids a country that wins a ruling from imposing retaliatory trade measures immediately. Only after the end of a years-long settlement process will the WTO allow retaliatory sanctions to go ahead. But the U.S. can set its own rules on military procurement.

Inslee amendment

In May, the House in a 410-8 vote passed a defense-bill amendment written by Rep. Jay Inslee, D-Bainbridge Island, that requires the Pentagon to review any subsidies affecting the tanker contest and to determine whether they provide "an unfair competitive advantage to any bidder."

A similar measure awaits a vote in the Senate.

Sen. Patty Murray, D-Wash., who led Wednesday's news conference, said she believes the Senate has the votes to pass it. Seeking remedies through the WTO's channels, Murray said, would come too late for the tanker deal.

"Today is both a victory and a vindication," she said. "Instead of just competing with Airbus, (Boeing's workers) have been forced to compete with the deep pockets of the European government."

The state's other senator, Democrat Maria Cantwell, said the subsidies would allow Airbus to lowball its tanker prices — something she said the U.S. government should not allow.

Richard Michalski, general vice president of the International Association of Machinists, the biggest union at Boeing, predicted the WTO's emphatic findings would force President Obama to react.

"The president has the ability to instruct the secretary of defense to do the right thing here," Michalski said.

In contrast, industry analyst Richard Aboulafia said requiring the Pentagon to assess the subsidies would transform what's supposed to be a dispassionate weighing of technical merits into a purely political decision. "Their job is to choose the best weapon on a value-for-money basis," he said.

Besides, he added, it is impractical to ask the Pentagon to do a review similar to what the WTO has just done.

"To do this right, you'd have to consider subsidies for us and subsidies for them," Aboulafia said. "This will, of course, occupy the entire Defense Department work force for upward of five years."

Aboulafia believes the tanker-contract award may hinge upon the November elections, which will determine whether the Democrats who favor Boeing retain control of the House.

But if EADS were to win the contract, he said, the WTO ruling could "prepare the ground for — guess what? — a protest by the loser."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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