Boeing V. Airbus: Subsidy Dogflight Essay

1732 words - 7 pages

For several decades the commercial airline manufacturing industry has been dominated by two major companies: Boeing and Airbus. There are a number of smaller aeronautical firms like Lockheed but none capable of building the large passenger planes that cost billions of dollars to develop and sell for hundreds of millions of dollars each. Because of these high costs, there is serious barrier to entry to any new competition and significant first mover advantage in the industry. For example, “it is costing Airbus $14 billion to develop its new super-jumbo jet, the 550 seat A380. To recoup the costs…Airbus will have to sell at least 250 A380 planes.” (Hill 186) Because customers may only purchase 400 planes and the A380 was first to market, Airbus will most likely dominate the global marketplace in this category for many years to come.Another unique aspect of the commercial aerospace industry is its long history of development subsidies (Hill 232.) Boeing has received subsidies from the United States Government, the State of Washington, the State for Kansas, and receives numerous contracts from the US Department of Defense (DOD.) Airbus, on the other hand was originally started by a consortium of European companies (mainly British, German and French) in the 1960s, but is now a private company. Nevertheless, the EU continues to subsidize Airbus through low interest development loans, even though it has grown to be the leader in the industry.Both Boeing and Airbus dislike the fact that their competition is getting an edge from these subsidies and think it is an unfair advantage. To level the playing field, in 1992 they entered into an agreement that limited the aid that they could receive from their respective governments. The EU was limited to funding Airbus with repayable launch aid of up to one-third of the development costs of a new design. This money had to be paid back to the EU if the plane was successful. The US, in turn, had to limit indirect aid in the form of contracts from its agencies like the DOD to 4 percent of Boeing’s total revenues. All in all, this agreement sounds like an equitable solution for both companies that would make competition within the industry fair. Then along came the Japanese.Japanese companies have an existing partnership with Boeing and offered to make development of the 787 a “national project” and subsidize the design with $1.5 billion. The budget request made sense to the Japanese government because thousands of jobs would be created in Japan. They would produce 35 percent of the parts for this particular aircraft. Airbus thought that this violated the contract that Boeing had agreed to and urged the EU to take a claim to the WTO. The US in turn, demanded that the EU end to the launch aid to Airbus on its A380 because it had already given them $3.7 billion. The US knew this was an excess of a third of the development costs on the A380 and suspected that Airbus was using the money to...

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