Competition: Airbus and Boeing

The History of the Boeing can be traced back to the year 1916. The Boeing defined the
modern jetliner. It is committed to be the leader in commercial aviation industry by
making and offering airplanes and services that offer high quality design, efficiency and
value to customers all over the world. More than 12,100* Boeing commercial jetliners
are in are in operation currently It flies passengers and freight more efficiently in
comparison to the other carriers in the market.

The Airbus
Airbus was made official in the year 1970. The aircraft was given the name “Airbus”
because it was an aviation term used by the airline industry for commercial airlines. Also,
it was an acceptable term for the French linguistically (Wikipedia, 2006).The airline made
its first maiden voyage in the year 1972, its first production model being the A300.

History of competition between Airbus and Boeing

Boeing is the world’s largest aerospace company in the world and a stiff competitor to
the Airbus in the commercial aircraft industry.

The rival companies do not share comfortable diplomatic relations.

In 1992, an agreement between the companies stated the extent to which subsidies
were allowed from their respective governments. This agreement has proved to be
futile.

Both companies blamed one another for not following the rules and regulations of the
agreement. The Boeing filed a formal complaint in October 2004 (WTO, 2006).

The current project status says that the A380 aircraft is intended to go head on with the
Boeing 747. For the first time the Airbus had surpassed rival Boeing for delivering the
more number of aircrafts in a single year.

Airbus introduced in January 2005 the double-decker A380 in hopes of being taken
back to the market once again. The A380 is the world’s largest passenger plane with two
decks and seating for 555-840 people.2005 was the fifth year in a row that Airbus swept
over fifty percent of the market share in order intake. However, problems with the A380
are likely to bring this streak to a halt this year. The delays in the manufacturing and
delivering of the A380 are 24 proving to be very damaging.

In June of this year, Airbus had mentioned a second delay in the delivery of expected
aircrafts, which is leading to a decrease in orders and shares.
FedEx reversed its order for ten A380’s listed at $300 million dollars each.

Instead, the company will purchase fifteen of Boeing’s 777 freighters listed at $235
million each (Wilber, 2006).

Airbus still has 166 orders listed, but further delays and frustration can easily cause
Airbus to lose more sales to Boeing. The year 2006 is the biggest year yet in the battle
between Airbus and Boeing for market share.

1.2 Compare the development of aircraft-models between the two

companies. Are there trends in the movements of profits, planes sold,
planes produced etc. between these two firms over the last 20 years ?
Airbus
The first airplane introduced by Airbus was the 300 seats A300. The A300 was the
world’s first twin-aisle aircraft with two engines. Then in 1984, Airbus announced the
production of the A320 series aircraft. The A320 is smaller than the A300 because it
seats about half as many people. The A320 has the widest single-aisle fuselage on the
market. It is also the most modern because of its fly-by-wire technology used in the
cockpit. In 2004,Airbus for the first time had surpassed rival Boeing for delivering the
most aircrafts in a single year. Airbus introduced in January 2005 the double-decker
A380 in hopes of taken back the market once again. The A380 is the world’s largest
passenger plane with two decks and seating for 555-840 people.

Airbus falls under the umbrella of its parent company EADS. Their source of revenue is
derived from two sectors of operations. Civilian aircraft manufacturing, lead by Airbus,
accounted for 78% of its sales in 2005, and its military division the other 22%.Sales by
countries and regions break down as follows: France 10%, Germany 9%,United Kingdom
8%, Europe 12%, North America 26%, Asia/Pacific 22%, Middle East6%, Latin America
3%, and others 4% (Euronext, 2006).In 2005, Airbus experienced their best year in
company history, acquiring 1,055firm new orders for aircraft valued at around $95
billion. That gave Airbus a bigger market share in terms of aircraft units at 52% and 45%
in terms of value (Airbus Annual Review, 2006). The addition of these firm orders
enabled Airbus to maintain a strong backlog of 2,177 aircraft valued at $220 billion, the
highest it has ever been, continuing to be ahead of the competition for the sixth
consecutive year (Airbus Annual Review,2006). A majority of the orders came from Asia
and the Middle East, in addition to many in Latin America and several low cost carriers in
Europe. The largest orders came from China, with a boost from the orders for the A380,
bringing the total to 219 aircraft. Leasing companies accounted for another 195 aircraft
(Airbus Annual Review, 2006).
Boeing
The Boeing 747, the original “jumbo jet” with its distinctive upper-deck profile, is among
the fastest airliners in service. The four-engine airplane, with seating capacity of more
than 400, has been crisscrossing continents for four decades.Currently, Boeing engineers
are developing a new and improved member of the 747 family. The larger 747-8 will
offer the lowest operating costs and best fuel-efficiency of any large passenger freighter
airplane. At the same time, the jet will set a new environmental benchmark with a
substantially cleaner and quieter footprint than competitors in the large twin-aisle
market.

Boeing’s commercial fleet consists of 14 models spread across 5 aircraft families. It has
built approximately 85% of the industry’s current fleet and, until recently, regularly
captured 60-80% of orders and deliveries. The flagship of the Boeing fleet, the 747-400,
holds 412 passengers in the standard three-class configuration and as many as 550 in
certain “high-density,” all-coach configurations used mainly on Asia routes. More than
three decades after the jumbo was introduced, demand for it remains strong. Boeing
delivered 25 747’s in 2000, down from47 planes in 1999, and had an order backlog for
80 more.4 At the corporate level, Boeing had revenues of $51.3 billion, net income of
$2.1 billion, an equity market capitalization of $58 billion, and 198,000 employees at
year-end 2000. Sales of commercial aircraft generate almost two-thirds of total revenue
while sales of military aircraft, missiles, and space systems account for the rest. In
addition to being the US government’s second

1.3 What are the facts and what are the main arguments in the dispute
between the two companies over subsidies/governmental support
In the news recently Airbus and Boeing have been feuding with each other over
subsidies. These subsidies make it possible for the two companies to make a new plane
that will not be released for up to five years. It take almost five years from the time it is
approve to be in production until its delivered to its customers (testing and research
and7development are added into the five years). During this stage in the process from
designing to delivery, Airbus and Boeing compile very large debt until the planes are
sold and they make the money back. In 2002, the European Union (EU) and the United
States agreed to keep subsidies fair between the two companies. Although Boeing
consistently argues that Airbus has received too much government aid, while Airbus
complains that Boeing receives bogus research and development subsidies from NASA
and the military. The World Trade Organization (WTO) is consistently mediating Boeing
and Airbus to settle these claims against one another. However, these two companies
try not to let it affect their relationship as stated in Wikipedia (2006), Rob Portman (from
the USA) and Peter Mandelson (from the EU) issued a statement jointly, “We remain
united in our determination that this dispute shall not affect our cooperation on a wider
bilateral and multilateral trade issues. We have worked together well so far, and intend
to continue to do so.” As you can see, Airbus and Boeing rely on each other to make the
best product they can and to make the largest profits possible. Airbus and Boeing both
cooperate in reverse engineering with each other (Rothman, 2004).

2. Let us say that the market for huge passenger aircraft is a duopoly
market. What kind of a duopoly market is it? Is entry of new producers
something to worry about ? Are the various planes good substitutes to each
other? It is often asserted that the market is “segmented”. What will that
mean ?There could also be an element of “cannibalism” in the market –
meaning that a new product from producer X may hurt not only its
competitor, but also producer X itself. Explain this in some detail.
Structural Estimates of Aircraft Demand and Mark ups
The market for aircraft is typically divided into two product categories: narrow-body and
Wide-body aircraft. Narrow-body aircraft are single aisle, short-range aircraft (up to
6,000 km) that typically carry between 100 to 200 passengers. The leading aircraft in this
category are the Boeing 737, the Boeing 757, and the Airbus A-320.

Wide-body aircraft are double aisle, medium to long-range aircraft (up to 14,000 km)
that can carry between 200 to 450 passengers.

The leading aircraft in this category are the Boeing 747, the Boeing 777, and the Airbus
A-300.Within the wide-body market, planes also differ significantly in terms of their
characteristics depending on whether they are aimed at serving the medium range (as,
for example, Boeing 767,5 the Airbus A-300 and A-310, DC-10, and L-1011) or long-
range market (as, for example, Boeing747 and 777, the Airbus A-330 and A-340, and the
MD-11). As a result, we can view narrow body, medium-range wide body, and long-
range wide body aircraft as imperfect substitutes for one another because the planes
are designed to serve different markets, and competition is much more intense within
each category than between them. We focus mainly on the wide-body segment of the
aircraft industry in part because most of the international trade disputes have centered
on competition in this product range. The increase in international travel since the 1970s
has made this a rapidly growing segment of aircraft demand. The wide-body market has
also been very profitable: the Boeing 747, for example, is said to account for as much as
a third of Boeing’s entire profits in certain years. As aresult, Airbus, for example, entered
the aircraft market in this segment with the A-300 in 1974,and only later began
competing in the narrow-body market with the launch of the A-320 in 1988.

There are fewer product lines in wide-body segment of the market, and the number of
aircraft sold is much smaller than in narrow-body segment. The cumulative output of
the best selling wide-body Boeing 747 has only reached about 1,185 units in 1998 (it
was introduced in 1969),and the best selling Airbus aircraft A300 sold only 481 units
between 1974 and 1998. As a result, competition tends to be more intense in wide body
market because, since from the firm’s perspective, each additional sale generates
valuable revenue. In contrast, narrow-body planes often sell well above 1,000 units over
their lifespan, with Boeing 737 selling over 3,200 units until 1998.

Two can be an awkward number, as many a prom-goer can attest. That also is true in
markets with only two producers. Managers of such firms face difficult choices, and so
do their customers. When they make any major decision, they must always consider how
their one competitor is going to react.

Large passenger aircraft constitutes just such a market. The U.S.-based Boeing and
Europe’s Airbus are the only producers with any significant market share. As
competitors, they each must think several steps ahead when deciding whether to spend
billions on a new plane. The profitability of such investments always depends on what
the other firm does.

Airbus recently celebrated the first flight of its new A380 jumbo jet. Boeing made a
decision some time ago not to develop a new plane that would directly compete with
the A380. Instead, Boeing is concentrating efforts on its 787 Dreamliner and announced
large sales of this model to Air India and Air Canada as the new Airbus taxied out.

Boeing’s first-quarter 2005 earnings, however, were down 14 percent on current

business. Orders for passenger 747s – as opposed to cargo versions -have dried up.
With many major airlines facing financial difficulties, how these two firms will fare over
the next five to 10 years is not at all clear.

Economists call these market situations “duopolies,” and they are a specific subset of
oligopolies, which refer to markets with more than a single producer but in which the
number is still very small.

In duopolies, the two producers are not the only ones who must think strategically –
their customers must also. A large airline may see particular advantages to the new
A380. However, it also realizes that it would suffer if Boeing lost so much business to
Airbus that the U.S. firm went out of business.

If Boeing bit the dust, Airbus would be a monopolist with much more power to raise
prices. Airlines want to get the best plane for their money, but they also want to see that
at least two competing aircraft suppliers remain in business.

This dilemma is not limited to the airlines. It has been true for railroads and locomotive
builders for more than a century.
Competition in the wide-bodied aircraft industry has attracted attention not just
because of the controversy surrounding the Airbus subsidies, but because of the
industry’s unusual market structure, in which economies of scale are enormous relative
to market demand. The aircraft sector provides a textbook example of an industry in
which trade policy could affect the strategic interaction between a domestic and an
international rival and shift profits in favor of the domestic firm, as proposed in Brander
and Spencer’s (1985) canonical model of strategic trade policy.

Competitors’ moves will be clearly delineated by technological lumpiness, and exhibited

strategic interdependence: thus, it seems clear that if each competitor developed a
brand new model both would incur very large losses and that intense competition in the
pricing

The aircrafts will not be considered as perfect substitutes because while boasts of being
a low cost carrier the other concludes that it’s fuel efficiency is greater and it can
accommodate more passengers. Each requirement compliments one another and hence
cannot be substituted for another.

Segmented Market
A market segment is a sub-set of a market made up of people or organizations sharing
one or more characteristics that cause them to demand similar product and/or services
based on qualities of those products such as price or function. A true market segment
meets all of the following criteria:

 It is distinct from other segments (different segments have different needs),


 It is homogeneous within the segment (exhibits common needs)

 It responds similarly to a market stimulus and

 It can be reached by a market intervention.

The term is also used when consumers with identical product and/or service needs are
divided up into groups so they can be charged different amounts. These can broadly be
viewed as ‘positive’ and ‘negative’ applications of the same idea, splitting up the market
into smaller groups.

Cannibalism
Do the new Airbus and Boeing aircraft have a role in the revival of the air transport
market? Yes, they both will, but in different ways. Neither aircraft is right nor wrong, it
depends on market size and growth rate. However, while both aircraft have similar
range capability, there are consequences from making the wrong choice. If the aircraft is
too big and the break-even load factor is not reached, then losses will occur or
frequency will be lost in an attempt to maintain load factor that will also impact on
yields. If the aircraft is too small, because the number of frequencies will rise, direct
operating costs will rise, and in many markets competitive pressure may mean that
yields cannot be increased. This is a particularly likely outcome for the Australia-UK
market.Dynamic fleet management provides a way to manage this problem. There are at
least three commercial computerised systems available to achieve dynamic and real
time fleet management, but airlines in the past have performed the function manually.
This process is about matching aircraft and configuration to changing market patterns
on a short-term basis. Dynamic fleet management works well in a domestic or short-
haul international context where open skies, or at least capacity and type flexibility, exist.
In long-haul operations, however, there isalso the need to consider:

 rewing problems when aircraft types are changed,


 directional market issues,

 bilateral issues,

 code-share and alliance issues.

There is a ‘golden rule’ of aircraft sizing: when a capacity shift is to take place, the
revenue to be earned from the smaller aircraft must be equivalent to the break-even
revenue point of the larger aircraft, otherwise, there is no point to the substitution. The
challenge is to capture the market without generating over capacity by substitution. The
context is one of temporal, seasonal and directional

demand imbalances. Using either the B787 or the A380 as a substitute for the other is a
real challenge and the A380 has, depending on the configuration adopted for either
aircraft, twice the capacity.

3. Describe A-380 and Boeing 747 and compare the two planes. (A little
more personal : Where is the future ? Will huge planes, with 800-1000
passengers, with bars and showers and…. dominate the long-and medium-
range market or will the future belong to planes with 200-300 seats ? Pro
and contra ?)
The Airbus
Airbus is the great ingenuity of the major European countries coming to gather to
create one giant company to compete worldwide against the United States’ Boeing.
Airbus is a formation of smaller companies all combine into one. Recently, Airbus has
done very well in gaining global market share for airplanes. Airbus is continually trying
to expand its market share by trying to reach out to new emerging markets. These new
markets like China and India will play a big role in the future for Boeing and Airbus.

The A380 is the world’s largest passenger plane with two decks and seating for 555-840
people. It generously incorporates lighter composite materials. Its jet engines produce
more thrust and lift more weight. By minimizing fuel consumption, the A380 gives its
operators slight but much appreciated wiggle room in the binding that ties them to oil
prices. Airbus made the decision to build the 800-seat capacity airplane believing the
commercial carriers want to carry more people on fewer airplanes on point-to-point
long-distance flights. Though none of theA380 launch customers have chosen a
passenger cabin fitted anywhere close to that many seats. Take an airplane 33 percent
bigger than a 747 and fill it with just 25 percent more passengers and a slightly more
spacious environment will be the result.

The Boeing
Boeing traces its history to aviation pioneer William Boeing who, in 1916, built the
company’s first airplane, a seaplane for two with a range of 320 nautical miles (515 km).
Since then, Boeing has defined the modern jetliner and introduced the twin-aisle cabin,
the glass cockpit and countless other innovations. Today, Boeing Commercial Airplanes
offers a family of technologically advanced airplanes, including one that can seat more
than 500 and another that boasts the longest range in the world, at more than 9,300
nautical miles (14,966 km).

The Boeing 747, the original “jumbo jet” with its distinctive upper-deck profile, is among
the fastest airliners in service. The four-engine airplane, with seating capacity of more
than 400, has been crisscrossing continents for four decades.

Currently, Boeing engineers are developing a new and improved member of the 747
family. The larger 747-8 will offer the lowest operating costs and best fuel-efficiency of
any large passenger freighter airplane. At the same time, the jet will set a new
environmental benchmark with a substantially cleaner and quieter footprint than
competitors in the large twin-aisle market.

Market Share and Future Trends

The A380 and B747aircraft are not alternatives, but complementary. They can be used
and misused in markets than can absorb them. The further they are flown, the faster unit
costs fall, the more often a market is served, thehigher the yields, and, by flying
intelligently, total fleet costs can be reduced. As both have lower fuel costs per
passenger kilometre than existing aircraft types of the same broad size, they will help
maintain markets in a time of high fuel costs and regional political instability that has
produced new travel deterring security measures. The long delay in deliveries of A380 is
having a significant impact on carriers, their fleets and their schedules. It was initially
thought that the A380 would have been in service in 2006.In 2006; Airbus confirmed
that Singapore Airlines will have its first delivery in the second half of 2007 and all other
carriers are scheduled to receive their initial aircraft in 2008. It may be that the recovery
will have plateaued, especially as the US economy remains uncertain. With major
technical problems resulting in delayed delivery the end result may be that the A380 will
have a short-term role in the recovery. The B747 will help carriers’ costs but may not
stimulate new traffic The benefits may go to the carriers rather than passengers. There
are no alternatives: Boeing has no orders for its developed and slightly larger version of
the B747-the dash 8-and Airbus has yet to announce a firm commitment to its new mid-
sized aircraft, the A380 (extra wide body) that is slated for 2012 delivery. If the recovery
is to continue until significant fleets of the two, perhaps three, new types become
available, and then it will be on the basis of aircraft now flying or enhanced variants such
as versions of B777 and an allegedly improved Airbus —.

1. Go back to the dispute over subsidies. Consider the market for wide-body long-range
aircrafts, and assume that A-380 and Boeing 747 are the only possible competitors in
that market. Assume further that both aircrafts have the cost structure as given in part 4.
above. Explain that it is most efficient from a global perspective that only one type of
plane is produced

Consider now the game between Airbus and Boeing before neither firm has decided to
enter this market. Each firm has two strategies :

 Do not enter the market

 or
 Enter the market and produce 2000 planes.
 To determine the market price in the various situations we assume that the total
demand in the market, directed towards both planes, is given by the demand
function in part 5.(We consider A-380 and Boeing 747 to be perfect substitutes.)
Calculate the market price and the profit of the two planes in the four possible
outcomes. Describe this Competitive situation as a two-person non-cooperative
game in Simultaneous moves and solve the game. Consider next the situation
Where Boeing has the first move – meaning we have a sequential game With
Boeing as the first mover. Solve this game.

Then let the relevant European governments decide to give Airbus a subsidy
equal to ( a little more ) than Airbus fixed costs for A-380 if they start producing
the A-380 – and this subsidy is independent of what Boeing is doing. Solve the
two games described above when this subsidy is promised and compare the
situations with and without this subsidy.
Airbus, Boeing, and Bombardier:
Making sense of the aircraft
subsidy wars
n a surprise move late Monday, the Canadian aircraft company Bombardier
announced it had reached a deal to sell part of the production of its CSeries planes to
Airbus, the European air giant. The agreement is notable because the CSeries had
been at the center of a fight between Bombardier and Boeing, which in turn had
turned into a diplomatic spat between the United Kingdom and Canadian governments
(where Bombardier’s production is based) on the one hand versus the United States.
The U.S. had been threatening Bombardier with punitive tariffs equaling 300 percent
of the jet’s value, essentially killing a planned sale to Delta Airlines. Under the new
Bombardier-Airbus deal, at least some of the production of the CSeries is expected to
take place at Airbus’ Alabama plant, thus potentially avoiding U.S. tariffs–
though international trade lawyers note it’s not yet clear if this will be the case, given
the complexity of U.S. trade enforcement laws.
Author

Geoffrey Gertz
Fellow - Global Economy and Development
@geoffreygertz

These latest developments are in fact just the latest salvo in a decades-long fight over
aircraft subsidies. The two lead actors in this drama are Boeing and Airbus, with
supporting roles played by Bombardier and Brazil’s Embraer. Ever since Airbus
emerged some 40 years ago to challenge Boeing’s position as the world’s dominant
aircraft manufacturer, governments have been accusing one another of illegitimately
propping up their respective national champions, while simultaneously professing
their own innocence in providing support. Before the U.S. took on Canadian subsidies
to Bombardier, it had long been decrying the “launch aid” European governments
gave Airbus to help it bring new models to market. The Europeans, for their part,
complained about the indirect subsidies Boeing received in terms of inflated defense
procurement contracts and NASA research expenditures. The two sides reached
something of a truce in a 1992 agreement that set limits on subsidies, but that deal
broke down about a decade ago, and since then the disputants have been fighting it out
in a series of seemingly never-ending World Trade Organization (WTO) disputes.
Meanwhile Brazil and Embraer have also brought their complaints against
Bombardier—which are very similar to the grievances alleged by Boeing—to the
WTO, in a case that is still pending. All in all, aircraft manufacturing is arguably the
most contested industry in international trade governance.

The irony is that the traditional tools of trade governance are particularly ill-suited to
aircraft manufacturing. The basic logic behind trade enforcement mechanisms,
whether pursued unilaterally or multilaterally through the WTO, is an attempt to
“level the playing field,” or to correct the market for the distortions of government
interventions. The problem is, when it comes to aircraft manufacturing, there’s never
been anything close to a perfectly competitive, distortion-free market: It’s politics and
subsidies all the way down. Not only are there tons of subsidies on the production
side, but governments are also the most important consumers of aircraft, buying both
military planes and consumer planes for publicly-owned national airlines.

Thus the aircraft market consists of governments subsidizing production by their

national champions, then lobbying other governments to buy their planes—often
linking these procurement decisions to diplomatic relationships. Indeed, in late August
President Donald Trump sparked a diplomatic hiccup when, at a joint press
conference with Finnish president Sauli Niinistö, Trump announced that Finland
would be buying F-18 fighter jets from Boeing, news which Finland promptly denied.
Two weeks later, meeting with Malaysian Prime Minister Najib Razak, Trump
announced Malaysia would be buying new Boeing jets. And such high level political
interventions in airline sales are nothing new: a New York Times analysis of leaked
diplomatic cables revealed how American ambassadors and envoys frequently served
as Boeing salespeople throughout the last decade.
How much are such diplomatic overtures—an indirect form of government support—
worth to Boeing? There’s no good methodology to reasonably price this subsidy. And
this points to the larger problem in trying to arrive at a “fair” outcome in the aircraft
subsidy complaints: Given how governments are so deeply and fundamentally
involved in the industry, asking what a jet would cost in the absence of government
distortions to the market is an impossible question. Government distortions constitute
the aircraft market; take them away, and there’s nothing left.

Ultimately the aircraft manufacturing industry shows both the strengths and limits of
the rules-based, legal approach to global economic governance. The WTO has made a
valiant attempt to discipline some of the more direct subsidies governments provide to
their aircraft manufacturers. But the legal record shows it has been a long, drawn-out
fight, with no signs of easing. And the institution is not cut out to weigh into the
informal, indirect subsidies provided by defense contracts, let alone adjudicate how
much diplomatic pressure is appropriate in pushing for a jet sale. It’s unclear if
governments could ever delegate binding enforcement over such matters to an
international organization. Informal truces hashed out by diplomats, rather than
binding legal agreements, may be the best that can be hoped for.

Meanwhile, looming on the horizon is a bigger and potentially far messier aircraft
subsidy fight. In May of this year, China’s COMAC, a state-owned aircraft
manufacturer, completed a successful first flight test of its new jetliner, designed to
compete with Boeing and Airbus. For now neither Boeing nor Airbus wants to take an
aggressive stance against COMAC, as the two Western companies don’t want to risk
losing out on lucrative sales to China’s domestic airlines. But ultimately they—along
with their government backers—will need a strategy for dealing with this new
challenger. Perhaps this will finally prompt Boeing and Airbus to aim their attacks
away from one another and toward a common threat, just as Siemens and Alstom
recently joined forces to take on the China Railway Rolling Stock Corporation,
China’s state-backed train maker that’s winning more and more contracts overseas. In
the meantime, expect the aircraft subsidy feuds to continue; at the moment Boeing
seems to have lost the battle, but the war is far from over.

WHEN TRADE IS NOT ONLY

ABOUT ECONOMICS: AIRBUS VS
BOEING
The commercial war between the European giant Airbus and its
American counterpart Boeing continues order after order from
the world airlines. But what is it all about?

On 6 October 2004, the European Union requested consultations with

the Governments of the Member States participating in the project
(namely Germany, France, Spain, and the United Kingdom)
concerning measures affecting trade in large civil aircraft construction,
as the United States were claiming that the EU was providing
subsidies that were not complying with the Agreement on Subsidies
and Countervailing Measures and GATT 1994. At the same time the
European Union requested consultations with the US concerning
prohibited actions on the same matter.
Two types of capitalism
Some market analysts have often assessed how this controversial
situation was heuristic in order to understand the two different existing
forms of capitalism, the one in the EU (Rhenan Capitalism) and the
other in the US (Anglo-Saxon Capitalism). They usually affirm that
while in the US there is a real market economy, in the EU state aids
are still very important and they name Airbus, as it is a project shared
among and financed by different EU Member States, as a prime
example.

Of course in Europe there is a variant of capitalism that finds a strong

attention to welfare and sees banks playing a main role together with
the government even if state intervention is allowed only to certain
extent and it is less than in the past. By contrast in the US the main
role is played by the shareholders who are able to decide in the short-
term the policy of the business, while the government or any state aid
is formally forbidden.

Having said so, in the light of what was focused during the
consultation of the WTO, we can leave aside this simplistic way of
analysing this specific matter. In fact, it is true that Boeing is not state
owned, but the US Government provides large amounts of subsidies
to US producers of large civil aircraft and in particular to the Boeing
company nonetheless. These have the form of specific legislation,
regulations, statutory instruments and amendments in order to allow
such subsidies, grants, and any other assistance to US producers.
Moreover, the EU pointed out how these include specified federal,
state and local subsidies for the production of Boeing 747, specified
NASA research and development subsidies, specified Department of
Defence research and development subsidies, specified National
Institute of Standards and Technology subsidies, FSC/ETI subsidies;
research and experimentation tax credits, NASA procurement
contracts, and so on.

It is true that Airbus obtained direct subsides as they are not forbidden
and do not need to be occulted: the measures include for example the
provision of financing for design and development to Airbus
companies (known as “launch aid”), the provision of grants, goods and
services to develop, expand or upgrade Airbus manufacturing sites as
well as for the development and production of the Airbus A380.

So we are facing two different ways of capitalism and, in this specific

case, two different ways of protecting/financing/subsiding a national
enterprise. Complains coming from the US are most probably a result
of the overcome from the European firm over Boeing thanks to its
avant-garde technology. But this was not due to the amount of
subsidies that Airbus obtained, as the US claims, but mainly to a
difference in strategy: Boeing preferred to exploit at the maximum its
aircraft, making little changes in technology and decreasing its selling
prices, while Airbus invested in R&D creating 5 new aircraft instead of
the one produced by Boeing.

Hard competition between the two

Lately Boeing announced to wait an order from Singapore Airlines
worth around 8.5 billion euros, while Airbus concluded contracts with
the Italian low cost airline Eurofly and India’s first low cost carrier Air
Deccan.

Until now, Airbus managed to secure more than 5,900 orders across
its range of 14 aircraft, from 213 customers: Air Canada, Air France,
easyJet, Emirates, Iberia, Lufthansa, Northwest Airlines, United
Airlines and US Airway while its market share is growing steadily from
44% in 2002 to 52% in 2003 and from 54% in 2004 to 56% in 2006.

It will be interesting to see if the new Airbus 380, the most spacious
and efficient aircraft ever conceived with a capacity of 555
passengers, will meet the high expectations: by now 149 of these
aircraft have been ordered. A direct contest will be with the upgraded
747

An ending consideration must be done from the political and

macroeconomic point of view: such a big industry as is the aircraft
production means employment and economic growth; for these
reasons it is not difficult to imagine that governments will lobby on it in
order to obtain company contracts and orders from national airlines.
From this point of view the US seems to have an advantage as Airbus
remains a project shared among different countries Germany, France,
Spain, and the United Kingdom and is not a proper European project
(yet).

This is another aspect that underlines the necessity of a really

unified Europe, giving us lobby ability and a stronger position at
the moment of closing deals at the international stage.