Boeing versus Airbus: The endless crusade for continuation of

subsidy!
(A case study)
Case reviewer: Angelica Sharma*

Brought up in a family in which my parents were always ready to help anyone,

closely or even remotely related to them, but not without being duly satisfied about the
urgency, righteousness / desirability of assistance (mostly financial) that was asked for, I
have, overtime, come to view non-market incentives like subsidies, grants and tariffs
from a mind-set that I have found moulded in their company. I look upon my parents as
really great protagonists of market-economy without undermining their sense of
sympathy and concern for the hapless lot around them in that country, they proudly refer
to as India. They always made a distinction between who deserved and who did not
deserve the favour that has been asked for. And also, they were particular to find out
when, in what form, how much and for how long the assistance, if any, was to be there.
Strangely, even to day, they remorsefully recall the few instances of having wasted their
scarce productive resources on individuals who, they later-on found, never wanted to be
on their own. But they did learn a lesson from these experiences. I have grown in such
family environment of respect for merit, hard work and self-pride. It is endowed with this
sense that I intend to ponder over the Boeing-Airbus subsidy-related trade-rift and
comment on the perceptions, policies, arguments and counter-arguments of the two sides
and their respective governments in respect of the basic issues inherent in this
controversy. Let me first summarily describe the facts of this dispute, and the classical
dichotomous roles of the governments, on the two sides.
History of trade dispute between Boeing and Airbus: An overview
Until 1980, US commercial aircraft industry enjoyed a de facto monopolistic
position in the world market, despite the European-based Airbus Industry having come to
exist in 1970.2 The US dominant position, with two US commercial aircraft
manufacturers, Boeing and McDonnell Douglas together, accounting for more than twothirds of the world market share, continued till as late as the mid-1990s. With Boeing
deciding to acquire McDonnell in 1996, it was expected that the position will improve
further. Surprisingly, this formidable position came to be challenged by Airbus, which
since 1981, contrary to its initial perception of having been regarded as only a marginal
competitor, was progressively increasing its market share. By early 2000s, Airbus was
consistently garnering a larger share of new orders than Boeing, and in 2003, it even
surpassed Boeing for the first time in deliveries of aircrafts (305 deliveries by Airbus as
against only 281 by Boeing).
* The authors review of the Boeing-Airbus trade-dispute is mainly based on the details
of the case specified in Hill (2005)1
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The phenomenal success of Airbus was not received well by many in the US who
attributed it to the fact that it was due mainly to the huge subsidies it received from the
government. This was followed by a chain sequence of accusations and counteraccusations. Somehow, under an agreement in 1992, the two sides agreed to make some
allowances to each other. The agreement allowed Airbus to receive some launch aid from
EU governments (Great Britain, Germany, France and Spain), and Boeing to benefit from
government R & D contracts. Under the agreement, direct government subsidies were
limited to 33 per cent of the total costs of developing a new aircraft with the condition
that such subsidies had to be repaid with interest within 17 years. But the agreement did
not last long. In 1997, the agreement broke down when the European Union decided to
challenge the merger between Boeing and McDonnell Douglas on the ground that it
limited competition. Boeings plea was that the merger was necessary to strengthen its
presence in the defense and space side of the aerospace business areas where McDonnell
Douglas was traditionally strong. After the two sides listened to each other, the dispute
between the two appeared to have settled. But soon after, the Airbus executives, who had
initially stated that they had no objections to the merger, gradually started opposing the
merger again and became increasingly vocal in their pronouncements. Trade tensions
between them erupted yet again in 2004. This time, the US questioned the
appropriateness of Airbus receiving the launch aid even as it had consolidated its position
in the world market. To this the Airbus responded with the accusation that Boeing was
still benefiting from subsidies. No break-through was seen in the dispute. To add fuel to
the fire, the British government decided to announce even a fresh dose of aid ($ 700
million) to the Airbus in mid-2005. The US dissatisfied with these developments formally
filed a request with the WTO for establishment of a dispute resolution panel. The EU, on
its part, quickly reacted and filed a countersuit with the WTO claiming that US aid to
Boeing exceeded the terms set out in the 1992 agreement.

Main issues of contention and their merit

Looking back at the history of trade dispute between Boeing and Airbus, I may
summarize and comment upon the main grievances, arguments and counter-arguments of
this case as follows:
The most convincing grievance of Boeing (which was consistently losing its
business to Airbus) was that Airbus received huge subsidies, between 1970 and 1990, in
the form of loans at below-market interest rates and tax breaks which together amounted
to $ 25.9 billion. This benefited Airbus in two major ways. One, its R&D became a
highly subsidized, hence, a high-voltage innovative program with extremely favorable
cost and quality implications, and thereby, a competitive edge in the market. Two, it also
provided a financial base to the Airbus which was strong enough to enable it offer its
aircrafts to its customers on highly attractive terms of credit credit to the extent of 80
percent of the aircraft cost for a term of 8-10 years, at approximately 7 percent interest
rate. This was quite in contrast as compared to the credit provisions in the case of Boeing.
The US Export-Import Bank supplied credit for purchase of Boeing and McDonnell
Douglas aircrafts 20 percent down payment, and credit against only 40 percent of the
aircraft cost, the remaining 40 percent to be financed by private banks at an average
interest rate of about 8.5 percent for a period of 10 years. Apparently, the two competitors
cannot be said to be on a level playing field with regard to the availability of credit
support to their marketing efforts. But there is other side of this issue, as well. a little
reflection on which would tilt the scale in favour of Airbus. We will turn to it a little later.
Let us first see what the contention of Airbus was in this regard.
The main reaction of Airbus to the said objection of Boeing was that its success
was not due basically to the subsidies it received, but to its state-of-the-art technology,
and strategic production and marketing vision. Strategically, it concentrated initially only
on market segments not served by new aircraft or not served at all. As this position of
Airbus appears to be based on facts which are of objective nature and verifiable, the
grievance of Boeing, expressed in the disguise of unequal credit terms, is possibly the
expression of disgust over its failure to protect its market share and retain its hegemony
in the market. Even otherwise, the main issue of trade rift between the two cannot be said
to be the government aid. If Airbus received subsidies, so did Boeing, too. If at all, the
blame with regard to the subsidy controversy lies with any one, it lies first of all with
Boeing, and then with the governments, on the two sides.
If we evaluate and compare the subsidies availed by Airbus and Boeing, there is a
major difference between Airbus subsidy and Boeing subsidy. The Airbus subsidy has
been in the form of repayable loans with interest for aircraft development, which is legal
according to the World Trade Organization. The Boeing subsidy, on the other hand, has
been for aircraft production, which is prohibited by the WTO and which is never required
to be paid back. This fact is duly supported by a research conducted at the CanadaUnited States Trade Center in the UB Department of Geography 3. If someone is to lose
the case on this ground, it is Boeing. Is Boeing ready to payback the subsidies and accept
self-financing arrangement to cover for the areas funded by subsidies?
Secondly, it is quite intriguing as to why government aid continues to be allowed
even after these giants have matured enough to be able to find out to stand on their own

strength. To me no argument (in favour of any further continuation of aid) - employmentbased, or BOP-based, or even the one that derives its strength in the name of national
pride - is acceptable to me.
Watching this episode from heaven, Hamilton and List, would have wondered
over the wrong empirical side of the Infant Industry Argument they put forward in
support of players competing on unequal levels! According to the infant industry
argument, it makes sense to extend temporary support to such domestic industries which
are crucial to the general wellbeing of the people of the country and which cannot
compete with its giant competitors for want of level playing field. It is a historical fact
that the worlds three market economies - USA, Germany and Japan - all began their
industrialization duly assisted by their respective governments through various types of
trade barriers. This argument seems fine, highly plausible and convincing. Many
governments have seen merit and conviction in this argument. But there are instances
when governments, both in developed and developing countries, have made its extensive
use to defend their, otherwise unjustifiable, anti-free-trade policies.
Protectionist measures, tariff or non-tariff, are justifiable only as a temporary
support. But experience has shown that in most countries, the shelter behind these
restrictive trade practices became mostly a perpetual phenomenon (look at the classical
case of agricultural subsidies in India). Subsidies, beyond a particular stage, may do no
good if these fail to make the industry really competitive and self-reliant. Even after
decades of basking under the comfort of subsidies, both Boeing and Airbus, and sadly,
even their respective governments, still continue to regard their continuation
indispensable.
The following are the main arguments that have been put forward in support of
continuation of subsidies, in this case:

High development costs: The costs of developing a new airliner are

estimated to be between $ 5 billion to $ 15 billion for various categories of
aircrafts.

High break-even level: Given such enormous development costs, a

company must procure a substantial market share to break-even. It has
been estimated that the break-even in the case of commercial aircraft
industry may not be expected before 15 years or so, given the demand and
production projections.

Volatile demand: The commercial airline business is prone to cyclical

behaviour. As experience shows, in the recent past, many major airlines
suffered from falling demand and went bankrupt, although there were
other, less important, reasons, too.

Substantial experience curve levels: In aircraft industry, a significant

experience curve exists on the manufacturing side. It has been estimated
that the positive economies, induced by experience and learning acquired
during sustained production tempo, produce a significant reduction in unit
cost with doubling of accumulated output the company enjoys a unit cost
advantage to the extent of 20 percent. Conversely, it means that if a
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company achieves only half of the market share required to break-even, it

will suffer a 20 percent cost disadvantage.
There can be hardly any dispute with the merit of these arguments. But one thing is
not clear. If the two commercial aircraft companies are expected to be competitive and
profit-making in the long-run by their respective governments, and further, if they are
regarded worth developing through subsidies and other protectionist measures, why
should the government not leave them to the total care of the private sector; why should it
assume any responsibility for itself, in this regard? To counter this suggestion, it may be
argued that the investment involved is on an enormous scale, and for a long period, and
above all, it is exposed to the adverse effects of demand uncertainties. This argument
surely is not convincing. If at all, it implies any thing it is as follows: Only the productive
resources owned by the private sector have an opportunity cost, so do not let them be
wasted. The resources at the command of the government are no bodys money (the taxpayer!), so why care for their opportunity cost. Moreover, the argument that private
investors take into account only the current returns in an industry and fail to take account
of the future prospects is not consistent with investor behaviour in advanced countries,
particularly where the latter are often observed to back projects whose returns are
uncertain and lie far in the future. (Consider, for instance, the US biotechnology industry,
which attracted hundreds of millions of dollars of capital years before it made even a
single commercial sale)4.
Reality of the situation
On the strength of these arguments, one would tend to agree with the view of the
analysts in this area that the world market for commercial aircrafts can at the most
support the presence of three major producers. In my assessment, recognition of the
oligopolistic nature of global commercial aircraft market must be accompanied by
acknowledgement of the self-defeating outcomes of individually-centered, non-collusive
strategies adopted by firms in such industry. This is what Boeing and Airbus has to learn
from Cournots model in which oligopolistic firms are portrayed behaving in an
extremely nave, if not stupid, manner, and never learning from their past mistakes. As a
result, they finally land themselves in a collectively disadvantageous position. In such
case, respect for mutual interdependence and acting in a coordinated way is in the interest
of both. More or less, similar are the implications of other non-collusive behavior
models, for instance, Stacklebergs model (the leader-leader case).
Conclusion
The substance of this review of the case, in question, is that firms, such as Boeing and
Airbus, operating in an oligopolistic market environment should not be misled to be
competitive by way of granting legitimacy to their clamour for subsidies, direct or
indirect. This is patently unjustified. This amounts to frittering away scarce productive
resources for which policy makers owe an explanation to the tax-payers. The sooner the
two giants in the arena of global commercial aircraft market see the writing on the wall
and adjust themselves to the reality of the market scenario and assimilate its culture of
co-existence (in terms of leadership acceptance, or market sharing, or adopting limitpricing behaviour so as to keep potential entrants at bay), the better it is for them and
their countries. In no way, this perception may be construed to imply a competition-

limiting approach. The fact is that in this particular case, any attempt of acquiring a
competitive edge by one side on the other is most likely to induce a chain sequence of
actions and counter-reactions, arguments and counter-arguments. Ultimately, it is
detrimental to their own interest as well as to the interests of their customers. Both
Boeing and Airbus spend billions of dollars for buying aircraft parts and sub-assemblies
such as avionics and landing gears. So, frequent trade war can be more deteriorating than
just affecting the airline customers. In any dispute between two parties when
insinuations and allegations replace logic, when the mediator (like grievancesredressal mechanism of the WTO) lacks the necessary teeth to ensure compliance of
its norms and rulings, and when even the governments lose objectivity and vision,
solutions are not easy to seek. Given, sincerity of purpose and sagacity, the solutions
are not difficult, either.
U.S should explore the options of expanding its target market to other emerging
foreign markets like Vietnam and Iran5. Current export controls in U.S. prevent Boeing
from entering these markets. They also affect Airbus sales through re-export constraints.
Airbus can lower the U.S content by the introduction of Rolls Royce engines in place of
the manufactures Pratt and Whitney and General Electric. The two companies should
look for ways of comparative advantage by looking at the use of cost effective and more
specialized products and services produced by other country to bring in operational
efficiency through scale economies. For example, Western Europe holds a competitive
advantage with respect to Wind Tunnel capability.

References
1. Hill, Charles W. L. (2005), International business: Competing in the Global
Market Place, Mcgraw-Hill.
2. http://ec.europa.eu/trade/issues/sectoral/industry/aircraft/index_en.htm)
3. http:// igeographer.lib.indstate.edu/pritchard.pdf
4. Krugman, Paul R. (2003), International Economics, Pearson Education, Inc.
5. Global Competitiveness of U. S. Advanced-Technology Manufacturing
Industries- By DIANE Publishing Company