Harry Stonecipher Article on FT.com
Article as published on ft.com
Airbus's ‘launch aid' has to be grounded
By Harry Stonecipher
Published: September 14 2004 20:40 | Last updated: September 14 2004 20:40
This week, trade officials from the US and the European Union are due to discuss subsidies in the commercial aircraft market. The talks must focus on the subsidy that distorts the market the most - “launch aid”, which has allowed Airbus to develop a full family of aircraft without assuming the commercial risk for doing so.
Resolving trade disputes is the proper role of government but I would like to clear up some myths that muddy the negotiating waters.
During a recent visit to the UK, I realised there was a fundamental misunderstanding about the notion of so-called “indirect subsidies”. Boeing's defence contracts do not, as some claim, amount to an indirect subsidy to its commercial aircraft division. Little, if any, benefit flows from defence work to commercial activities, a point reinforced by the experiences of several major US defence contractors no longer in the commercial aircraft business. It is much more likely that technological benefits flow from commercial activities to military applications, such as the A400M transport aircraft being developed by Airbus. And let us be clear: any benefits that do exist go also to Airbus, whose parents - BAE Systems of the UK and EADS, the European group - have greater defence revenues, and thus a greater opportunity for commercial benefit, than Boeing.
Another myth is that Boeing gets unique tax and infrastructure benefits from governments around the world. Publicly available records show Airbus and its parent companies benefit from economic development incentives commonly available to industry in the US - including in Louisiana, Florida and Mississippi. These incentives benefit those communities as a whole. In contrast, the government support Airbus received for facilities to build and assemble the A380, its next project, is not for the benefit of the general community - it is uniquely for Airbus.
Finally, the discussion of launch aid is most muddied by the claim that this form of support, which is unique to Airbus, is not a subsidy and does not distort competition in the civil aircraft market. Nothing could be further from the truth.
Airbus receives 33 per cent of each new aircraft model's development costs upfront, as a subsidy from European sponsor governments. None of the $15bn in launch aid Airbus has received from European governments has been repaid on commercial terms - in fact, much of it has not been repaid and may never be. Indeed, a great deal of it has been forgiven entirely. Thanks to this subsidised “borrowing”, Airbus has avoided at least $35bn in debt.
This subsidy indeed distorts the market. The French senate has stated the case thus: “Launch aid ‘socialises' risk. Advances made to companies need only be reimbursed if the programme is successful. In the event of failure, the public money is lost and the advance becomes a subsidy, a sort of insurance policy for the company against industrial risk.” This “insurance policy” has allowed Airbus to develop aircraft without the attendant commercial risk, and thus without the commercial discipline nearly every other company around the world works under.
And now Airbus is receiving about $3.7bn in launch aid for the A380. It began receiving this money five years before the aircraft's first expected delivery, and under the terms of the 1992 US-EU Agreement on Trade in Large Civil Aircraft, Airbus could have almost five more years beyond first delivery before it has to begin repaying this A380 launch aid. If it does not hit its projected sales total, Airbus may never have to repay the money. While it is clear that this agreement has outlived its usefulness, it has never relieved our nations of their broader international obligations.
US and EU trade authorities can best serve the global aviation industry by creating a framework for the future that eliminates trade-distorting aid to commercial aircraft manufacturers and creates a level playing-field with complete visibility on both sides.
European officials deserve credit for their publicly-stated
willingness to reconsider launch aid to Airbus. This week, I hope they will follow these statements with actions that display a seriousness of purpose. This will dispel any notion that they are stalling in the hope this is simply a political issue that will evaporate after the US presidential election. Both US presidential candidates have expressed support for ending launch aid to Airbus, but any impression that this is merely election-year politics is mistaken. Airbus is a mature, profitable company. It no longer needs launch aid to compete. It is time for launch aid to end.
The writer is president and chief executive officer of Boeing
ENDS.