| The commercial jet
aircraft market and the airline industry remain extremely competitive. Competitive
pressures and increased lower-fare personal travel have combined to cause a long-term
downward trend in passenger revenue yields worldwide (measured in real terms).
Market liberalization within Europe has enabled low-cost airlines to enter the
market. These airlines increase the downward pressure on airfares, similar to
the competitive environment in the United States. Airfares between Asia and the
United States are among the lowest yield (airfare divided by revenue passenger
miles) of any in the world. These factors result in continued price pressure on
the Company’s products. Major productivity gains are essential to ensure
a favorable market position at acceptable profit margins. |
| In
July 2000, three major European aerospace companies (Aerospatiale Matra of France,
DaimlerChrysler Aerospace of Germany and Construcciones Aeronautica of Spain)
combined to form the European Aeronautic Defence and Space Company (EADS). As
a result of the formation, EADS became an 80% owner of Airbus Industrie (AI) and
led the effort for the formation of the Airbus Integrated Company (AIC) in early
2001. The creation of the AIC effectively changes the Airbus role, from that of
a marketer/distributor of large commercial airplanes to one including complete
manufacturing responsibility. The AIC is incorporated under French law as a privately
held corporation owned 80% by EADS and 20% by BAE Systems. |
| Over
the past five years, sales outside the United States have accounted for approximately
51% of the Company’s total Commercial Airplanes segment sales; approximately
46% of the Commercial Airplanes segment contractual backlog at year-end 2001 was
with customers based outside the United States. Continued access to global markets
remains vital to the Company’s ability to fully realize its sales potential
and projected long-term investment returns. |
| The
impact of world trade policies In 1992, the United States and the European
Union entered into a bilateral agreement disciplining government subsidies to
Airbus Industrie. Among other things, the agreement limited the amount of the
subsidy to no more than 33% of the total development costs for each airplane program.
It also calls for a “progressive reduction” in that level of support.
However, in 1994, more than 130 countries, including all the states of the European
Union, signed the Subsidies and Countervailing Measures (SCM) Agreement at the
World Trade Organization (WTO) in Geneva. The 1994 SCM Agreement prohibits government
subsidies to virtually all industries, including the aerospace industry. The Company
welcomed the restructuring of Airbus into a “Single Corporate Entity”
assuming that Airbus complies with the 1994 SCM and results in more transparent
financial reporting. |
| The WTO promotes open and non-discriminatory
trade among its members. Among other things, it administers an improved SCM Agreement,
applicable to all members, that provides important protections against injurious
subsidies by governments. It also uses improved dispute settlement procedures
to resolve disagreements among nations — a provision not found in the 1992
bilateral agreement. The 1992 bilateral United States- European Union agreement
and the later-in-time WTO SCM constitute the basic limits on government supports
of development costs. The Company takes the position that the 1994 WTO SCM is
the controlling agreement. |
| See
the discussion concerning the European Union challenge that has been filed
with the WTO related to U.S. Foreign Sales Corporation and Extraterritorial Income
Exclusion tax provisions. |
| Governments and companies in Asia
and the former Soviet Union are seeking to develop or expand airplane design and
manufacturing capabilities through teaming arrangements with each other or current
manufacturers. The Company continues to explore ways to expand its global presence
in this environment. |
| Summary
Although near-term market uncertainties remain, particularly with respect to the
recovery post September 11, 2001, the long-term market outlook appears favorable.
The Company is well positioned in all segments of the commercial jet airplane
market, and intends to remain the airline industry’s preferred supplier through
emphasis on product offerings and customer service that provide the best overall
value in the industry. |
| Military Aircraft
and Missile Systems Business Environment and Trends |
| The Company
is the world’s largest producer of military aircraft and the second largest
supplier to the U.S. Department of Defense. The Company’s Military Aircraft
and Missile Systems segment portfolios are well balanced among research and development,
major development programs, current production and upgrade activities, and post-production
aerospace support activities. The Company continues to explore a wide array of
options and opportunities for growth around the globe. |
| Militaries
worldwide are transforming their forces and changing their approach to acquisition.
The transformation in forces is evidenced by a trend toward smaller, but more
capable and more technologically advanced, force structures. The transformation
in acquisition is evidenced by an increasing trend toward cooperative international
development programs and a demonstrated willingness to explore new forms of acquisition
and ownership including the lease of military support aircraft. The Company is
uniquely positioned to integrate the customer knowledge, large-scale systems integration
and lean enterprise competencies of its Commercial Airplanes, Military Aircraft
and Missile Systems, and other operating segments into value creating solutions
for its military customers. |
