Randy's Journal: Archives

13 April 2005

Five card draw

I'm not a poker player. But I know enough about the game to realize that the way Airbus might play it would get them thrown out of any Las Vegas casino.

What I'm taking about is the government "launch aid" Airbus receives to develop new airplanes. It's just not a fair way to play the game. And that's why the U.S. Trade Representative and the European Union have been trying to reach an agreement to end those subsidies. Monday, a 90-day negotiation period expired, with no agreement.

It's a complicated issue, but it has caught the attention of some commenters who feel that I sometimes steer clear of certain topics like this in the news.

It's not that I expect you to trash Boeing and drag all the skeletons out of the closet. At the same time, when the word is out on some story and there is silence .. the story becomes the elephant in the room.

Great case in point: I'd really like to hear your take on what is going on between Airbus, the EU, and Boeing. It appears that this is going to the WTO. However, many are suggesting that Boeing benefits just as much from government help as Airbus does and that you'd be better off negotiating directly with them rather than taking a hard line at the WTO.

You have a knack for making things like this clear, and interesting. Here's hoping you'll share a little bit about this case.

Brian
Louisville, Kentucky

It's an excellent point. I haven't been trying to avoid the subject. But it's true, I haven't mentioned it here. Although it does come up frequently when I'm out talking to airlines, analysts, investors, and the media.

So, here's my take.

Success in business is partly about taking risks. And in the airplane business, it is expensive risk-taking. When Boeing produces a new airplane model we invest our own money, and sometimes borrow funds to finance the project.

Airbus does that too, but gets a distinct advantage that we don't have. Since the early 1990s, they have been getting up to a third of their development funding up-front and "risk-free" from European governments. That's "launch aid."

Prior to 1992, Airbus received as much as 100% of its new airplane funding from European governments! And considering the cost of developing a new plane, that equates to a multi-billion dollar (or euro) head start.

So, what do I mean by "risk-free?" That means, if the airplane does not make its sales target, Airbus simply does not have to pay back the loans. For them, it's just an "oops." Or, for you golfers, a mulligan.

Boeing accepts full commercial risk for every new airplane we build. But Airbus shifts its risk onto the backs of European taxpayers. Now, maybe this made sense 35 years ago when Airbus was an infant company trying to break into the commercial airplane business. But today, they're mature, and claim to be more efficient and profitable than Boeing.

Airbus now has a full product line, and governments have invested heavily to get them there. And the hard fact is, for the past few years, they've been delivering more airplanes and winning more orders than we have. So why on earth do they still need government subsidies to compete?

Airbus defends its subsidies by claiming that Boeing benefits from Pentagon and NASA contracts. But Airbus' parent companies, EADS and BAE Systems, have combined defense and space revenues that exceed Boeing's. So, if there is a benefit from having space and defense in the corporate portfolio, Airbus benefits equally from these kinds of contracts.

Another Airbus claim is that Boeing gets "tax breaks" from the state of Washington. But these state incentives are available to all commercial aerospace companies, not just Boeing, and even to Airbus if they choose to set up an operation in our beautiful state. There are already a number of Airbus suppliers here, and they benefit too.

Now, what I don't get is why the state and local incentives Airbus and EADS get in Florida, Mississippi and Louisiana apparently don't count - not to mention incentives they get in France, Germany, the United Kingdom, and Spain. Somebody should ask them.

Finally, Airbus complains that Boeing's Japanese suppliers get government support. Well, similar government support goes to Airbus suppliers in Belgium, Sweden, Italy, and other countries. Boeing and Airbus can do business with any suppliers they choose, and pay market rates for parts and equipment. So what's the complaint, really?

The bottom line in this fracas is launch aid. These risk-free loans distort the commercial airplane market. Airbus gets them from European governments. Boeing doesn't get any. Period. It's really long past due for Airbus to drop it.

With the help of launch aid, they've built the A380, the most heavily subsidized airplane in history. Airbus chose to go with a very large airplane. Fine. But now they also want to go after the middle of the market with the A350. And they want yet another handout to help launch it. Did they maybe choose poorly the first time, going after a very small market in the over-500 seat category?

Look, Boeing is out there every day competing for every possible order. We know our airplanes are the best, in both performance and value. We've got no problem with tough competition. As I've said before, this is a tough business. But let's all just compete on a level playing field.

According to the rules of the poker game of five card draw, first you get dealt a set of cards. And then you get one opportunity to discard unwanted cards and draw new ones. Airbus got dealt a set of cards. They took their draw. And they got a good hand. But now they want another new set of cards. That's against the rules.

It's time for the dealer to say, play the cards you have. No more handouts.