Architectural Designs

how airbus gain in market share affect the legitimacy of claims for subsidies?

in december 2003, Boeing announced it would go ahead with the development of its latest commercial jetliner, the 7E7, which Boeing will position against Airbus's popular A330 aircraft. The "E" in the Boeing 7E7 stands for 'efficient.' By making extensive use of new composite and engine technology, Boeing hopes to reduce the aircraft's operating costs by as much as 20 percent compared to a traditional design. If it is successful, this will make the plane a potent competitor against the best-selling A330. however, the 7E7, now renamed the 787, is a risky project for Boeing. The aircraft will cost about $7 billion to develop, according to industry estimates, and demand is uncertain. To share the costs and risks of development Boeing has taken on several partners who will help to design and build the 787. Most important among these are a trio of three Japanese companies, Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Fuji Heavy Industries. Collectively, these three companies will probably build as much as 35 percent of the 787 by value, including parts of the fuselage, wings, and landing gear. They will ship the finished components to everett, Washington, for final assembly. These three companies are longtime Boeing partners. They contributed about 21 percent by value to Boeing's last new jetliner, the Boeing 777. Although there has been a long history of development subsidies in the commercial aerospace industry, a 1992 agreement between Boeing and Airbus limits the state aid either company can get from their respective governments. Airbus, now a private company, is limited to repayable launch aid that must not exceed one-third of the development costs of a new aircraft. The launch aid has to be repaid only if aircraft sales are high enough for Airbus to turn a profit on the investment in a new plane. As for Boeing, indirect aid from U.S. government agencies such as R&D contracts from the Pentagon and NASA are capped at 4 percent of its total revenues. It is unclear if the 1992 agreement extends to other parties in the projects. The Japenese Aircraft Development Corporation, an association of Japanese aircraft makers, has asked the Japanese government for help with the 787 project. The country's Ministry of Economy, Trade, and Industry has submitted a budget request that would make the 787 a "national project. Newspaper reports put the request at about $1.5 billion. Upon hearing this, Airbus officials were quick to claim that the arrangement could violate several international agreements, including a 1994 WTO prohibition against subsidies that can harm competitors. Behind the scenes, Airbus executives started to urge the European Union to look at the issue and possibly file a case on their behalf. They also noted that Boeing received aid from the states of Washington and Kansas, where its factories are located, and that also constitutes an unfair subsidy that was outside the scope of the 1992 agreement. In mid-2004, the issue became even more contentious when the u.s. government demanded an end to airbus's launch aid. airbus had already been granted lans of 3.7 billion to develop its latest aircraft, the A380 super-jumbo, but what really got attention in america were signs from airbus that it would also build a direct competitor to the 787, the A350, and ask for launch aid to help cover the development costs of that plane. Estimates suggested the lunch aid for the A350 could total $1.3 billion. furthermore, in 2004 airbus surpassed boeing in global market share. American officials felt that given the strength of the company, subsidies were no longer appropriate. In late 2004, the EU and U.S. government entered into negotiations to try to resolve the dispute, but talks ended in March 2005 with no agreement. The dispute now goes to the World Trade Organization, which must rule on the legality of the various subsidies. Meanwhile, Boeing is starting to pile up orders for the 787, and industry observers speculate that the longer launch aid for an airbus competitor is stalled in legal limbo, the less likely Airbus will be to go ahead with the plane.

Public Comments

1. Well, its obvious that subsidies go down as a company gets stronger. And if they are gaining market share, then they are getting stronger. So, their subsidies will go down. And these subsidies could eventually become nothing. But, lets say that they gained market shares. And the government thought that it would be good for the economy and for efficiency of fuel, money, etc etc. If the government wanted to, they could give a subsidy. But, this of course has to take place after they figure out if they are allowed to or not. And, if it was such a good plan to develop these new technologies, and they are gaining market share, the government would not give a subsidy. Mostly due to the fact that, even without a subsidy, these companies would go ahead and develop these new planes anyways...So, the government would not have to dish out money. If these companies were short of money, they would borrow from banks or ask their partners to try to give more to help develop these projects.