How EADS is Killing the Aerospace Free Market

EADS subsidies do no exist in a vacuum. These subsidies cause a ripple effect throughout the industry.

As a direct result, US aerospace companies lose market share and American aerospace workers lose current and future jobs. Additionally, to compete against these subsidies American companies are forced to cut costs; many times through the use of overseas suppliers, causing further US job loss.

America is not the only country affected. Canada which has the world's fourth largest aerospace industry - generating more than $22.7-billion in 2007 - has also suffered. Unlike the US though, Canada has decided to join EADS in the subsidies game.

The Canadian Government recently announced a $350 million dollar loan to support local owned Bombardier's new C-Series airliner. According to Canadian Business:

This is a plane that will reportedly use 20% less fuel than comparable aircraft on the market at a time when airlines around the world are struggling with record high fuel prices. According to Bombardier, it will give the third-largest civil aircraft manufacturer a huge advantage. So why are Canadian taxpayers involved?

Government officials, who hope the loan will earn a “positive” return, say they want Canada to maintain its strong position as an aeronautics supplier. They point to a $250-million auto fund, as if that shows the Harper government has always supported the logic behind corporate handouts (rather than offering another good example of Harper’s growing capacity for pandering).

Simply put, Montreal was competing with Missouri for assembly rights on the C-Series jet. And with buying votes in mind, the Harper government decided to sell its soul to woo Quebec. To do so, it was even willing to risk an international trade war, since the subsidized C-Series will compete with U.S.-based Boeing and Airbus-maker European Aeronautic Defence and Space Company (EADS).

Since EADS is the king of subsidies, we don't think they will complain too much. But, the US government and workers in Missouri should be outraged.

Brazil - home to Embraer, another competitor to the future C series - will probably also have some issues with the "loans". But, as Wikipedia points out neither company is a stranger to the subsidies game:

Both Embraer and its main competitor, Bombardier, were engaged in a subsidy dispute in the late 90s and early 2000s. It was found by the World Trade Organization (WTO), in a 2000 ruling, that Embraer has received illegal subsidies from the Government of Brazil. In its ruling, the WTO ordered Brazil to eliminate its Proex export subsidies program, which was found to aid Embraer. In October 19, 2001, the WTO ruled against Canada, just as it had ruled against Embraer, over low interest loans from the Canadian government designed to aid Bombardier in gaining market share.

Just when you think a free market is starting to be establish someone calls for a new round of subsidies and it all falls apart again.

Lockheed: No fan of EADS or Airbus

Much is being made of Robert J. Stevens, Lockheed Martin's CEO, and his statement at the Security and Defence Agenda Conference on NATO in the Next Decade on 3 June. Some have even suggested that his statement supports EADS's tanker.

In reality nothing could be further from the truth. In his statement Mr. Stevens never mentions Boeing, and he only mentions EADS and the tanker issue in passing. Below are the paragraphs that KC-30 supporters are selectively interpreting:

In Europe, we see a greater focus on the need for open markets and transparency and the benefits of competition, both from the Commission and from the European Defense Agency. The Commission's recent work, including the draft directive on defense procurement, is a positive step in this regard, as the Commission seeks to achieve greater openness in the European market. But it will be extremely important, as the Commission's directive is reviewed and ultimately implemented by the European Parliament and the Council, that the focus on openness and competitiveness is retained. I believe the notion that European markets should first be "protected in order to be strengthened" is misguided. Protectionism is not now, and has never been, a substitute for competitive strength. With each passing opportunity, those companies who linger under this veil will only grow weaker - until they will be quite literally "protected to death."

Note that Mr. Stevens is talking about European protectionism; which is a continuing and real problem. He is not talking about America or Boeing running the risk of being "protected to death" but instead European firms like EADS and Airbus.

In his next paragraph though he does briefly mention the tanker issue:

A second positive trend is the increasing number of transatlantic programs. The decision by the USAF to purchase Airbus tankers reinforces the openness of U.S. markets and is the most recent example of the growing willingness of the United States to look to global sources of supply for vital equipment. While our company is not involved in the Tanker program, Lockheed Martin is involved in a number of significant transatlantic programs today...

[Three paragraphs later he says] I should also note that the U.S. market remains open to the acquisition of defense companies as evidenced by initiatives previously undertaken by BAES, Rolls Royce, Thales, Smiths, EADS and, most recently, Finmeccanica's offer to acquire DRS Technologies.

Again, Mr. Stevens only mentions EADS and the tanker decision as an example to reinforce just how open the US market is. This US openness would be in stark contrast to the European market. In fact as the Economist recently pointed out, the common jibe thrown across the Atlantic is that ,"America fosters competition; Europe protects competitors."

Mr. Stevens is correct on all his points. At Tanker War Blog we would go even further to say that the Air Force tanker contract decision shows not only the US's openness, but its openness to a dangerously foolish extent.

As we previously posted, the US Government needs encourage free markets though its own openness, but it must also enforce free markets by taking to task countries, and subsidised companies like EADS and Airbus, that do not play by free market rules.

In fact, if Mr. Stevens was asked directly about EADS and Airbus we are sure he would be polite but would not have a lot of good things to say about them. Remember, Lockheed used to be in the commercial aviation business. Here is what a PBS special on the history of commercial aviation says:

As commercial aviation entered an era of ferocious competition, airlines weren't the only ones falling by the wayside. One of Boeing's American competitors,Lockheed, gambled on building their own jumbo jet. The L10-11 was hailed as a magnificent plane, but it turned out to be a financial disaster. Failing to recoup its investment, Lockheed was forced to leave the business in 1983. ... It seemed that Boeing was destined to enjoy a virtual monopoly - not only in America, but in the world. For the Europeans it was a difficult idea to stomach.

In their determination to compete with Boeing, the Europeans came up with a remarkable collaborative agreement to create a new commercial aircraft manufacturer, Airbus Industrie.

This "remarkable collaborative agreement" included government ownership of Airbus, support to keep the European market closed to US manufactures, and providing government subsidies/funding for the development of new aircraft. If Lockheed was the recipient of launch aid and this type of government protection it might arguably still be in the commercial aviation business. Instead it was forced out.

Also, as we mentioned in a previous post, EADS has profited greatly by European protectionism of and subsidies to the A400M which competes against Lockheed's C-130J.

So to summarize:
1) Lockheed CEO's speech is 100% correct
2) KC-30 PR team continues to overreach with their "spin"
3) The US government needs to ensure EADS and Airbus play by the rules of the free market before it rewards them with our taxpayer money

More EU Subsidies for Airbus and EADS

Bloomberg reported yesterday that the Airbus SAS request for European governments to contribute $18.2 billion in development costs for the A350, which will directly compete against Boeing's 777 and 787, has been tentatively approved.

The article states that:

Airbus approached European nations for aid and ministers have agreed "in principle" to the idea, Peter Hintze, Germany's deputy economy minister, told reporters today at the Berlin Air Show. His comments were echoed by Dominique Bussereau, junior minister for transport in France.

Loan commitments for the new A350 widebody jet may exacerbate a trade dispute between the European Union and U.S. over aid for planemakers. The U.S. filed a complaint with the World Trade Organization in 2005 about European assistance to aerospace companies. The EU filed a countersuit against the U.S. and the dispute is still being weighed at the WTO in Geneva.

"It's not going to do trade diplomacy any favors, but it's not like they have a choice," said Richard Aboulafia, vice president at Teal Group, a consultant in Fairfax, Virginia. "Delaying the most important product for the company in the name of diplomacy doesn't sound like a smart move."

I know what Mr Aboulafia means, but I disagree that Airbus does not have a choice. They can choose to compete fairly without asking for a government handout every time they want to develop a new product. Airbus chooses not to forgo subsidies because its state-ownership and shared-production business model is not competitive without them.

This new round of subsidies comes in addition to other announced government "investments" in A350 components such as the Welsh government's contribution to $14.8 million to develop the next generation composite wing technology for Airbus.

The Bloomberg article quotes EADS Chief Executive Officer Louis Gallois saying that Airbus needs more state aid to compete fairly with Boeing.

"We are asking only for a level playing field with the competitor," Gallois said in an interview. "We feel the competitor is getting support from its government for research and development, and from the states of Kansas and Washington."

Gallois said yesterday at the company's annual meeting in Amsterdam that EADS doesn't need to seek a capital increase from investors for A350 funding because the company has 8.3 billion euros in cash.

It is hard to fathom how a company that has over $11 billion is cash, with which it could finance any development, still needs an $18 billion government handout.

Also, I must have missed the billions of dollars in US government support for commercial products Boeing is supposedly getting when the appropriations bills were signed into law last year. Maybe Mr. Gallois knows more about this than those who help write the bills. It is also funny to see he no longer mentions defense contracts as a Boeing subsidy like the original EU WTO countersuit.

One of the most absurd parts of this dispute though is how those in the executive branch, who talk of using all elements of national power, would seemly surrender our nation's economic power and all its leverage over EADS to give up its illegal subsidies.

Why should EADS give up its subsidies when DoD would rather myopically take advantage of the lower the System Development and Demonstration (SDD) cost and reduced unit prices these subsidies provide? No need to look out for the economic interest of the country as a whole if you can cut yourself a good deal.

In fact, DoD seems intent on rewarding EADS as quickly as possible and support the EU's economic war against America's largest manufacturing exporter. You're doing a heck of a job, Brownie...oops I mean Robbie.

Better watch out, next thing you know Kanye West will be saying Bush doesn't care about American workers either.

[Note: The commentary to this post is not the consensus view of Tanker War Blog. While we are all in full agreement on the Airbus subsidy issue, many members are not convinced the SecDef has had much of a role in the tanker dispute. But, we do respect the member's right to make their view known and we believe their perspective is a valid contribution to the tanker debate.]

HASC Bill Includes WTO Language

In what will be the first of many attempts to include tanker dispute language in this year's bills, the House Armed Services Committee (HASC) is directing the Air Force to review whether illegal government subsidies played any role in a contentious refueling tanker contract pending any adverse WTO rulings.

The Hill reports that this legislation though will most likely up in a clash with Senate that would rather not include the tanker dispute in their version of the 2009 Defense Authorization Bill. Also, the Hill reports that HASC Chairman Ike Skelton (D-Mo.) caveatted the inquiry in his mark:

Any inquiry would be done after the World Trade Organization (WTO) delivered its rulings on trade disputes between the United States and the European Union over illegal subsidies to Airbus and tax breaks for Boeing . The two bitter rivals on the world’s commercial aircraft market are also at the center of the tanker controversy.

Since the U.S. WTO case against Airbus will be ruled on first, the Air Force Secretary would have 90 days from that ruling to conduct its first review. The article goes on to state that:

If the Air Force determines the illegal subsidy had a “material impact” that calls into question the “fairness” of the contract award, the service leaders have the right to take “appropriate measures” to remove the impact of the illegal subsidy and make the process “fair to all,” according to the legislative language in the chairman’s mark.

But the provision leaves that to the discretion of the Secretary of the Air Force. It is unclear when the WTO would rule on either of the cases, but it could be several more months until that happens. The discussion could spill into the next presidency and a new Secretary of the Air Force with a different approach than the current secretary, Michael Wynne.

As our previous post indicated, the WTO ruling against the European Union could come as early as next month.

If the WTO ruling comes out against Airbus, we at Tanker War Blog expect Congress would not idly wait by while the Air Force review is conducted. Instead, we would hope funding for the tanker would be cut and not restored until the contract excludes the use of illegally subsidies Airbus planes.