TUTORIAL 5: GOVERNMENT INTERVENTION AT AIRBUS AND BOEING

SUGGESTED SOLUTIONS TO CASE QUESTIONS

1. Where do you stand? Do you think EU subsidies and soft loans to Airbus are
fair? Why or why not? What advantages does Airbus gain from free financial
support from the EU governments? Are complaints about the EUs government
intervention fair in light of Europes long history of democratic socialism?

This case underscores the complexities and interdependencies of political and

economic systems. In Europe, where democratic, socialist regimes prevail, mixed
economies result with some government interference. By contrast, the U.S. is
characterized by a market economy with minimal government interference. The
following table is replicated from Chapter 7:

Most government interference

Totalitarianism Command economies Least innovation
Adverse commercial environment
Some government interference
Socialism Mixed economies Mixed innovation
Diverse commercial environment
Least government interference
Capitalism Market economies Most innovation
Ideal commercial environment

The political/economic context defines the expectation and extent of government

subsidies. These are very much a part of the supply chain in Europe. If, however,
socialist governments track too far to the totalitarian/command economy side, then
history has demonstrated the demise of those systems that fully subsidize inefficient
enterprises just to keep firms in existence. Excessive subsidization of business activity
is detrimental to economic growth

For capitalist/market economies such as the U.S., military contracts sustain a firm,
although they are not equivalent to subsidies. The U.S. government does not see
contracts with the military as equivalent to direct government grants. One could argue
that the economic policies based on democratic socialism are aimed at investing in key
public services such as health, education, communication, and utilities to increase
social capital. Commercial aviation activities are not public services. The government
should take a regulatory position rather than a shareholder position. Taken to its
extreme, government intervention may negatively impact the market dynamics.

What about the fact that Boeing has turned the tables on Airbus subsidies by getting
its own subsidies from the Japanese? The new Boeing 787 is built in an alliance with
Mitsubishi, Kawasaki, and Fuji. The Japanese government provided at least $1.5 billion
in soft loans, repayable only if the aircraft is a commercial success, just like the soft
loans given to Airbus.

2. Do you believe U.S. military contracts with Boeing amount to subsidies? Have
these types of payments provided Boeing with unfair advantages? Justify your
answer.

2005- the U.S. Trade Representative brought its case to the World Trade Organization
(WTO).
It arose because EU member states approved $3.7 billion in new subsidies and soft
loans to Airbus.
The case alleged that financial aid for the A350, A380, and earlier aircraft qualified as
subsidies under the WTOs Agreement on Subsidies and Countervailing Measures
(ASCM) and that the subsidies were actionable because they caused adverse effects to
international trade.
Under the ASCM, subsidies to specific firms or industries from a government or other
public bodies are prohibited. If a WTO member provides such support, it is subject to
official sanction.
Airbus confirmed that it had applied to the governments of Britain, France, Germany,
and Spain for launch aid for its model A350. Officials of the European Commission
countered that government subsidies are permissible and that it is up to individual EU
countries to decide whether to provide them.
After concluding that EU subsidies and soft loans to Airbus constitute unfair trade
practices, U.S. officials were going ahead with their action at the WTO.

The WTOs subsidy definition contains three basic elements:

A financial contribution
By a government or any public body within the territory of a member
Which confers a benefit

All three of these elements must be satisfied in order for a subsidy to exist.
Military contracts are not subsidies. Performance is a condition of payment. Although
the recipient of lucrative military contracts, Boeing must generate products/services as a
condition of the contract. This is vastly different from the soft loans given to Airbus and
repayable only if the aircraft is a commercial success.

3. Assuming that Airbus cannot compete without subsidies and loans, is it likely
that the EU will discontinue its financial support of Airbus? Is it in the EUs
interests to continue supporting Airbus? Justify your answer.

Most likely, the European Union will continue providing subsidies to Airbus unless the
WTO prohibits such activity.
Commercial aircraft manufacturing is highly labor and capital intensified industry, thus
the support will most likely continue even if Airbus performs well. Airbus generates the
following benefits to European community:
 First, Airbus R&D activities result in new technologies of considerable value to
the EU, which can be applied to different fields other than aerospace and lead to new
knowledge creation.
Second, Airbus provides jobs to some 53,000 skilled and semiskilled
Europeans.
Third, Airbus value-chain activities attract massive amounts of capital into
Europe.
Fourth, Airbus generates enormous tax revenues.
Finally, EU branding- Airbus is the vehicle for European best practices and
pride in commercial aviation. Airbus strengthens the EUs position as a global player.

4. In the event the WTO rules against Airbus and tells it to stop providing
subsidies and soft loans, how should Airbus management respond? What new
approaches can they pursue to maintain Airbus lead in the global commercial
aircraft industry?

If the WTO blocks subsidies and soft loans provided to Airbus by the consortium,
alternative means to support Airbus may be sought.
Financial resources through government contracts, similar to what has helped Boeing,
may also serve Airbus well.
Strategic alliances with partners in the military or aerospace industry for the purposes
of knowledge transfer and R&D cost/risk sharing.
Global sourcing of R&D or manufacturing to lower cost countries could result in
significant efficiencies.
Diversifying into new industries that are related to their current business line, e.g. the
customized private jet market. The sharing of resources and economies of scope would
easily translate with this related diversification. Barriers to entry would be lower since
Airbus is already in the commercial aircraft industry. Profit margins would be higher for
this niche market.