Thursday, October 28

Ain't Capitalism Grand?

Airbus, the new kid on the block out of Toulouse in France and representing Europe ... takes on Boeing, the old Seattle Washington favorite

In the post Ethiopian Airlines Works we took a look at the Boeing - Airbus battle for dominance within the airliner industry.

It matters because these are the only two companies left in the world that make intercontinental passenger planes that are in demand by airlines. Tupolev, of Russia, also manufactures airliners and while its technical standards, particularly with respect to safety, are approaching Western norms, the baggage of the Soviet past restricts competitiveness on the international scene.

Embraer, of Brazil, makes smaller, but worldclass, airliners often for the commuter market. Bombardier, of Canada, which also owns Learjet, also commands a healthy portion of the world market for regional jets.

The Economist discusses how recently the
U.S. trade representative filed a formal complaint to the World Trade Organisation (WTO) alleging billions of dollars of “unfair” subsidies were paid to Airbus. Within an hour, the EU said that it would file a counter-claim about equally large sums of unfair aid going to Airbus’s rival, Boeing.

Boeing has been smarting ever since Airbus snatched the lead in the civil jet market last year by delivering more aircraft for the first time. Airbus is still in front this year, with 224 deliveries to the end of September, compared with Boeing’s 218. The Americans’ beef is that Airbus, which is 80% owned by EADS, a European aerospace group, and 20% by Britain's BAE Systems, still gets soft loans from the governments of Germany, France, Britain and Spain.

This finance comes in the form of repayable loans, known as launch aid, for the development of new aircraft. Some $3.7 billion of it enabled Airbus to launch its new A380 super-jumbo, which will eclipse Boeing’s venerable 747 when it enters service in 2006. Boeing complains, quite reasonably, that nowadays Airbus is a profitable, successful company and as such should no longer receive this help.

An earlier trade row was settled in 1992 with a bilateral agreement that limited Airbus’s launch aid to 33% of the development costs of a new plane, while indirect support to Boeing (from the Pentagon and NASA) was restricted to 4% of its turnover. Now Boeing and the American government want to replace that deal with a new agreement that bans all state aid.
The number of Aerospace businesses has shrunk even as the prospects of longterm market growth seem healthy. The major cause of this trend is the post-Cold War slashing of defense budgets during the 1990s in the U.S. that caused a massive reshuffling in defense dependent businesses.

Even at the height of Boeing's Cold War era in the 1950s and 1960s, U.S. government involvement was not as direct as the current relationship between Airbus and certain European governments. For obvious reasons, the fact that Boeing developed the necessary technology and built the B-47 and B-52 bombers certainly helped when the time came to work on the first successful civilian jet airliner, the Boeing 707.

However, Boeing was not getting a free ride. It still had to deliver value for money in its military business where exceptionally high standards were demanded by General Curtis LeMay's Strategic Air Command (SAC) charged with the entirety of America's nuclear deterrent.

Boeing took a substantial risk investing its profits in the Dash 80 which become the 707. In the 1960s when the 747 was being developed Boeing was saved from bankruptcy by an early contract for jumbo jets from Pan Am.

Boeing remains a major defense contractor despite its loss of the multi-billion dollar contract to manufacture the Joint Strike Fighter to Lockheed, the only other American company that can make jet fighters. This makes its continual health vital to American security policy. However, the Boeing relationship with its government does not approach the level of intimacy and dependence that Airbus has with European governments.

After all, if Boeing persistently makes bad business decisions it would very well go out of business. Even if saved by a last minute Congressional bailout it will survive in am unrecognizable form that will not please its fired management but may please its investors. It is hard to imagine any circumstances in which concerned Europeans would let any such fate happen to Airbus. The story of many American airlines is illustrative from Pan Am to United.

Despite the appearance given by billions of dollars in post 9/11 bailouts, American airlines have historically gone bankrupt on a regular basis when they screw up and other more efficient carriers rise up. Europe, despite much deregulation of late, has numerous prestige 'dinosaur' national carriers draining national budgets whose fate is associated with national pride.

Airbus is also becoming even more important to Europe in defense matters. However, anemic E.U. defense budgets will dilute the Airbus-military connection for some time to come even though the EADS consortium that owns 80% of Airbus also builds the next generation Eurofighter for several European countries. With interests in space, defense and transport EADS alone is a massive establishment.

Barring a devastating 9/11 size Al Queda attack in France or Germany proper, two important European countries will continue to bluster about American 'hyperpower' and arrogance while carefully appeasing globally anti-Western forces through inaction. All the while they are silently counting on the U.S. to defend essential Western interests worldwide. This post-Cold War American subsidy of European defense and the ailing European welfare state indirectly aids Airbus even though the size of European defense industry growth is by strategic choice, quite limited.

One underappreciated part of the Boeing-Airbus rivalry is that given the often incestuous nature of 21st century globalised business, each company enrichens major subcontractors on both sides of the Atlantic and worldwide. There are numerous American businesses that delight in Airbus success and many European ones who pray for Boeing success.

The Economist argues, somewhat unconvincingly to us, that in addition to tax breaks by actors such as Washington State, where Boeing assembles some airplanes, that
the grandaddy of aid going to Boeing comes from Japan. This emerged last November when Airbus persuaded the EU to investigate a $1.5 billion subsidy that the Japanese government is, in effect, putting into the 7E7. A consortium of three companies, the heavy-industry parts of Fuji, Kawasaki and Mitsubishi, will make the wings and fuselage wing box for the 7E7. This is the heart of any plane, and the fact that Boeing has decided to outsource it to the Japanese is highly significant.

Boeing has always resisted Japanese requests to get their hands on important aircraft-making technology in return for Japan’s airlines buying from Boeing. But to win a big launch order for the 7E7 and get financial help, it has had to let the Japanese become key suppliers. All this makes for a tangled web of claim and counter-claim for the WTO to get to grips with, even before it begins to affect other trade issues.
Note that several Japanese COMPANIES are helping Boeing out for their own interests while Airbus is supported by European GOVERNMENTS for potentially local political reasons and bureacratic interests.

Boeing seems to be taking a calculated business risk in Japan. Namely that the competition from an independent Japanese aerospace industry empowered by Boeing technology - in the long term - is worth getting the 7E7 off the ground. It is more likely that Japanese firms will end up as a Boeing partners in competition with Europe.

Why not? Japan and the U.S. look to remain sincere allies for a while yet and from the Japanese perspective the Europeans certainly can't be trusted with security matters in case of trouble with China, Russia or North Korea. Globalisation seems like the way to go. Otherwise, even for multi-billion dollar companies that are part of multi-trillion dollar economies ... new products become too expensive to develop.

This seems like a preferable development for a productive competitive world economy than simply figuring your local parliament will bail you out of trouble. However the basics are worked out by the WTO and despite the extra security matters involved, the usual cut-throat competition between all the actors is a sign of good health all around. Hopefully for the entire confluence of reasons given above both companies will prosper while always looking over their shoulders or ahead ... scared that they have to do ever better to survive.

The oppressive capitalist class is the victor in all of this corrupt capitalist intrigue and exploitation! Right? No, the oppressive capitalists certainly stand to make some money but others benefit as well ...

Stockholders, also known as the 'people' and the 'workers' are a part of the capitalist class in most modern economies worldwide and benefit by their hundreds of millions when they invest their money to enable new technologies and good management. Their choices will make money via pension funds, bank accounts and direct stock ownership.

Aerospace and Airline Workers everywhere benefit from a diffusion of skills and techniques that bring efficiency and higher salaries.

National Economies benefit from increased resources made available by improved means. This means more tax money for things like education, highways and healthcare.

Most important of all the Citizen-Consumer gets more money in hand for faster personal computers, homes and whatever else they may need or just plain want.

The Consumer-Flyer makes out like a real bandit from all of this. She gets to fly all over the world with ever increasing safety, comfort and economy just because the capitalist system somehow gets billions of dollars, euros, pounds and yen spent productively and millions of people organized efficiently just on the odd chance that she will someday end up on a plane built in Toulouse rather than one from Seattle.

Ain't Capitalism Grand? It makes life better for more folks than any other system mankind has yet got to work.

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