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Serious stakes in a serious game

Posted by Richard Tuesday, April 12, 2005

An important deadline passed yesterday, the date on which the long-running dispute between the EU and the United States over Airbus and Boeing subsidies was either to be resolved or passed to the WTO arbitration panel.

In the manner of these things, however, nothing of substance actually happened, the day ending with Peter Mandelson, for the EU commission announcing that there were "currently" no plans to take legal action against the US.

Nevertheless, he made it clear that the "window of opportunity" left in which further talks could take place would not remain open for long: Airbus would soon be seeking a multi-billion-dollar soft loan from the EU to launch its A350, the mid-range plane which has stoked up the dispute to its current level.

Equally, despite accusations of bad faith from the former US trade representative and now deputy secretary of state, Robert Zoellick, directed at Mandelson, in exchanges which have been characterised by bad temper, Washington has also held back from resorting to the WTO arbitration procedure.

Interestingly, both The Times in an editorial today and the Foreign Editor's Briefing last week takes a dim view of the dispute.

Bronwen Maddox in the briefing piece wrote that "this has to be one of the stupidest rows it has picked… It is a mystery why the United States thinks it can win by setting Boeing on a collision course with Airbus." To this she added: "Any ruling could harm both companies, as well as relations with Europe, just when the US claims to be trying to make them better."

Then, the editorial today tells "both sides… to make a further effort to heel themselves," stating that a formal WTO inquiry could serve a useful purpose. "It is unlikely", thinks The Times, "that the body would rule against Airbus without also ordering cuts in Boeing's state support."

From all this, it concludes that "it is bad enough that most of the world's airlines are kept aloft by subsidies — the aircraft makers must learn to fly by themselves."

But this newspaper, like others, has not so much lost the plot as missed it altogether. Boeing is not just an airline manufacturer but has emerged as a major US defence contractor, from which it is currently earning the bulk of its revenue.

And one of the juiciest contracts up for grabs at the moment is for the replacement of the US Air Force’s ageing fleet of KC135 air tankers, and its fleet of AWACS aircraft - based on the same airframe - the total value of which over the next 20 years is over $100 billion.

Herein lies the real story for the first tranche of the contract, to lease and buy 100 767 tankers - worth $23.5bn - was to be awarded to Boeing last year. However, it was cancelled by the Pentagon at the last minute after a scandal involving former Air Force official Darleen Druyun, who went to work for Boeing, and was later found to have boosted the price of the contract as a "parting gift" for the company.

Ms Druyun was sentenced to nine months in prison for holding job talks with Boeing without removing herself from air force contracts related to the company. Mike Sears, former Boeing chief financial officer, was sentenced to four months in prison for his role in the scandal and Phil Condit, the chief executive, was forced to resign.

More recently, his successor, CEO Harry Stonecipher, was forced to resign after an affair with a company director in contravention with the ethical policy which Stonecipher himself had devised, reinforcing Boeing’s reputation as a tarnished giant.

The affairs of the company have attracted the scrutiny of John McCain, the powerful senior Republican on the Senate armed services committee, who is looking carefully at other Boeing contracts – not least the $100 billion Future Combat System contract – all of which has considerably weakened this aerospace giant.

Now, ever quick to spot an opportunity, the Franco-German aerospace company EADS, that owns 80 percent of Airbus industries, has put in its own bid to supply the USAF with tankers based on the Airbus 330, claiming it can deliver its product at $8 million per unit cheaper than can Boeing.

So keen is it to gain the contract that it has teams scouring the United States looking for suitable site for a manufacturing base and is claiming that upwards of 70 percent of its aircraft would be US-built.

Ironically, the favourite site is a plant in Everett, in Washington State, Boeing's own back yard, where the company is prepared to spend $600 million on a plant employing up to 1,100 people. Perversely, this would allow EADS to benefit from the same $3.2 billion package of tax breaks and other incentives the state has offered Boeing to attract the 787 plant to the location – a subsidy which is at the centre of the Boeing-Airbus dispute.

It is this that puts that dispute into perspective. With Boeing under such pressure, the major card it has to play is the American flag. EADS is perceived as being predominately a French company, and no country has irritated the Bush administration more than the French.

Friends in Congress - particularly Sen. Patty Murray and Rep. Norm Dicks, both Democrats - have been outspokenly opposed to the notion of having American military personnel fly French jets into war. In February, Murray issued a statement accusing EADS of "disingenuously wooing US communities as locations for an 'American' EADS plant." The Airbus parent company, she said, is "attempting to secure US taxpayer dollars to support European jobs."

By having the current dispute framed in a US versus EU context, Boeing hopes to stoke up national passion, particularly in Congress, to the point where buying from EADS would become politically unacceptable – in which case the only alternative supplier, Boeing, would have to be awarded the contract.

Thus, when The Times notes that the airliner subsidy dispute could harm relations between the EU and America, that is precisely the intention. And, if the EU lifts its arms embargo on China, that will kill any chance EADS might have of supplying the US Air Force stone dead.

Serious stakes are being played for here, in a serious game and Boeing is no amateur. The Europeans, crowing at having recently outsold its American rival in the airliner sector, might find themselves outmanoeuvred.