Who will win: Boeing or Airbus?

Date: Wednesday, March 16, 2005 9:54:07 PM EST By DONNA BORAK, UPI
Business Correspondent

WASHINGTON, March 16 (UPI) -- With only a few weeks left before
negotiations between the world's two largest commercial aircraft
producers -- Airbus and Boeing -- are expected to conclude, trade and
policy experts are less than optimistic that the resolution to end
subsidies will be anything close to diplomatic.

Insiders have said thus far that negotiations between the United States
and the European Union have stagnated and have not been progressing as
scheduled in the three-month time period allotted to resolve the
dispute.

"My understanding is things are not going particularly well at this
time. They haven't moved a lot," said Claude Barfield of the American
Enterprise Institute, host of the trade policy seminar on Wednesday.
"We may have a WTO (World Trade Organization) case or an extension of
negotiations."

In January, the United States and the European Union in a breakthrough
decision agreed to halt disputes and re-enter into bilateral
negotiations for three months, in the hope that they could put an end
to subsidies on the production of large commercial aircraft.

At first glance, the decision by the United States and the European
Union to halt the dispute and charter a course to resolution outside of
the World Trade Organization was seen as a political move meant to
soften relations only weeks before President George W. Bush went on his
four-day "charm offensive" tour throughout Europe.

But both sides of the Atlantic were adamant that a resolution would in
fact take place at the end of the three months, with the United States
urging the European Union to end subsidies to Airbus, Boeing's leading
competitor.

The European Union has made the case that subsidies and launch aid are
mechanisms to spur job creation and growth. But for the United States
and Boeing, who has slowly seen a diminishing clout in the jetliner
industry, the U.S. point of view has been that European subsidies are a
means to freeze out Boeing from the market.

"It's pretty hard to see the economic rationale for future subsidies
(going forward),"said Phillip Swagel of AEI.

"If you can't come up with an economic rational from the European
taxpayer's point of view, it's hard to avoid the perception that this
was a political decision and one aimed at the United States in some
point," Swagel added.

According to Swagel, the launch aid provided to Airbus is in essence
loans extended by the government to the airline. If the product line is
successful, then Airbus would be required to pay the loan off at the
appropriate time, however, if the product line is unsuccessful then the
loan is written off. The problem arises in that every time a product
line is successful the company can in turn negotiate an even better
deal which only ends up making the company even more profitable.

While subsidies arguably may be beneficial to the United States in
terms of increasing competition, providing consumers with more choices
and lower prices, the long-term net gain for the United States may in
fact be a loss especially as the European airliner attempts to edge
closer into the U.S. defense industry.

"The desire of the European defense industry to have a larger slice of
the much larger spending in the United States ... clearly has an
influence on some level behind this," said Barfield.

According to commercial expert Richard Aboulafia of the Teal Group, 80
percent of Airbus' market share is owned by the defense company EADS,
which offers the commercial aircraft more of an opportunity to expand
and float market shares.

Aboulafia explained that much of the success of Airbus has rested in
company's approach to business, unlike its competitor Boeing.

Boeing, largely controlled by shareholder returns, is more vulnerable
to equities and capital markets and generally takes a short-term
approach allowing it to be more affected by risk. Airbus, on the other
hand, puts market shares first over shareholder profitability. It takes
a long-term approach to business with an increased willingness to
invest making it easier to launch new products with little risk.

Additionally, Airbus has focused in the last decade on investing in
more products than Boeing and has been better at reinforcing their
product lines. In the last five years, Airbus has introduced the A318
and A340, while Boeing only introduced the 767 which ended up failing.

In the next five years, with the new A380 which is expected to be
completed in 2006, and A350 expected to be completed in 2010, Boeing is
planning to launch the 787 in 2008 in the hopes that it can step up the
competition against the A380 a 555-seat wide jetliner.

"Without the 787 they're in serious trouble," said Aboulafia. "Arguably
they would be left with only a third of the market by the end of the
decade without some serious reinforcement of their product line."

Although the Boeing 737 rakes in the largest cumulative value on its
deliveries at over $80 billion, the majority of jetliner profits come
from wide-seat international jet liners. Unfortunately, Boeing has lost
many of its major wide-seat jetliners like the 757, and is expected to
shut down the 767 and possibly the 747 if the company is unable to
successfully launch an upgraded model.

"Looking forward, it's very tough to be a two-product plane maker,"
said Aboulafia.