:: October 2016 Letter ::
As part of Teal Group’s commitment to bring you timely market intelligence, I am delighted to announce my new regular column devoted to the latest developments in the WTO jetliner trade case between the US and the EU. We at Teal recognize the need to keep our clients and readers informed of news affecting the aerospace world, and are privileged to be regarded as noteworthy providers of time-sensitive business analysis.
How regular will this column be? Oh, once each decade or so should do it. If you want background on the start of this complaint, read my November 2004 letter. Little has happened since, but last month saw a WTO ruling stating, in effect, that much of the Boeing/US complaint was valid. This doesn’t mean much, and this WTO complaint is less relevant today than ever. Still, this would be an excellent time for the US and EU to negotiate a set of rules for government aircraft aid.
First, the new ruling isn’t terribly important for reasons I outlined in 2004: (a) an EU counter-complaint muddies the waters; (b) there is no WTO ruling enforcement mechanism, other than giving the winner the right to retaliate, which could trigger a trade war; (c) appeals can drag things out, and (d) government aid can be reconfigured in myriad forms, and when it’s reconfigured, the plaintiff needs to start the process all over again. The WTO may work well for auto parts and frozen chickens, but it clearly isn’t geared for aviation. It’s like watching a school crossing guard direct columns of tanks.
Next, the US-EU complaint/counter-complaint is much less relevant than in 2004. Consider:
1. The context has changed. The primary reason Boeing and the US launched the complaint was to protect the 787. It was just getting launched, right as Airbus was mired in the horrible A380 development phase. Boeing was understandably concerned that the 787 would be ambushed by a direct response (the A350) which Airbus could only launch with lots of government aid.
Here we are, 12 years later. The A380 is no longer a major drain (just a slow, steady leak) and the A350XWB arrived without too much government help (Boeing can’t change that now). The 787’s commercial success has come at a steep price, but Boeing’s losses on that program have been 100% self-inflicted and have nothing to do with Airbus or European launch aid for Airbus.
2. A380 fallout is more important than the WTO. In a few years (or less), the A380 will die. European taxpayers may notice that they just lost billions of euros in public money on a doomed project. Europe might not have a Tea Party, but it does have angry voters. Judging by the past year or so, they seem to be getting angrier. The days of Euro-hubris are over. I don’t think they’ll do this again.
3. No moonshots. Back in the 2000s the industry launched ambitious and expensive new jets: A380, A350XWB, 787. Government aid is useful when you’re betting tens of billions of dollars on risky products and technologies. But today, everything in the pipeline is a re-engined derivative of an existing jet: A320neo, A330neo, 737MAX, 777X, etc. Government aid is completely unnecessary for these relatively inexpensive projects. Even a clean-sheet Middle of Market (MoM) product would not tax either company’s resources, because of the next factor:
4. More profits and resources. Thanks to the magic of air travel growth, Boeing’s BCA unit and Airbus’s jetliner business are both much larger than they were in 2004; Airbus’s 2015 jetliner revenue is more than twice its 2004 level, while Boeing’s revenue has tripled. Back in 2004 “profitable Airbus” was the industry’s silliest oxymoron; today, they’re generating increasingly respectable commercial margins. They no longer need government aid, particularly given the relatively non-burdensome new programs they’re undertaking.
Finally, despite the meaninglessness of this WTO case, the US and EU (and other countries) should sit down right now and create a set of global standards governing public aid for aircraft programs. They should regard the whole WTO complaint/counter-complaint as water under the bridge, and do something to create mutually agreed standards. Legal confrontation hasn’t achieved anything, and, if the next 12 years resemble the last 12 years, it won’t achieve anything.
Creating new standards is important because we don’t know what’s coming from new market entrants. I continue to regard state-owned players as unlikely threats; Russia and China are going nowhere fast, creating exactly the kind of products that result when governments try to directly meet commercial market needs. But consider a future scenario: what if, in 20 years or so, the Chinese Government succeeds in reforming COMAC, sets it up with a very high level of capitalization, and then privatizes it, granting the independence it needs to create products that are competitive with other commercial jets? It could even happen in post-Putin Russia. There would be no established rulebook that the US and EU could cite to prevent this development.
Also, there’s Canada. The CSeries represents a unique hybrid: it’s a competitive product created by a private (that is, non-government owned) company, but it may also soon be the Western world’s only majority government-funded aircraft program (assuming Ottawa matches Quebec Province’s $1 billion investment). It’s probably too late for anyone to stop the avalanche of public cash needed to save the CSeries, but harmonizing rules would prevent future products like this from distorting markets with the help of billions of dollars in government money.
Alternatively, Airbus and Boeing can resume their futile WTO boxing match. And let’s face it: that’s the baseline scenario.
October Aircraft Binder updates include the large cabin Gulfstreams, KC-390, CRJ, Caravan, and Eclipse reports. Please note: we’re still running a bit late with these due to a new publication system; my apologies for that. And I hope you had a great month.
Yours, ‘Til…Well, Until My Next WTO Letter, Around 2028,
© Richard Aboulafia 1997-2006, All rights reserved.