October 5, 2016
The battle between The Boeing Co. and Airbus Group SE intensified after the World Trade Organization (“WTO”) ruled that the EU had failed to stop the supply of illegal funding to Airbus.
The Latest Development
On Oct 3, the U.S. government announced that it will implore the WTO to come up with a panel report that establishes the supply of unfair subsidies by the EU to Airbus. A special meeting could be held at the WTO on Oct 14 with the U.S. Trade Representative in the nation’s efforts to protect Boeing’s market position from unfair competition posed by the European plane maker.
What Led to the Conflict?
The battle between the U.S. and the EU over the latter’s state aid to Airbus alone began in 2004. Washington and Brussels had then filed complaints against each other, citing an international trade rules that government support is illegal if it is proven to be detrimental to the companies or industries of another WTO member state.
This was followed by a WTO order in 2011 to cease support and subsidy from the EU to Airbus. However, the EU failed to comply with the order. Interestingly, even though the WTO had refrained from providing an approximate value, Boeing alleged the illegal funding for Airbus’ development and sales to have reached as high as $22.0 billion.
A Win for Boeing
The WTO found that the support received from the EU enabled Airbus beat Boeing in several major multi-billion dollar contract wins in Europe, China, India and other countries. Allegedly, the EU had even provided Airbus enough subsidies to manufacture the world’s largest jetliner –A380. In addition, Airbus received billions of dollars in unfair funding, which in turn, has a disastrous impact on Boeing’s sales.
On Sep 22, the WTO finally confirmed that the subsidies were illegal in nature, as per the international trade regulations. This will allow the U.S. to now impose annual retaliatory duties against the EU of up to $10 billion. Nevertheless, the U.S. is still open to negotiations before finalizing on such a penalty. This could prove to be beneficial for Boeing.
Meanwhile, the EU government is disappointed by the latest ruling and may plan to file an appeal. In retaliation, the EU has hinted at its plans of lodging a complaint against the U.S. for providing illegal support to Boeing at the WTO.
Our View
It’s clear that the WTO ruling was in favor of Boeing and the U.S. In fact, in the years ahead, Boeing expects to participate in healthy and fair competition with Airbus and secure a higher share of contracts.
If and when the subsidies dry out, Airbus’ cost of operations will undoubtedly go up, leading to higher prices for its airplanes. Meanwhile, a Boeing report recently projected an exponential rise in demand for aircraft over the next two decades. So, increased prices of Airbus’ planes could prove to be beneficial for Boeing over the long run.
However, the losses that Boeing has already incurred due to the unfair support through all these years are a matter of concern as it has not received any compensation so far.
(By Zacks Equity Research)