Summary
While the preliminary WTO ruling upheld Washington's claim that Airbus received billions in "launch aid" which violated trade laws, it is unlikely to impact market dynamics, competitive strategy or alter aircraft pricing in the near term.
This will wait until a verdict is announced in the European Union's counter-claim that alleges that Boeing also receives unfair support via subsidies and tax breaks at year end, and ultimately, as appeals and arbitration progress.
Analysis
The recent preliminary ruling by the World Trade Organization upheld Washington’s claims that Airbus was the recipient of billions of euros of “launch aid” which distorted trade and violated trade laws. This ruling should, in the end, set guidelines for acceptable government funding and support in civil aviation which will impact, not only industry stalwarts, Airbus and Boeing, but also companies such as Brazil’s Embraer and Canada’s Bombardier, as well as developing market entrants in China, Russia and Japan.
Washington claimed that Airbus received unfair aid in the form of subsidized loans from the governments of Britain, France, Germany and Spain for a number of programs including development of the superjumbo A380. While the Airbus A350, their first program to heavily incorporate carbon fiber composites and specifically designed to compete with Boeing’s 787 Dreamliner, was not named in the suit, the recent ruling is anticipated to impact Airbus’ development strategy. Over the past 3 months, the governments of France, Germany, Great Britain and Spain announced support of approximately EUR3 billion for the A350, including loans of the kind that the WTO ruled were in violation.
A countersuit, filed by the European Union, is currently in process which alleges that Boeing also received subsidies and tax breaks which violated trade laws. No ruling on this suit has been issued to date and is not expected until year end. Regardless, it’s expected that any and all verdicts will be challenged and that appeals and final arbitration will take years to complete.
In the short term, little will change for either Airbus or Boeing, at least until a ruling on the countersuit is issued. Both governments are also highly incented to limit any spillover from the ruling in order to minimize any impact on ~$700 billion in annual trade. However, near term political implications may be seen in the upcoming U.S. Air Force tanker replacement program where Boeing will compete with Airbus, through a joint Northrop Grumman/EADS bid. Other civil aviation market participants, (ex. Bombardier, Embraer, etc) will be left to await details on the highly confidential decision, rumored to be a 1,000 page document.
While the recent WTO verdict will be sure to garner headlines and industry commentary in the near term, it is unlikely to impact business practices, market dynamics or affect aircraft pricing in any material way.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
