How the USA Is Losing the Aviation Industry Battle
1916, only 13 years after the Wright brothers flew the first heavier-than-air aircraft, an American company was established, ready to revolutionize the fledgling aviation industry. Founded as Pacific Aero Products and renamed just a year later as Boeing, the company enjoyed decades of success and developed some of the best technologies and many of the best aircraft of the time. From the first modern commercial airliner, the Boeing 247, launched in 1933, to the iconic Jumbo 747, Boeing was able to amaze humankind for decades... until Airbus came along that is. 90 years after the launch of the iconic Boeing 247, the world of aviation today is radically different. Not only does Boeing no longer lead
the market, it has been overtaken by a competitor almost half its age: Airbus. Take a look at this graph. What you see is a hard-fought war, a market divided between two giants where Airbus is now in the lead. And it has been for most of the past 20 years, Europe's Airbus has recorded more orders than its North American rival. The question is, why? How is it possible that the Europeans have managed to beat the mighty American commercial aviation industry? Many of you may be thinking that this change has a lot to do with the Boeing 737 MAX fiasco, a plane that was grounded for 20 months because air safety authorities banned it from flying after two fatal crashes.
And yes, in a way this has a lot to do with what happened, after all, the 737 Max was Boeing's great hope. Although we are not going to delve too much into this matter because we have already made a video entirely dedicated to this topic here on VisualPolitik. I’ll leave the link at the end of the video. But no, that's not the only reason why Airbus has managed to overtake its US rival. In this case, the story goes back much further.
Have you ever wondered how on earth a European aircraft company managed to catch up, in quality and technology, with the great American leader that controlled this industry practically from the start? How did Airbus come into being, whose idea was it and why was it created, and who put up the money to make it look like a rival for Boeing? And perhaps the most important question of all: What on earth does all this have to do with VisualPolitik? VisualPolitik viewers, the story of Airbus and its war with Boeing is more than a story of competition between two companies, it is also a story of political competition: the United States versus the European Union. The old giant versus the new titan. And believe me when I tell you that there are a lot, and I mean a lot of layers in this one. This is a story that goes far beyond aviation itself. So... Are you ready? Are your seat belts fastened?
Well... Let's get started. (UNITY IS STRENGTH) The second half of the 20th century was the era of economic explosion and modernity both in the West and in much of Asia. And it was also the time when Europe was rising from the ashes of World War Two. Where once there had been constant fighting and conflict, now suddenly there was agreement and cooperation. In fact, if this had not been the case, Airbus would probably never have existed. The European aeronautics company par excellence was launched in 1970. It was the result of a
political negotiation between governments that had already begun a few years earlier. Yes, that’s right. Airbus was not the brainchild of some visionary entrepreneur or anything like that. The idea came from the offices of the
French and West German governments in the late 1960s. To achieve this, these governments encouraged the union of the French aeronautical company, Aerospatiale, with the German company, Deutsche Airbus. The consortium was later joined by aeronautical companies from Spain and the United Kingdom. In essence, the idea was to replicate the
collaboration that the French and the British had undertaken to create Concorde a few years earlier, but in this case with the objective of creating a long-term structure that would make it possible to make aircraft that were, shall we say, less exclusive. Aircraft that first had to be able to fill a gap in which the American Boeing, Lockheed and McDonnell Douglas, which completed about 80% of the market, had no product. And later to compete with them, directly, on a large scale. And so it is that the first aircraft to be launched was the Airbus A300, which was the first wide-body aircraft to make commercial flights with two engines under ETOPS standards. But, let's not get sidetracked and let's get into the situation. With the
Europeans manufacturing modern aircraft and gradually gaining more and more market share thanks to the merger of several companies, Boeing had to do something. So in 1997 it tried to replicate the model by acquiring its direct US competitor, McDonnell Douglas. However, with this purchase, the American giant inherited some of the company’s problems, including economic and corporate culture problems that would sooner or later take their toll. Be that as it may, the fact is that the era of what is perhaps the most important and powerful duopoly of all had begun: that of aviation. Now, let's not go too fast. This is an industry that requires a lot of capital investment, that is, to make it work you have to put in a lot of money. As you can imagine, designing, developing and manufacturing aircraft is not easy.
The question is: Who was going to put up the money to develop the technology that would allow each of the two companies to try to conquer the market? For the first time, Boeing had a potential giant in front of it, capable of looking at them eye to eye, but how exactly would they compete? How did the Europeans intend to eclipse the US giant? Well, you see, let me say it again, in order to launch a new program, to create a new airplane, two things are needed above all: the first is money, lots and lots of money. But to give you a clearer idea of what we are talking about, let's take a concrete example, let's take a look at the case of Airbus A380, the world's largest airliner, which was discontinued in March 2021 when the last aircraft left the factory. Well, take a look. The A380 program, which includes the entire development cycle from conceptual idea to entry into service, was initially estimated in 2000 to cost about $11.3 billion. However, estimates today point to the development of this giant of the skies swallowing up more than $30 billion. These are astronomical figures. And,
keep in mind that Airbus itself acknowledges that the A380 has never made a profit. Well, it is not that it has not generated profits, but that billions of dollars were lost along the way. And this is where we come to the second thing you need to launch a new aircraft. In addition to money, there obviously needs to be sufficient demand.
Given the numbers involved, poor forecasts could turn the development of the new aircraft into a disaster. Well, right here we come to the most controversial part of this duel of titans. The question is, what has Airbus done better than the Americans? From the point of view of many Americans, what Europe has done with Airbus is nothing short of unfair competition. A situation that even provoked a trade war between the United States and the European bloc. Take a look. (U.S. and EU Agree to Suspend Airbus-Boeing Trade Fight The 17-year trade fight is the longest and most costly in the history of the WTO. U.S. importers have paid more than $1.1 billion of tariffs
since the duties in the dispute took effect in 2019, according to data from U.S. Customs and Border Protection. – Wall Street Journal) Now, do you want to know exactly what this conflict is about and why it has occurred? Has Airbus really grown thanks to favored treatment from European governments? Has this been a case of unfair competition? And what about the United States? Well, let's take a look. (WAR OF EGOS) The trade dispute between the United States and the European Union, and between Boeing and Airbus, with the World Trade Organization in the middle, had one very clear cause: financing. You see, Airbus, the European aircraft
manufacturer, has been receiving huge amounts of public money since its inception to meet the costs of developing new aircraft. But let's look at a few facts. Throughout the history of the consortium, the governments of France, Germany, the United Kingdom and Spain, later joined by others, have injected tons of cash. Money in the form of both direct subsidies and loans at artificially low interest rates or, directly, without any financial cost, that is, without interest. We are talking about aid that could exceed 15 billion dollars, but whose impact on the market could, according to some estimates, be in the region of 200 billion dollars, all of which, logically, works against Boeing in the United States. All this funding is what is known as "launch aid" and forms one of the largest industrial policy plans in Europe in recent decades.
Basically, the European States used these tools to cover a significant part of the cost of the development of the first Airbus models, such as the A300 or the mid-size aircraft family, such as the A320, which competes with the Boeing 737. The conflict arises because, initially, the idea was that these subsidies would be reduced until they disappeared as Airbus matured in the market. And also because they would have to be repaid in full as each program made a profit. In other words, the company was to be supported with European taxpayers' money as it took off with the expectation of returning a higher profit down the track. Basically, a typical industrial policy plan, which I am sure many of you would consider favorably. After all, Airbus was a success and, well, you may also think that it is better to devote public resources to initiatives like this one rather than to other types of... Let's say
more abstract, less productive causes. Of course, there would be a lot to say about this matter, but that is more a topic for our sister channel, VisualEconomik. In any case, as you can imagine, the Americans are not happy about it. And even less so if we take into account that this financial aid didn’t end up disappearing nor has Airbus repaid the totality of these loans. (6 March 2019: Airbus In Dispute Over $600m
Of Unpaid Loans Used To Develop The A380 According to Reuters, Airbus claims that "it would no longer need to repay any outstanding state loans on the A380 because governments had agreed to share risk in the roughly 15-billion-euro project." – Simple Flying) As you can see, these "launch aids" were so advantageous that they apparently included a clause whereby, if the program went wrong, the risk was shared between the lenders, that is governments, and the recipient: Airbus. In other words, both would share the losses... Which, by the way, does not happen with the profits. In fact, it's not like Airbus is losing money. Yes, the A380 program went badly, but the company is going from strength to strength. For example,
in 2022, this company posted a net profit, that means after tax, of more than 4.2 billion euros, the best result in its entire history. Despite this, part of the losses on the A380 program have been absorbed by the European countries. [And to tell you the truth, I don't know if this makes sense]. But what is clear is that the Americans don't like it one bit. The anger is monumental.
Both at Boeing headquarters and among politicians in Washington. In their view, the Europeans have been torpedoing their aircraft industry with alleged illegal aid. And in fact, the World Trade Organization went so far as to rule that such loans to Airbus generated unfair competition. So, what can I say, they did have a point. In order to make peace with Washington and comply with WTO guidelines, the European Union, France and Spain had to raise the interest rates charged to Airbus for loans linked to the launch of the A350, one of the European manufacturer's new flagship programs.
Now then, stop, let’s put the brakes on. Before you tip the scales in favor of one or the other, wait a bit because as we usually insist on VisualPolitik... every story has at least two versions. And it’s not exactly as if the Americans
have been behaving above board. Not at all. In fact, we could even say that the US government has bailed Boeing out of a lot of trouble in recent years, and it has done so in a number of different ways. Some of them, by the way, with catastrophic consequences. Do you want to know what exactly we are talking about? Do you want to know what tricks the Americans got up to? Well... Pay attention! (BAILOUTS… UNDER THE TABLE?) We have already told you that Airbus has received a lot of money from European taxpayers. Debts that
on many occasions have been forgiven, which has clearly harmed Boeing in its competition with Airbus, but... What about the Americans? Have they stood by with their arms folded? Well, obviously not. There are some winners and losers in this story. Boeing has also been receiving billions of dollars in US government funding and for many, huge sweetheart deals. Favorable treatment, which is reported to have come at times from the US Federal Aviation Agency itself, the until recently highly respected FAA, the agency in charge of regulating and overseeing all activities related to civil aviation and its safety in the United States.
The question is... How did they do it? Well, you see, the way the United States has – and continues to – fund Boeing is through multi-billion dollar military and aerospace contracts, which many believe are awarded, with inflated prices. In other words, as a kind of hidden subsidy. In fact, look at the data: Boeing's largest contractors are none other than NASA, the US Department of Defense and the US Department of Homeland Security. In 2017 alone Boeing earned $23.4 billion in US government contracts, according to data compiled from the General Services Administration. And in fact, in its defense, Airbus claims
that the constant and numerous contracts Boeing receives from the US government and public agencies are a way of subsidizing the American aviation giant. But not only that, there is also the alleged favorable treatment by the FAA that we were telling you about a moment ago. Take a look. (FAA saw high risk of crashes, but let Boeing 737 MAX keep flying – The Seattle Times) ([The Boeing 737 MAX crashes] "were the horrific culmination of a series of faulty technical assumptions by Boeing's engineers, a lack of transparency on the part of Boeing's management, and grossly insufficient oversight by the FAA" – Report of Transportation and Infrastructure Committee of the United States House of Representatives) (FAA and Boeing manipulated 737 Max tests during recertification – The Verge) In fact, all indications are that, in addition to the money that the United States injects into Boeing every year through contracts, it was also helping the company by providing it with certain laxity when it came to certifying its airplanes.
Specifically, the case of the 737 MAX, which was an aircraft that was designed late and poorly to compete with the Airbus A320neo, which was launched practically by surprise and against which Boeing found itself out of the market and unable to compete. If these suspicions are confirmed, what we can say is that the outcome was tragic. But hold on because we haven't told you about tax incentives yet. (12 March 2020: Washington state repeals pro-Boeing tax break; U.S. hopes to avoid EU tariffs The changes would remove the 40% savings on Business and Occupation tax, which saved Boeing some $118 million in 2018 based on published jetliner revenues. – Reuters) Are these provisions not public subsidies that also harm free competition, and are they not favoritism on the part of US administrations towards Boeing? Well... the truth is that the World
Trade Organization not only ruled against Airbus, it also ruled against the Americans. (WTO rules US failed to stop unfair tax break to Boeing The US had not enforced an order in 2012 to stop subsidies to the US aircraft maker through Washington state tax breaks. The undue competitive advantage led to lost sales of Airbus' A320neo and A320ceo single-aisle aircraft in five sales campaigns. – Financial Times) So, what can I say? Both giants are guilty of doing the same thing but in different ways. This is a story in which there are neither good guys nor bad guys... But at ground level there
are big, "suckers": the taxpayers. Because yes, it may be reasonable to support the development of large technological and industrial projects, but perhaps the aid should be fairer, limited and open to more companies, don't you think? The fact is that signing a trade peace agreement on this issue between the United States and Europe has not been easy, nor has it been something that fell from the sky. What's more, there has been one factor that has played a key role in the end of the war between the two companies and the two blocks. Can you guess what it could be? Well... Listen up. (WHAT CHINA HAS JOINED TOGETHER, LET NO MAN PUT ASUNDER) Seventeen years of war between the world's two leading aircraft companies takes its toll. In the end it's something we repeat a lot on VisualPolitik: trade wars don't usually benefit either side. And the case of Boeing and Airbus is no different. Both manufacturers have been hurting each other... And by extension may have been
hurting the development of the industry. The fight between the United States and the European Union raised import and export costs, restricted the use and development of technologies and ultimately made aircraft more expensive and slowed the evolution of the industry. And do you know what? This created an ideal breeding ground for others to try to take advantage of the troubled waters. Now the wolf's ears are in view. And yes, the wolf is, once again, China. ("We also agreed to work together [EU & U.S.] to challenge and counter China's non-market practices in this sector that give China's companies an unfair advantage." – Joe Biden) As we also told you in a past video in our dedicated series of videos on the world of aviation, the Airbus-Boeing duopoly could be threatened, at least in the short and medium-haul segment, by a new competitor: China's COMAC.
Beijing is aggressively using a mix of the two forms of public subsidies we have seen in this video, those used by the Europeans and those used by the Americans. The Chinese government is directly subsidizing aircraft development, and is also placing huge orders through its state-owned airlines. In fact, the COMAC ARJ21, which can carry up to 100 passengers, is already flying commercially, and the COMAC C919 is currently on its initial commercial introduction. Although it has encountered some problems
and its entry into service may be delayed from the 2023 schedule, the fact remains that this aircraft may pose a huge threat to the future of Boeing and Airbus. We are talking about an aircraft that can carry up to 174 passengers and therefore competes directly with the A320 and 737 in China, the flagships of the two Western giants. What's more, China expects to manufacture 150 of these aircraft per year by 2028.
And this scenario, that of an aircraft manufacturer for the Chinese short- and medium-haul market, would be the worst nightmare for Airbus and Boeing. Why? Because China is the key market for the future of the two aviation giants. In fact, according to Boeing's own calculations, the Asian giant will need to buy, wait for it, almost 8,500 new passenger aircraft between now and 2041. This is a real payday, and if a local competitor such as COMAC manages to take even a significant slice of this pie, the future of Boeing and Airbus could change completely. A direct hit to the business.
So both companies – and the governments of the United States and the European Union – have been pragmatic. In recent years, both companies have opened final assembly lines in China for some of their most sought-after models, such as the Boeing 737 or the Airbus A320 and A321neo. In addition, the European Union has suggested to the United States that they will end the so-called "launch aid" to Airbus, in exchange for financing the consortium through military spending. Something we are already seeing. Check it out. (Spain to lend Airbus 2.14 bln euros for military programmes – Reuters) Yes, as many of you may be thinking, this is practically adopting the American model of financing Boeing that Brussels has been fighting against for 17 years. [Well, it’s not exactly unheard of for European politicians to change their tune...]. What is known so far is that both blocs,
the EU and the US, have signed a truce, a ceasefire in this trade war, which in theory should be resolved before 2026. The future? Well, we can't know for sure, but what is clear is that neither Airbus nor Boeing is in a position to complain too much about unfair competition. The two industrial giants have received enormous amounts of money, both control more or less a similar share of the market, and both have enormous political connections with the public sector. But now it's your turn: do you think Airbus and Boeing will make peace for good? Should the two companies start working together to prevent the Chinese from gaining a foothold in the market? What do you think the war for control of the skies may look like in the coming decades? Leave us your thoughts below in the comments. Remember also that if you like what we do you can
support us by joining our community in Patreon in one of the six different options we have. Once again, thank you very much for being there. All the best and see you next time.
2023-06-10 04:23
