How the USA Is Losing the Aviation Industry Battle

How the USA Is Losing the Aviation Industry Battle

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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

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