Boeing Versus Airbus: Trade Disputes

Introduction

For years the commercial aircraft industry has been an American success story. Until 1980, U.S. manufacturers held a virtual monopoly. Despite the rise of the European-based Airbus Industrie, this persisted through the mid-1990s, when two U.S. firms, Boeing and McDonnell Douglas, accounted for over two-thirds of world market share. In late 1996, many analysts thought that U.S. dominance in this industry would be further strengthened when Boeing announced a decision to acquire Mc-Donnell Douglas for $13.3 billion, creating an aerospace behemoth nearly twice the size of its nearest competitor.

The industry is routinely the largest net contributor to the U.S. balance of trade, and Boeing is the largest

U.S. exporter. In the 1990s, the U.S. commercial air-craft industry regularly ran a substantial positive trade balance with the rest of the world of $12 billion to $15 billion per year. The impact of the industry on U.S. employment is also enormous. In 2000, Boeing directly employed over 120,000 people in the Seattle area and another 100,000 elsewhere in the nation. The company also indirectly supported a further 600,000 jobs nation-wide in related industries (e.g., subcontractors) and through the impact of Boeing wages on the general level of economic activity.

Despite Boeing’s formidable reach, since the mid-1980s U.S. dominance in the commercial aerospace industry has been threatened by the rise of Airbus Industrie. Airbus is a consortium of four European aircraft manufacturers: one British (20.0 percent ownership stake), one French (37.9 percent ownership), one German (37.9 per-cent ownership), and one Spanish (4.2 percent owner-ship). Founded in 1970, Airbus was initially a marginal competitor and was regarded as unlikely to challenge

U.S. dominance. Since 1981, however, Airbus has con-founded its critics and emerged as the world’s second largest aircraft manufacturer. By the early 1990s, Airbus’s share of aircraft orders in any one year stood between 20 percent and 30 percent, up from 14 percent in 1981. In 1994, Airbus captured more orders than Boeing for the first time in history (Airbus garnered 122 orders against Boeing’s 121). However, most analysts point out that this was an aberration, given the extremely low level of air-craft orders in that year. In 1995, Boeing captured over 70 percent of all new aircraft orders, leaving Airbus with less than a 25 percent share. Nevertheless, Airbus set its sights on gaining a 50 percent share of all new orders for commercial jet aircraft of more than 100 seats by 2000. In 1998, Airbus moved closer to attaining this goal when it snagged 46 percent of the record 1,212 large commercial jet aircraft ordered that year, leaving Boeing with 54 percent of the market. Since then, Airbus and Boeing have roughly split the market for new aircraft orders.

Over the years, many in the United States have responded to the success of Airbus by crying foul. It has been repeatedly claimed that Airbus is heavily subsidized by the governments of Great Britain, France, Germany, and Spain. Airbus has responded by pointing out that both Boeing and McDonnell Douglas have benefited for years from hidden U.S. government subsidies. In 1992, the two sides appeared to reach an agreement that put to rest their long-standing trade dispute. However, the dispute has surfaced twice since then. First in 1997, when the European Union decided to challenge the merger between Boeing and McDonnell Douglas on the grounds that it limited competition. Then again in 2000, when Airbus announced it would build a super-jumbo jet to compete with Boeing’s lucrative monopoly in the jumbo jet market. Boeing stated it would be watching the development closely to make sure that European governments did not exceed the ceilings of launch aid subsidies agreed to in 1992. In this case, we examine the debate between the two sides in this on-again, off-again trade dispute. First, however, let us look at the competitive structure of the commercial aircraft industry.

Industry Competitive Dynamics

Competitive dynamics in the commercial aircraft industry are driven by a number of key factors. Perhaps fore-most among these is that the costs of developing a new airliner are enormous. Boeing spent a reported $5 billion developing and tooling up to produce the 777 wide-bodied jetliner that it introduced in 1994. The development costs for Airbus’s new aircraft, the 555-seat A380 “super-jumbo,” are estimated to be anywhere between $10 billion and $15 billion. (The A380 is Airbus’s direct competitor to Boeing’s profitable 747 model line.)

Given such enormous development costs, a company must capture a significant share of world demand to break even. In the case of the 777, for example, Boeing