Boeing Good, Airbus Bad

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If, as Samuel Johnson is purported to have said, patriotism is the last refuge of the scoundrel, perhaps the mercantilist parallel in the age of global commerce is a faded bumper sticker once popular around Seattle: If it’s not a Boeing, I’m not going.

That, in part, seems to be animating the current tawdry mud fight between Boeing, Bombardier, Airbus and Delta, with the skirmish lines being drawn in the stuffy bureaucracy of the World Trade Organization. Obscured by the war of the PR departments is that this is really little more than moneyed legal teams striving for the high notes in identifying each others’ kettles as mere pots.

Arriving in my inbox this week was an analysis from the Business Travel Coalition, an advocacy/lobbying group for transparency in policies related to the managed travel industry. It excoriated Delta Air Lines for its purchase of 100 new Airbus A320neos by pulling—what else—the patriotism card. Quoting Commerce department estimates, this buy will supposedly cost some 65,000 American jobs. (Never mind that most A320s for the North American market are built in Mobile, Alabama, not far from Continental’s engine factory.) BTC also dinged Delta—fairly, I’ll admit—for advertising and promotion heavy on commitment to American commerce while it was busy buying—horrors!—European airliners.

This skillet has been simmering awhile but came to a boil earlier this year when Boeing challenged Delta’s purchase of Bombardier CS100 single-aisle jets, claiming the airline was getting such a good deal that Bombardier had to be dumping into the U.S. market. The U.S. Department of Commerce agreed and slapped a 300 percent tariff on the Delta buy, effectively killing the deal if not Bombardier itself. Retaliation is the stuff of trade spats and it didn’t take Canada long: Last week, it cancelled a $6.5 billion order for Boeing F/A-18 aircraft. It will buy used versions from Australia instead. In the meantime, Airbus stepped up and acquired a no-cash majority position in the CSeries program that will allow Bombardier to leverage Airbus’s global heft in marketing and supply-chain economics. Smart move, Boeing.

Now the case goes off to the International Trade Commission, which will determine if Boeing’s claims of potential damage to the U.S. industry are valid. Core to the argument is government subsidies, which Boeing claims Bombardier got from the Canadian and Quebec governments when the CSeries program ran into trouble. Brazil has filed a World Trade Organization claim on this as well. The pot-kettle silliness arises from the fact that both Boeing and Embraer would have us believe they’re utterly unspoiled by the taint of government payments, laboring as they do in the remorseless hard-scrabble of western capitalism.

Of course, more than a third of Boeing’s $94.5 billion revenues come from government defense contracts, so there is that. And Good Jobs Firstáreports that Boeing has been an aggressive seeker of government subsidies in the form of loan guarantees, tax breaks and bond financing. In South Carolina, for example, it negotiated what could be as much as $900 million in property tax abatements for a new factory there.

And in Seattle, when the state and city were worried about Boeing exporting jobs in 2013, the company was given an $8.7 billion tax break, the single largest that any state has offered in the U.S. The company repaid the community by cuttingámore than 12,000 jobs, or 15 percent of the workforce. The legislature is busy crafting a law to get some of that money back.

The point is this: If you’re looking for moral bedrock here, there is none. It’s folly to apply white hat/black hat reasoning or to force the discussion into always-buy-American ideology. The reality is that in the global marketplace, aerospace giants are financed, subsidized and sustained by government money in some form and it’s na´ve to think otherwise. It’s just a fact of business life so you’re left to spin it toward European subsidies being socialism run amuck and U.S. subsidies as just good ole ‘Merican capitalism.

Further, Boeing and Airbus have both inked orders for airplanes selling below production cost. They make their money in sustained production programs. Not being privy to the details of Delta’s deal with Airbus, we can only guess if it was animated by spite or standard bottom-line thinking. But if businesses are shamed into higher-cost decisions for patriotic optics, they are by definition making themselves less competitive. This is equally true if a local government views a tax break as a promissory note for a full-employment program. If a company can’t trim workforce to accommodate productivity gains, it will become uncompetitive.

So the CSeries ITC case is just a bunch of noise to see whose lawyers can pull the wool over the commission’s eyes more effectively. The WTO will eventually get involved, I’m sure. The “buy American” argument strikes me as impossibly simple-minded in an industry that’s as globalized as aerospace. Why is it better to preserve jobs in Seattle than in Mobile? More than half of the CSeries components are U.S. sourced, so if those companies don’t get the business, will Boeing buy components for a type of airliner it doesn’t even build?

The quaint view of competition is that it has to do with the best products at the best prices and the great leveler of consumer demand will declare the winner. But competition is multifaceted, bridging into politics, the courts and manipulating public opinion. In my view, that’s Boeing’s top game here. It has decided to invest heavily in its cash-cow 737 series to the exclusion of smaller aircraft like the CS100. So rather than compete with a like product, it will sue the competition. (Nothing new about this. The Wright brothers started it with their protracted suits against Glenn Curtiss.)

Naturally, Boeing has its investors to consider and they ought to be happy indeed. Just this year, its stock price has soared from $153 to $296. Boeing alone accounts for more than 25 percent of the Dow’s average rise this year. With that kind of market cap ($175 billion), you’d think they could afford to fund a piddly 100-seat airliner project. But they probably look on that class of airplane the same way Cessna looked at the Skycatcher.

First Flight Day

Having mentioned the Wright brothers above, I'd be remiss in not noting that today is the 114th anniversary of the age of powered flight. The weather on the Outer Banks of North Carolina is remarkably similar this morning: 36 degrees, but a light breeze rather than the gale that lifted Orville Wright 120 feet on the first recorded powered flight, a mere three feet less than the wingspan of Boeing 737. Perhaps due to subsidies, an A320 is six feet shorter.

Comments (17)

Good coffee, good read. Thanks Paul.

Posted by: Rafael Sierra | December 17, 2017 7:45 AM    Report this comment

"Further, Boeing and Airbus have both inked orders for airplanes selling below production cost. They make their money in sustained production programs."

How is money made in a sustained production program by selling bellow production costs?

Sounds like the buy high and sell low, but make it up on volume logic.

Posted by: Jeff Land | December 17, 2017 8:41 AM    Report this comment

In a day when a new Gulfstream will set you back a cool $65 million ++, I can't figure out the advanced math that it takes to build - let alone sell - a 100-seat GTF-powered airliner for $19.6 million. Dumping is dumping.
But IF Airbus does build them in the U.S., that would be a big win for almost everyone. Can't wait to see the selling price, though...

Posted by: Tom Yarsley | December 17, 2017 2:20 PM    Report this comment

"How is money made in a sustained production program by selling bellow production costs?"

Because launch customers get sugar deals, development costs aren't fully amortized into the initial sales and aircraft builders make big production gains when they figure out how to build more efficiently. That last part is key. This article explains it.

www.forbes.com/sites/afontevecchia/2013/05/21/boeing-bleeding-cash-as-787-dreamliners-cost-200m-but-sell-for-116m-but-productivity-is-improving/#1518e7bc5cb5

Posted by: Paul Bertorelli | December 17, 2017 4:49 PM    Report this comment

And you forgot that Northrop Grumman / EADS had won the USAF tanker program -- TWICE -- but Boeing pitched a bitch and ultimately got the contract. The Mobile plant was to be the site where their tanker would be built. It's beginning to appear -- to me -- as if Boeing is using this tactic everywhere? In the KC-X case, Northrop Grumman ultimately threw their arms up and pulled out in protest.

See: www.militaryfactory.com/aircraft/detail.asp?aircraft_id=799

Posted by: Larry Stencel | December 17, 2017 9:55 PM    Report this comment

... silly me ... I also forgot the Darlene Druyun fiasco ... also convicted of a felony in the tanker program and who served nine months in prison. Boeing's CFO was also sentenced to four months and CEO, Phil Condit, resigned in the fiasco. She was also found guilty in awarding the Small Diameter Bomb (SDB) contract to Boeing. BTW: She still gets her Government pension :-(

See: en.wikipedia.org/wiki/Darleen_Druyun

And here we are 15 years later and the same tactic is still going on with Boeing. So if they can't complain and get a program ... they just hire the principals and steal competing company's plans.

Posted by: Larry Stencel | December 17, 2017 10:16 PM    Report this comment

President Eisenhower admonished us to be ware of the military industrial complex. He realized who the next enemy of the people truly was.

Posted by: Leo LeBoeuf | December 17, 2017 10:44 PM    Report this comment

Boeing does what Boeing has to, wants to do to make as much money as possible while stretching both legal and ethical boundaries of running a business. Boeing just doesn't care. Boeing just wants to make more money. This business culture first reared it's ugly head in a big way during the Enron fiasco, short term gain at any and all cost, period. The Enron practices have not changed, they have evolved, just gotten more refined and better at concealing. The same goes for corporate ownership and patriotism. The two don't mix, they can't mix. Corporations exist strictly to enrich their owners / shareholders. If they do appear to be patriotic, it's because the illusion of patriotism benefits the corporation directly from a profit standpoint. There is no other reason for a corporation to be patriotic.
They're religion is "profit" and they're god is money. Plain and simple.
Anymore, the only immediate benefit that the masses see or really care about is where is the product made. If it's made in the USA, "Good," if it's made anywhere else, "Bad." It's that simple.

Posted by: Thomas Cooke | December 18, 2017 5:37 AM    Report this comment

A bit of irresponsible journalism here. Skewing facts to fit the story. There will always be outlier data points in any business, but the general concept of subsidies is real. But aside from the subsidy issue, there are numerous other misrepresented facts in this story. Delta's order of A321's coming from Alabama is but a trivial piece of the business. Final assembly occurs there, but all the engineering, support, investors, and profiteers are in Europe. Of every dollar spent on a US-based A321, do you really think 100% of it stays in the US? On government subsidies, we have very strict rules on how government funding is allotted to the private sector. That funding goes to US Government programs; NOT Commercial. It goes to programs the government has specifically contracted with Boeing and others for a product or service. The Commercial sector gets NO benefit from that.

Overall, I thought this piece was a product of one author trying to stir up controversy, and not a true representation of the facts quoted throughout. The courts will decide (as they already have in several jurisdictions!!).

Posted by: Jay Frimer | December 18, 2017 6:32 AM    Report this comment

"That funding goes to US Government programs; NOT Commercial. It goes to programs the government has specifically contracted with Boeing and others for a product or service. The Commercial sector gets NO benefit from that."

That's not entirely true. If there are overlaps in technology between the commercial and government sides of the business, there are ways for some cross-pollination. And income is income, so the income from a government program can still ultimately be redistributed to the commercial side of the business. Besides, for every rule there is, there is a way to bend or stretch the rule

Posted by: Gary Baluha | December 18, 2017 7:34 AM    Report this comment

Jay, courts don't decide anything except who has the better lawyer(s

Posted by: Richard Montague | December 18, 2017 7:49 AM    Report this comment

Asymptotic and unrealistic learning/productivity curves aside, I'd like to meet anybody who actually thinks that ANY company EVER will be able to make even one dollar per article, manufacturing and selling C-series birds at $19.6 million each. The cost of the engines plus the avionics approaches that sum.

Posted by: Tom Yarsley | December 18, 2017 10:18 AM    Report this comment

More than 30 years ago, the Nobel laureate economist Milton Friedman stated that no one ever wins a trade war. Back then, globalization was just reaching critical mass and it was the Japanese that we were worried about. Today, businesses like Boeing and Airbus are so large that they have subsidiaries and subcontractors in virtually every country on earth. Calling either company American or European is silly pandering to the ignorant. Boeing's current tactic against Bombardier is short-sighted at best. If Bombardier cannot successfully build and sell future aircraft at the depressed prices, they will either have to raise the price, or they will ultimately fail, regardless of support from the Quebec government. And, Boeing has already cost itself future revenue from the sale of military aircraft from Canada, plus they might have also damaged any future sales of civilian aircraft to Canadian airlines. In the end, no one wins.

Posted by: John McNamee | December 18, 2017 11:38 AM    Report this comment

With me, it's "if it's Airbus, I ain't going"

Or any other FBW airliner for that matter, 787 included.

Posted by: Scott McGowin | December 18, 2017 1:15 PM    Report this comment

I'm reading that Airbus has just delivered it's 50th A320 family airplane from the Mobile, AL facility to Delta ... less than two years after delivering the first in 2016. And, they're now on track to deliver four aircraft per month. Doing some research, I found that T. Allan McArtor -- same guy some of us remember as FAA Chairman in the late 80's -- has been Chairman of Airbus Americas since 2001. And, Airbus has an Engineering facility in Wichita as well as other major manufacturing facilities in France, Germany and China. McArtor is claiming that "tens of thousands of employees from hundreds of U.S. suppliers contribute to their (U.S. built) aircraft."

So instead of building USAF tankers in Mobile, Airbus is now delivering commercial airliners which are competing with Boeing's 737max. Seems to me that Boeing's incessant complaining and ultimate award of the KC-46A tanker program may also be backfiring on them ... just like the Canadian F/A-18 issue.

Posted by: Larry Stencel | December 19, 2017 7:20 AM    Report this comment

On moral bedrock. Was Airbus's founder Franz Joseph Strauss a NAZI and a Der Spiegel aficionado? Airbus Group said thank you.

Posted by: Rafael Sierra | December 19, 2017 10:49 AM    Report this comment

Paul you missed the point that global aircraft manufacturing needs a level playing field. However, ego's and national pride preclude this from happening. And since the countries involved have not agreed on clear cut rules on what government funding is acceptable and what is not then it looks like the courts will get to sort it out.

I don't buy the David versus Goliath argument. Bombardier's track record for being good corporate stewards leaves little to be desired - taking a couple billion dollar investment in the C-series and paying Airbus to take it off your hands doesn't seem like prudent use of shareholder dollars.

Posted by: Rob "daSlob" Schaffer | December 20, 2017 6:20 AM    Report this comment

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