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July 2010 - Posts

National protectionism and favoritism in the aerospace industry never quite goes away I guess. Between the debates over Airbus subsidies, the influences of the “Buy America” mentality, airline foreign ownership regulations, and political pressure on the likes of Aeroflot and others to buy domestically built airliners, the industry seems to attract more than its fair share of controversy in the eyes of free trade advocates.

But is protectionism so bad? Is the importance than many countries attach to national aerospace, be it military or civilian, justified in the 21st century? Or is it simply leftover nostalgia or jealousy of bygone eras, and developing countries throwing precious money away while hopelessly trying to play technological catch-up?

What makes the aerospace industry so vital to hold onto for those who have it, and so enticing to those who don’t?

In an Ecnomic History article on the aerospace industry, author Glenn E. Bugos opens with an almost poetic passage that answers the essence of that question quite well:

The aerospace industry ranks among the worlds largest manufacturing industries in terms of people employed and value of output. Yet even beyond its sheer size, the aerospace industry was one of the defining industries of the twentieth century. As a socio-political phenomenon, aerospace has inflamed the imaginations of youth around the world, inspired new schools of industrial design, decisively bolstered both the self-image and power of the nation state, and shrunk the effective size of the globe. As an economic phenomenon, aerospace has consumed the major amount of research and development funds across many fields, subsidized innovation in a vast array of component technologies, evoked new forms of production, spurred construction of enormous manufacturing complexes, inspired technology-sensitive managerial techniques, supported dependent regional economies, and justified the deeper incursion of national governments into their economies. No other industry has so persistently and intimately interacted with the bureaucratic apparatus of the nation state.

China and Japan are attempting to launch themselves into the global jet market. Russia is seeking to regain a lost foothold. India is exploring its options for its own airliner program. All these efforts are benefiting in one way or another from state financial aid and incentives. Many analysts would predict only marginal sales success for an upstart manufacturer in the commercial aviation field. It is easy to say that these programs exist for reasons of national pride and boasting rights, rather than any real commercial opportunities.

In today’s industry, developing a new commercial aircraft is a daunting prospect. The costs involved are huge - $1.5B for the relatively modest MRJ, $3.5B for the larger CSeries for example. That kind of capital is not easy to generate in the private sector, especially for the rookies in the industry with no existing customer base to leverage for sales, nor existing products to leverage for technology development. The likelihood is that without state aid, most of these programs simply wouldn’t even have gotten off the ground. Some of them probably wouldn’t have been missed, but others have a real chance of leading to a growing a sustainable airframer, creating it's own technology and manufacturing centers, and making an impact on the global market place - and that helps drive competition and technological advancement across the board.

Now cue Airbus. I won’t get into the current WTO mess, but it is widely acknowledged that both Airbus and Boeing have, to a greater or lesser extent, taken advantage of favorable state subsidies, indirect funding or financial incentives over the years. The development costs of widebody aircraft are ridiculous – an estimated $15B for the A350 for example. Since the dawn of the jet age and mass market air travel, manufacturers essentially had to stake their future on a successful flagship long haul aircraft. If the gamble didn’t come out favorably, then the future was bleak, and sooner or later they would be pushed out of the market entirely. Decade after decade, successive manufacturers bowed out of the ever-globalizing market. The last example was McDonnell Douglas in the mid-1990’s.

Airbus represented a second chance for the European airframers to learn from the previous mistakes they made as individual entities. Without the state aid, I’m not sure if Airbus' parent companies would have made it past the A300/A310 family, given the stiff competition it faced from the Boeing 767. If that had been the case, the incredibly successful A320 and A330 would not have materialized. These two aircraft families probably represents Airbus’ most significant contributions to the industry, by providing near step changes in performance and efficiency over contemporary aircraft, forcing the rest of the market (namely Boeing) to respond more quickly than it might have liked. Ultimately, this competition brings about better aircraft efficiency, lower costs for the consumer and a more sustainable aviation industry.

The new aircraft developments in Japan, China, Russia, etc, could quite easily serve as the building block for the next round of completion, driving the industry onwards. This is bad news for the established airframers, who need to keep the competition in check, but good news for consumers and the aviation industry as a whole.

However, the WTO cases serve as a reminder that the route of subsidies or financial incentives cannot be relied upon for much longer, especially for an established airframer such as Airbus or Boeing. With free trade advocates likely to dominate in the long term, such support is becoming politically and legally unacceptable. And with an increasingly globalized manufacturing industry, with every larger components work shares being distributed all over the world, some of the reasoning behind such subsidies – supporting national companies hiring a local workforce – starts to disappear.

The net result I fear though is fewer ambitious and technological ground-breaking aircraft programs on either side of the Atlantic, as Airbus, Boeing and others attempt to protect themselves from self inflicting financial risk and ruin in the unsympathetic market of true capitalism.

 

Posted by Orion | with no comments
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