The gloves are off again as Boeing and Airbus resume trading blows over government support for their programmes

Boeing's timing in launching its campaign against government support for Airbus is coming under scrutiny as Europe marshals its defence against US charges of unfair subsidies. While European Union officials accuse their US counterparts of electioneering, EADS executives see a more sinister motive - poisoning the political atmosphere against Airbus in the run-up to a potential US Air Force tanker competition.

Meanwhile, with a second meeting of US and EU trade negotiators due this week, the risk - however remote - of Boeing's challenge having wider consequences than it intends is causing concern for analysts and suppliers alike. If talks to revamp the 1992 bilateral agreement on trade in large civil aircraft (LCA) break down, and the USA carries out the threat to take its case to the World Trade Organisation, they fear government support for suppliers, on which both Airbus and Boeing depend, could come under attack.

Boeing has made clear its fight is only with Airbus, but if the USA brings a WTO case, the EU could retaliate by challenging US state and Japanese government aid for development and production of the 7E7 - a move that could expose to unwelcome scrutiny the support suppliers around the globe receive from their governments.

Boeing says its demands are simple: no more government loans to cover any cost overruns on development of the A380 and no launch aid for any future Airbus programme. On the timing of its challenge, a Boeing official says the company "has only got a handle" on the issue within the last six months following a year-long search of publicly available documents in Europe. But the official acknowledges that blunt-speaking Harry Stonecipher's arrival as chief executive in December and the launch of the 7E7 in April influenced the timing.

EADS officials point to November's US presidential election to explain the timing of Boeing's challenge. "This is all about Washington state," says a senior executive. "This is electoral politics. It is a key state and it is in play. This is more about tankers than commercial competition."

But Boeing's "core message" - that Airbus is at parity or slightly ahead in the large civil aircraft market, and it is time to call a halt to government support - has been picked up verbatim by the US administration. Speaking at Boeing in Seattle last month, President Bush said US trade representative Robert Zoellick had been instructed to inform European officials at this week's meeting that the USA regards Airbus launch aid as unfair subsidies, and to "pursue all options" to end those subsidies.

EU officials say they are willing to renegotiate the 1992 agreement, but insist the talks must focus on both direct support - launch aid for Airbus - and indirect support - the benefit Boeing's commercial aircraft business receives from US Department of Defense and NASA R&D funding. The EU's biggest issue with the 1992 agreement is the vagueness of its definition of indirect support compared with the clear terms in which it describes direct support.

Boeing says Airbus has received $15 billion in government launch aid from France, Germany, Spain and the UK since its inception in 1968, but says EADS's books carry only $5 billion in debt from those loans. The EU says $6.5 billion in loans has been repaid since 1992 and points out Airbus's repayment schedule extends to 2018, by which time all loans will be repaid. Also, the EU calculates Boeing has received $18 billion in indirect support since 1992. These conflicting figures will be the starting point for talks to revise the LCA agreement.

Boeing argues the intent of the 1992 accord was to allow "start-up" Airbus to become established in a commercial aircraft market dominated by US companies. When the agreement was being negotiated, Airbus accounted for 20% of deliveries, but by 2001 it had outstripped Boeing in orders and in 2003 took pole position in orders and output.

"Then, Boeing and McDonnell Douglas were not worried about Airbus," says the Boeing official. "Today Airbus has a greater backlog than Boeing and is delivering more aircraft. By any standard, Airbus today is a mature, world-class company that does not need taxpayer money to compete."

The 1992 agreement was not "drawn up as a favour to Airbus", says the senior EADS executive. "It was about the balancing of equity between two completely different systems of government support - and nothing has really changed." Balancing Airbus launch aid against the benefit Boeing accrues from research and development funded by NASA, the DoD and US Defense Advanced Research Projects Agency (DARPA), "the equities remain about the same", the executive argues.

In 1992, when the LCA agreement was negotiated, independent research and development (IR&D) spending by US defence contractors topped $5 billion, of which half was reimbursed by the DoD. It has since dropped to about $3 billion, according to DoD figures, but is now almost all recoverable. "In Europe there is no NASA, no IR&D and no DARPA. The sources of indirect government support do not exist," says the EADS executive.

NASA spending on US aeronautics R&D has dropped dramatically since the early 1990s and is now below $1 billion a year, while EU spending on civil aviation R&D has grown, and Boeing argues it is targeted at Airbus. Despite this, EADS's R&D expenditure is far higher than Boeing's: in 2003 its $2.27 billion in R&D spending represented 7.3% of revenues, with 80% of it spent at Airbus; Boeing's $1.65 billion in R&D expense was 3% of revenues, and less than 50% of it was spent on commercial aircraft.

Higher spending on R&D is responsible for Airbus's market success, says the EADS executive, not the pricing advantage Boeing says accrues from the availability of government launch aid. Boeing says its European rival gets not only low-interest government loans, but also favourable terms that "back-load" repayments. The 1992 agreement also allows per-aircraft royalties to be set based on forecast aircraft deliveries, with Airbus and Boeing having famously differing views on the size of the market for the A380.

EADS and the EU argue that launch aid makes almost no difference when it comes to the market. The EU says government loans represent only 2% of Airbus's operating costs. The EADS executive says: "If we get a 1% advantage versus a commercial interest rate, what difference does it make? At the end of 2003 we had €4.3 billion in loans on our balance sheet - 1% is €43 million. Amortise that advantage over 300 aircraft and you get a $100,000-120,000 benefit on aircraft costing $50-250 million. Does it matter? No."

Boeing's extensive European document search uncovered more than just launch aid, and it has catalogued billions in capital injections, debt forgiveness and infrastructure subsidies. If these are placed on the negotiating table, however, the EU will scrutinise financing for the 7E7. Of particular concern are Japanese government support for manufacturers of the wing and fuselage, a $500 million Kansas state bond issue and a Washington state tax break worth $3.2 billion over 20 years.

"We believe they are being disingenuous in involving Japan as a supplier to Boeing," says the company official. "Airbus is also pursuing a national project relationship with Japan." Boeing says it is prepared to open its books on the Kansas and Washington deals if its European rival reciprocates. Trade experts, meanwhile, have warned that the Japanese and US state deals risk being declared illegal subsidies if the dispute escalates to the WTO.

Both the US and European sides are keen to avoid another trade war, but it seems unlikely the EU will outlaw launch aid without balancing concessions on indirect support from the USA. For Boeing, meanwhile, time could be running out: the LCA agreement calls for one year's advance notice of unilateral withdrawal from the treaty, and Airbus could only be months away from seeking launch aid for the A350 - its answer to the 7E7.

GRAHAM WARWICK / WASHINGTON DC

ADDITIONAL REPORTING BY JUSTIN WASTNAGE

Source: Flight International