Airplane subsidy talk isn’t cheap

Negotiators for the United States and European Union were pointing fingers again Monday, each accusing the other of breaking off talks aimed at resolving claims that both sides subsidize commercial airplane development.

The Europeans claim Boeing Co. receives assistance, including some from the state of Washington, worth $23 billion. The U.S. objects to “launch aid” that European governments provide Airbus for development of new airplanes – $15 billion so far.

Negotiations began Jan. 11 after months of posturing and the threat of complaints to the World Trade Organization. The Office of U.S. Trade Representative and European Union Trade Commissioner were expected to conclude those talks by April 11 unless both sides agree to an extension. A blowup Friday casts doubt anything will be achieved with three weeks left. But both sides have much to lose if the matter goes to the WTO.

The state of Washington – and Spokane – are not exactly disinterested bystanders.

While negotiations continue, the Europeans cannot provide any launch aid to the A350, its proposed competitor to the Boeing 787, also know as the Dreamliner. The 787, when it enters service in 2008, will cost significantly less to operate than existing airplanes. That edge will widen if jet fuel continues to increase in price.

To make sure the 787 would be built in Washington, the Legislature approved a $3 billion-plus aid package in 2003.

Boeing made its decision to proceed with 787 development based on an expectation that future air travel will rely less on the hub-and-spoke system that channels most traffic through centers like Chicago and Atlanta. Passengers then reach their final destinations on smaller planes. The 787 will take travelers directly to their destinations.

Airbus bet on hub-and-spoke and built the humongous A380 to serve the hub-to-hub market. Unless the world’s major airports agree to make expensive modifications to accommodate the A380, the gamble may turn out to be a bad one. But that’s one of the virtues of launch aid if you are Airbus, or its sin if you are Boeing. If a plane fails to be a commercial success, the assistance need not be repaid.

Meanwhile, as a hedge, Airbus has come up with the idea of modifying one of its existing airplanes to create a 787 competitor. That will take another launch aid package, adding to the friction over what is appropriate aid and what is not.

The Europeans counter that Boeing receives several subsidies in the form of lucrative defense contracts, state tax breaks, even Japanese government assistance to Boeing part or subassembly suppliers.

A 1992 agreement permitted government help for Airbus. Back then, the company was a lightweight challenger to Boeing dominance of the commercial airplane market. Airbus has since overtaken Boeing, at the cost of thousands of jobs in Washington. Given the parity between the companies, the U.S. says it’s time to ground launch aid.

All this was supposed to be resolved in the three-month round of talks. Unless the Europeans agree to a deadline extension, the dispute probably will move to the WTO for litigation that could take years to resolve. In the meantime, Airbus injects launch aid into A350 development, potentially creating a plane that, absent debt service, could be priced below the 787, a plane on which Boeing has staked much of its future.

But that’s not necessarily an unqualified win for the Europeans. Airbus is 80 percent owned by the European Aeronautic Defence & Space Co., or EADS. That consortium has been shopping a proposal for a new plant in the U.S. for production of a tanker that would compete with a Boeing design. The Bush administration’s 2006 budget contains $100 million to assess the need for a tanker to replace the KC-135. Spokane is among many U.S. cities competing for the $600 million EADS plant.

EADS can forget about a tanker contract if the Europeans go ahead with assistance for the A350. Congress will not, or at least should not, allow a company eating our lunch in commercial airplanes to start munching on defense contracts as well. EADS, notes the U.S. Trade Representative’s office, does $23.8 billion annually in defense business, compared with $23.7 billion for Boeing.

A settlement, should it affect the state’s Boeing aid package, does not bind the state. If a settlement affects the 787 deal, the state and federal governments would have to discuss an adjustment.

The outcome could be a wash for Spokane, whether or not EADS does build a tanker plant in the U.S. Triumph Composites, the former Boeing Co. plant on the West Plains, now does work for its former parent as well as Airbus.