1 1 Concubhar Deisceoil Wajahat Laiq Raya Awad Benedikt Bingler July 6th, 2009 Airbus/Boeing

2 2 Company Overview The US company Boeing and the European/based Airbus are the only big players in the commercial aircraft market. Founded 1916 Headquarter: Chicago, Il, USA Employees: 162,000 (2008) Revenue: US$60.91bn (2008) Founded: 1970 (Airbus Industry); 2001 (Airbus SAS) Headquarter: Toulouse, France Employees: 57,000 Revenue: EUR 43.26bn (2008)

3 3 Analyze why has the trade dispute between the world's two big aircraft-makers suddenly become so bitter? Examine the rivalry which has prompted them to offer their customers exciting new products, ranging from Airbus's double-decker super-jumbo to Boeing's long-haul medium-sized “dreamliner”. How subsides have sharpened a nasty dispute about the way that Europe and America have been helping the two firms. Recommendations ?? Today’s Discussion …

4 4 Small commercial aircraft market Few players in the market lead to high competitiveness High development costs lead to low cash flows Highly volatile demand leads to high risk Significant experience curve lead to high market entry barriers Market Overview

5 5 One of the recurring trade disputes between the United States and Europe concerns the rivalry between Airbus and Boeing in the market for wide-body aircraft. Airbus first began production of aircraft in the early 1970s with substantial financial assistance from European governments. As Airbus succeeded in making inroads into many of Boeing's markets, Boeing alleged that Airbus benefited from unfair subsidies and has pressured US trade authorities to counteract Europe's financial support. United States and European Community signed an agreement on trade in civil aircraft in 1992 that limited government subsides for aircraft production. This agreement, has come under new strain as Airbus introduces the A-380 super-jumbo aircraft designed to compete directly against the Boeing 747. Background …

6 6 Timeline… United States and European Community signed an agreement on trade in civil aircraft in 1992 that limited government subsides for aircraft production We are here 1970’s Airbus first began production of aircraft. Airbus United States and European Community signed an agreement on trade in civil aircraft in 1992 that limited government subsides for aircraft production. Boeing company merged with Mc Donnell Douglas (1997). EU opposed the merger since it was going to create a monopoly Boeing founded in 1916 and involved in the production of aircrafts throughout world war I & II and had a monopoly up to 1980 in the commercial aircraft industry. Boeing The chairman of the dispute panel formed in 2006 to examine the EU's counter-claim against U.S. support for Boeing Co. also said his panel would not report until The Dispute

7 7 Airbus needs subsides due to high development costs. Given the volume of sales required to break even, it can take up to 10 to 14 years of production for an aircraft model to turn profit and this on top of the 5 to 6 years of negative cash flows during development. Need of lower interest rate for operating cost. Airbus position with regard to the long running dispute over subsidize is reasonable because of rising demand and high fuel cost. Need of subsides since competitors are supported by government subsides. Could Airbus have been a viable competitor without subsides ?

8 8 The United States and four other European Union countries involved and agreed to limit direct government subsides to 33% of the total cost of developing of a new aircraft and interest be repaid within 17 years. The 1992 pact was reasonable since there was a need for subsidy regulation for both on the government and on the private sector Pact (-) Lack of neutral third party overseeing the allocation of the subsidies Higher barrier of entry for new competitors 1992 Pact (+) Prevent a renewed dispute Fairness in the aerospace industry Transparency in the subsidy allocations Was the 1992 pact agreement reasonable ?

9 9 The World Trade Organization is an international organization designed by its founders to supervise and liberalize international trade. WTO involved in handling trade disputes and help establish rules and mediated between the nations/companies. The World Trade Organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of member governments and ratified by their parliaments. The WTO has 153 members, representing more than 95% of total world trade both Boeing & Airbus presented arguments to the WTO. Decision regarding subsided is currently pending before the 2009 panel. Which role does the World Trade Organization play ?

10 Questions?