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WTO Report on Airbus Subsidies Roils Tanker Battle Further

by: Matthew Potter
July 1, 2010

Category: Airbus, Boeing, Business Line, Companies, Congress, Countries, Department of Defense, development program, EADS, Events, Federal Budget Process, France, Germany, logistics, McDonnell Douglas, Military Aviation, production program, Proposal, Protest, Services, U.S. Air Force | RSS 2.0

Yesterday the formal report by the World Trade Organization (WTO) on their investigation of complaints by the U.S. Government and Boeing (BA) that EADS (EADS:P) and its subsidiary, Airbus, received illegal subsidies was released. The WTO did not support all aspects of the complaint but did say that launch aid provided by European governments to the airliner company was wrong. This launch aid was normally in the provision of low interest loans that were only paid back once the sale of the aircraft became profitable. The aid was considered illegal export subsidies.

U.S. politicians supportive of Boeing’s bid for the new KC-X aerial tanker for the Air Force seized on the report to aid their quest to have EADS bid either rejected or adjusted to reflect the addition of the illegal subsidies. The Pentagon has clearly stated several times in the past that as part of their source selection process they cannot and will not take into account the loans and other aid.

Congress recently passed legislation in the House that is an attempt to force the Defense Department to do that. The Senate needs to also vote on it and it will then move to a discussion of whether the DoD will follow that requirement.

The WTO said that without this aid the company would not have been in as good financial shape as it has been and could not afforded to develop some products — including the superjumbo airliner A380. The WTO may force the company to pay back some of the money, or allow the U.S. to impose tariffs on European goods.

The WTO did rule though that other aid the company received such as tax breaks or infrastructure support rose to the level of illegal subsidies. EADS and the European governments will appeal the case back to the WTO and are waiting to hear about their counter complaint. In this they are claiming that the money Boeing received from the U.S. military for Research & Development (R&D) amounts to illegal subsidies as well as it helped develop their commercial aircraft. That ruling may be announced before the end of the month.

The KC-X program is now on its third attempt to buy a new tanker to replace the aging KC-135 aircraft. The WTO ruling will make it easier for Boeing’s supporters to claim EADS is undercutting prices and causing the source selection process to be even more difficult. It also allows for a protest by either company if they lose and will motivate Congress to interfere even more.

The situation has been caused by the lack of aircraft manufacturers in the world. Really only Boeing and EADS may bid on the contract. With the demise of McDonnell Douglas in the Nineties there exists only one U.S. source. Awarding a sole source contract to Boeing will be difficult and the Air Force wants at least a modicum of competition.

Further delays seem inevitable.

Photo from Monica’s Dad’s flickr photostream.

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2 Comments

  1. Defense Procurement News Post on WTO Report on July 1st, 2010 2:19 am

    […] is an article I wrote at our sister site, Defense Procurement News, about the WTO subsidies report and the KC-X […]

  2. Tweets that mention WTO Report on Airbus Subsidies Roils Tanker Battle Further | Defense Procurement News -- Topsy.com on July 1st, 2010 8:09 am

    […] This post was mentioned on Twitter by Dagpotter. Dagpotter said: WTO Report on Airbus Subsidies Roils Tanker Battle Further | Defense Procurement News http://bit.ly/csfW6e #in […]

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