UB Study Contends that Boeing's Proposed 7e7 Launch Covers Two Aircraft, Not One, and Warns of a 'Subsidy War'

Paper documents potential WTO violations by Washington State, Japan, others

Release Date: January 12, 2004

BUFFALO, N.Y. -- A research paper by University at Buffalo industrial geographers maintains that the launch of the proposed Boeing 7E7 "Dreamliner" will cost $13.4 billion, nearly double what the company estimates, because it is, in fact, covering the launch of two distinct aircraft.

The paper also documents that close to half of the launch funding comes from subsidies worth nearly $6 billion that may violate international trade agreements, and warns of an impending "subsidy war" as competition for the commercial aircraft market between Boeing and Airbus heats up further.

The paper, currently under review by the journal Industrial Geographer, contends that the launch process for the proposed Boeing 7E7 "Dreamliner" marks a dramatic shift in the way that the only remaining U.S. manufacturer of large commercial aircraft finances new passenger jets, one that ironically could doom the 7E7's launch prospects, spelling further economic losses for the U.S. aerospace sector.

"We're contending that the 7E7 is really two airplane launches wrapped into one," says David Pritchard, Ph.D., co-author and a research member of the Canada-U.S. Trade Center in the UB Department of Geography.

According to the paper, Boeing is asking its partners to design and build two different-sized aircraft: a short-haul model, with a maximum range of 3,500 nautical miles and a maximum takeoff weight of 252,500 pounds, and the baseline model with a maximum range of 7,800 nautical miles and a maximum takeoff weight of 452,500 pounds.

"When there's a 45 percent weight difference between the two models, you're really launching two different airplanes," says Pritchard. "You're asking suppliers to build two different sizes of everything: engines, landing gears, airframe structure."

The reason for the two sizes, the UB researchers maintain, is that Japan wants the shorter-haul version for its own domestic airlines. Japan, they add, is providing an estimated $1.5 billion subsidy for the production of the wing and fuselage, despite the fact that the country's aerospace industry has limited experience in manufacturing composite structures for large commercial aircraft.

The Japanese support to Boeing for the 7E7 program -- and potentially, launch purchases by ANA, All Nippon Airways Co., Ltd., and JAL, Japan Airlines -- hinges on Boeing's use of Japanese manufacturers for a significant portion of the airframe.

That fact alone could classify the Japanese subsidy as "prohibited" under World Trade Organization rules, say the UB researchers.

Should the WTO be asked by a member country to investigate and should it find that the Japanese subsidy is prohibited, it could require Japanese manufacturers to repay the subsidy, which the UB researchers say, could jeopardize the 7E7 launch.

Five other subsidies also could be "actionable according to WTO regulations," the UB researchers say. If the WTO investigates a claim by a member country and finds that such a subsidy is in place, that country may impose countervailing measures that amount to an import duty on the product.

"Say Boeing, for example, sells an aircraft to British Airways. If the WTO finds that a subsidy on that aircraft is illegal, then Britain could slap on a duty that essentially neutralizes the subsidy," explains Alan MacPherson, Ph.D., professor and chair of the UB Department of Geography and co-author on the study.

In the case of a commercial jetliner like the 7E7, expected to cost approximately $100 million, those measures could raise the price of each jet by as much as 40 percent, potentially making the 7E7 uncompetitive in the market.

Once the WTO gets involved, the researchers say, preliminary rulings could come within months.

The State of Washington's $3.2 billion subsidy, most of which is related to production (assembly) of aircraft, also could be classified as "actionable," the UB researchers state, because production subsidies violate WTO regulations and the 1992 U.S.-European Union Agreement on Trade in Large Civil Aircraft.

"At first, we thought the Washington State subsidy estimate was a typo," says MacPherson, noting that it may be the largest-ever subsidy granted by a U.S. government entity to a single U.S. company.

"The theory behind both the WTO regulations and the 1992 U.S.-E.U. Agreement between the U.S. and the European Union was to allow governments to provided limited assistance to aircraft manufacturers in designing and developing planes, but they cannot help companies produce the planes," says Pritchard.

"The way the Washington State tax incentive is written, Boeing will get a tax incentive for every plane -- not just every 7E7 -- that is built in the state," said Pritchard.

The production subsidy on every Boeing model, except the 717, which is built in California, could result in countervailing measures by participating countries on the sales of the 737 and 777, he continues.

MacPherson and Pritchard acknowledge that subsidies have, indeed, become part of the launch process for commercial aircraft but, they say, the subsidies for the 7E7 are different and could trigger a "subsidy war" as Boeing and Airbus fight for market share.

"Boeing is now taking its high-cost items like design and development and essentially downloading them to the Japanese and other countries," says MacPherson.

"In the past, Boeing would have given a drawing to its subcontractors and told them how to build the part," adds Pritchard. "But now, subcontractors will actually be involved in designing aircraft parts, as well as developing the manufacturing processes for making them."

That shift in design and development work, the authors say, will generate further job losses in the U.S. aerospace sector, where employment already has dropped by 50 percent since 1991.

"That prospect is especially injurious to the U.S. economy, since aerospace has been the nation's number one export sector for several decades, creating high-paying and highly skilled jobs in the U.S.," says Pritchard.

According to the UB researchers, the skyrocketing costs of the launch process for commercial aircraft have driven Boeing to become a system integrator, spreading the costs among risk-sharing partners and aggressively pursuing subsidies from foreign governments that cover not only production, but also design and development of the aircraft.

"Launch costs are going up and up," says MacPherson, "and profit margins for commercial aircraft are not especially big. One way to make the launch of a new aircraft attractive is to spread the launch costs across risk-sharing partners.

"The U.S. hasn't taken any special measures to support its commercial aerospace sector," he adds. "So if Boeing can get foreign governments to subsidize the cost of, for example, building the wings in Japan, it cuts costs for Boeing and makes building the 7E7 viable."

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