WASHINGTON, March 16 (UPI) -- With only a few weeks left before negotiations between the world's two largest commercial aircraft producers -- Airbus and Boeing -- are expected to conclude, trade and policy experts are less than optimistic that the resolution to end subsidies will be anything close to diplomatic.
Insiders have said thus far that negotiations between the United States and the European Union have stagnated and have not been progressing as scheduled in the three-month time period allotted to resolve the dispute.
"My understanding is things are not going particularly well at this time. They haven't moved a lot," said Claude Barfield of the American Enterprise Institute, host of the trade policy seminar on Wednesday. "We may have a WTO (World Trade Organization) case or an extension of negotiations."
In January, the United States and the European Union in a breakthrough decision agreed to halt disputes and re-enter into bilateral negotiations for three months, in the hope that they could put an end to subsidies on the production of large commercial aircraft.
At first glance, the decision by the United States and the European Union to halt the dispute and charter a course to resolution outside of the World Trade Organization was seen as a political move meant to soften relations only weeks before President George W. Bush went on his four-day "charm offensive" tour throughout Europe.
But both sides of the Atlantic were adamant that a resolution would in fact take place at the end of the three months, with the United States urging the European Union to end subsidies to Airbus, Boeing's leading competitor.
The European Union has made the case that subsidies and launch aid are mechanisms to spur job creation and growth. But for the United States and Boeing, who has slowly seen a diminishing clout in the jetliner industry, the U.S. point of view has been that European subsidies are a means to freeze out Boeing from the market.
"It's pretty hard to see the economic rationale for future subsidies (going forward),"said Phillip Swagel of AEI.
"If you can't come up with an economic rational from the European taxpayer's point of view, it's hard to avoid the perception that this was a political decision and one aimed at the United States in some point," Swagel added.
According to Swagel, the launch aid provided to Airbus is in essence loans extended by the government to the airline. If the product line is successful, then Airbus would be required to pay the loan off at the appropriate time, however, if the product line is unsuccessful then the loan is written off. The problem arises in that every time a product line is successful the company can in turn negotiate an even better deal which only ends up making the company even more profitable.
While subsidies arguably may be beneficial to the United States in terms of increasing competition, providing consumers with more choices and lower prices, the long-term net gain for the United States may in fact be a loss especially as the European airliner attempts to edge closer into the U.S. defense industry.
"The desire of the European defense industry to have a larger slice of the much larger spending in the United States ... clearly has an influence on some level behind this," said Barfield.
According to commercial expert Richard Aboulafia of the Teal Group, 80 percent of Airbus' market share is owned by the defense company EADS, which offers the commercial aircraft more of an opportunity to expand and float market shares.
Aboulafia explained that much of the success of Airbus has rested in company's approach to business, unlike its competitor Boeing.
Boeing, largely controlled by shareholder returns, is more vulnerable to equities and capital markets and generally takes a short-term approach allowing it to be more affected by risk. Airbus, on the other hand, puts market shares first over shareholder profitability. It takes a long-term approach to business with an increased willingness to invest making it easier to launch new products with little risk.
Additionally, Airbus has focused in the last decade on investing in more products than Boeing and has been better at reinforcing their product lines. In the last five years, Airbus has introduced the A318 and A340, while Boeing only introduced the 767 which ended up failing.
In the next five years, with the new A380 which is expected to be completed in 2006, and A350 expected to be completed in 2010, Boeing is planning to launch the 787 in 2008 in the hopes that it can step up the competition against the A380 a 555-seat wide jetliner.
"Without the 787 they're in serious trouble," said Aboulafia. "Arguably they would be left with only a third of the market by the end of the decade without some serious reinforcement of their product line."
Although the Boeing 737 rakes in the largest cumulative value on its deliveries at over $80 billion, the majority of jetliner profits come from wide-seat international jet liners. Unfortunately, Boeing has lost many of its major wide-seat jetliners like the 757, and is expected to shut down the 767 and possibly the 747 if the company is unable to successfully launch an upgraded model.
"Looking forward, it's very tough to be a two-product plane maker," said Aboulafia.