While the lively atmosphere of the Paris air show puts some excitement and showbiz into the industry's public image, behind the scenes there is scope for tackling the tensions between the USA and Europe
Two years ago, the Paris air show took place in the shadow of the disagreement between France and the USA over the Iraq war. This year, the show comes at a time when aerospace trade tensions between Europe and the USA are at their highest level ever.
On the eve of the event, the US government announced it would proceed with its World Trade Organisation (WTO) case against Airbus subsidies. In retaliation, the European Commission announced it will pursue a WTO case against Boeing subsidies, starting a trade war which has the potential to change the global civil-aircraft industry irrevocably.
There is more at stake for Europe than the future of launch aid for Airbus. The lower house of US Congress has already passed a defence bill designed to prevent Airbus competing with Boeing for US Air Force aerial-refuelling tanker orders if there is a WTO dispute under way. If supported by the Senate, the provision could have wider consequences for the ambitions of Airbus shareholders BAE Systems and EADS in the US defence market. With France's vote against a European Union constitution likely to delay integration of its defence infrastructure, the USA remains vital to Europe as both a source and an outlet for equipment and technology. Denied access to the US market, the European industry could be forced into another round of consolidation.
Even if, somehow, the Airbus/Boeing dispute is resolved amicably, other transatlantic minefields await. The same US defence bill would also bar any company selling military equipment to China from doing business with the Pentagon. Europe has delayed a decision on whether to lift its arms embargo on China, but the issue remains potentially explosive for industry.
Rather than being a place for industry to celebrate the turnaround in its fortunes, Paris appears to have acted as a catalyst for US action in its dispute with Europe over subsidies for large civil aircraft development. With Airbus expected to announce its first major orders for the A350 at the show, making the industrial launch of a direct competitor to the Boeing 787 a certainty, the USA has acted pre-emptively on the assumption that European governments will approve the $1.7 billion in launch aid sought for the aircraft.
Hand forced
After rejecting a European offer to reduce launch aid for the A350 by 30%, as a first step towards phasing out all government support for Airbus and Boeing, the USA filed a request on 31 May for a WTO dispute settlement panel. "We would rather not go back to the WTO. But the EU's insistence on moving forward with new launch aid is forcing our hand," US Trade Representative (USTR) Rob Portman said in a statement.
The USA has restarted its WTO case because it believes at least some of the four Airbus nations are close to granting launch aid for the A350 – as close as Paris, perhaps. By restarting the case, the USA hopes it can force the EU back to bargaining table under the original negotiating terms – to end, rather than reduce, subsidies on large civil aircraft.
By requesting the panel, the USTR says the USA "is providing time for the EU to reconsider its plans to provide new subsidies" and re-commit to the agreement on negotiations. This would include an immediate halt to further steps toward providing new launch aid. "We still believe a bilateral negotiated solution is possible," says Portman. "But the negotiations won't succeed unless the EU recommits to ending subsidies."
The USA is not giving Europe much time to consider. Language added to the House of Representatives mark-up of the fiscal year 2006 US defence budget would bar any company involved in a WTO dispute with the USA from doing business with the Pentagon. The provision is directly specifically at EADS North America's plan to offer the A330 tanker to the US Air Force in competition with the Boeing 767, but could have wider implications for Airbus shareholders BAE and EADS. If supported by Senate, the legislation could be a "done deal" within weeks.
The provision was introduced by Rep-resentative Duncan Hunter. His two previous attempts to restrict European access to the US defence market were defeated in Congress. This time, he has the support of US industry because the provision is narrowly targeted and links access to the $50 billion USAF tanker market to resolution of the subsidies dispute.
Protectionism
Hunter's provision is not protectionism, says US Aerospace Industries Association (AIA) chief executive John Douglass: "Would you buy something from someone you are having a dispute with? I think not," he says. Having orchestrated opposition to Hunter's previous "buy American" provisions, the AIA believes his latest legislation is "well crafted". The White House does not, and has voiced its opposition to the provision "as written" because of its possible adverse impact on competition for Pentagon contracts.
The AIA is now working with the Bush Administration to understand the consequences on the provision. But the association points out that the White House objects to the language, not the intent of the provision, while industry would still support some form of legislation linking access to the US defence market to resolution of the subsidies dispute. "If Europe wants to do business in the USA, then they have got to get along with us in the WTO," says Douglass. "Absent the dispute, the markets are open."
European industry might dispute that statement. There is also the China provision to deal with and, while BAE publicly and EADS privately have stated they will not jeopardise their links with the USA by selling defence equipment to China, some European governments seem intent on lifting the arms embargo. The USA has threatened to retaliate by further tightening its export controls, already a major hindrance to transatlantic co-operation.
US technology-transfer restrictions are already jeopardising a multi-national effort to agree standards for interoperable network-centric operations. Involving about 70 companies, the Network Centric Operations Industry Consortium has been unable so far to secure licences allowing information to be exchanged between its US and non-US members. The group has been forced to form a sub-consortium of non-US members until the issue is resolved. The emergence a separate non-US group led by German defence firm Rheinmetall poses the threat that the standardisation effort will splinter.
European industry has its own internal problems, too. But, on the eve of Paris, the messy handover of power at EADS and Airbus appears to be near completion with Gustav Humbert, Airbus chief operating officer, reportedly approved as the next chief executive, following tense negotiations between EADS's French and German shareholders. Humbert's appointment will clear the way for former Airbus chief executive, Noel Forgeard, to assume his new position a co-chief executive of EADS, alongside Tom Enders, preserving the delicate French/German national balance of power.
Boeing, meanwhile, is working with a shortlist of internal and external candidates as it closes in on the choice of a chief executive. The turmoil at the top of the two largest aerospace companies contrasts with the smooth transfer of leadership over the past two years at Lockheed Martin, Northrop Grumman and Raytheon.
Paris will see the show debut of Safran, the unlikely merger of engine and equipment supplier Snecma and telecommunications and defence company Sagem. A similar French government-inspired merger between Thales and EADS was opposed by the German shareholders and the "file is closed", declared the outgoing management team earlier this year. Whether EADS's new management will dust off the file remains to be seen.
Thales and Italian aerospace giant Finmeccanica, meanwhile, deny they are discussing a merger of their defence electronics businesses. Finmeccanica completed a tie-up of its space businesses with France's Alcatel last year, after both companies declined to throw in their lot with EADS Astrium, and the company makes no secret of its search for acquisition targets in Europe and the USA.
There are hopes for behind-the-scenes progress on some issues facing the industry. But whatever transpires it seems likely that, two years from now, at Paris 2007, Europe and the USA will still be tussling for dominance of the aerospace market.
GRAHAM WARWICK/WASHINGTON DC
Source: Flight International
