Airbus vs. Boeing

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  Airbus vs. Boeing the case study Jimmy Jones University of Phoenix The case “Boeing vs. Airbus: Two Decades of Trade disputes” deals with the dispute that has existed between the US aircraft giant and the European Aircraft manufacturing giant. Boeing has 57,000 workers in Seattle and an additional 100,000 employees in the country. Boeing has also provided 600,000 employments nationally and it is considerd to be a big force in US economy. Boeing attained its main competitor McDonnell Douglas and merged as one in 1996. Airbus is a European manufacturer of commercial airline and its backed by four European countries. Airbus was originally a minor contestant in the airline market and was believed as improbable to face up to U. S. control. However, in early 2000 Airbus has tranfered itself to a major corporation from an association. And in 2003 the company exceeds Boeing in delivery of aircrafts. Legal issues: To understand the problems in this case it is important to mention 4 points about the airline manufacturing industry and why only few competitors can exist in this market: 1) High Development costs involved in manufacturing aircrafts 2) Levels of breakeven that amount to a considerable proportion of global demand 3) considerable familiarity of level curve necessary for corporations to reach point of breakeven levels and turnovers 4) Unstable demands due to factors like fuel pricing, inflation, etc. After the success of the Airbus, the US officials and government criticized the heavy subsidies that Airbus had gained from the four European countries: Germany, Spain, England, and France. Boeing argued that these funding were in loans form and at under interest rates received from these countries, as well as airbus gaining breaks in tax. In addition, Boeing argues this subsidy has helped Airbus to offer striking financing terms for Airbus’s clients. The Airbus camp responded by pointing out that Boeing had long been benefitting from US subsidiaries which weren’t shared with the public. In 1992 the two parties reached an agreement where Airbus was allowed to receive launch aids from EU government and Boeing was allowed to use up the US government’s R&D spending. The agreement listed that limited direct government subsidies to 33 percent of the total costs of developing a new aircraft would be allowed and specified that such subsidies had to be repaid with interest within 17 years. The agreement also limited indirect subsidies, such as government-supported military research that has applications to commercial aircraft, to 3 percent of a country’s annual total commercial aerospace revenues, or 4 percent of commercial aircraft revenues of any single company in that country. In 1996 Boeing made a bid to merge with its old rival McDonnell Douglas which caused a new problem between the US and the EU trade unions and the two companies. Boeing’s argument to the US Federal Trade Commission (FTC) and the EU competition commission was that the Boeing–McDonnell Douglas combination was necessary to create a strong U. S. competitor in a competitive global marketplace. The EU could not actually stop the merger but under EU competition law the commission could declare the merger illegal, restrict its business in Europe, and fine it up to 10 percent of its estimated $48 billion annual sales (Papendropoulos, Tajana, 2006). Meanwhile Boeing also made a deal with the top 3 US airline, Delta, American Airlines and Continental to be the exclusive provider of aircrafts for the next 20 years. The EU body argued that this agreement was anticompetitive and could cause a considerable increase in the market power of Boeing. The three main concerns for the EU were: restriction of market competition, funds received from U. S government in space programs could be used to built commercial aircrafts, and the unfair contract of Boeing which singly received to supply major American airlines for the next 20 years. The US FTC affirmed that McDonnell Douglas was no longer a practical challenger in the huge jet market and so, merging will not have a disadvantageous result on opposition. The FTC did raise a concern over the sole supplier agreements that Boeing had reached with the 3 airline carriers. Boeing changed the deal and said that it would not enforce provisions in the 20-year supplier contracts with American, Delta, and Continental. After the agreement Boeing went through a period of financial turmoil, the result of congestion in its production system as the company tried to rapidly ramp up deliveries during the late 1990s. By 2002, however, Boeing was back on track and in 2003 it decided to go ahead and build its first new aircraft model in a decade, the 787. By 2005 both the United States and EU agreed to freeze direct subsidies to the two aircraft makers but a new dispute broke through. The EU claimed Boeing was receiving lavish subsidies from federal, state, and local governments in the United States that will amount to $23. 7 billion. Boeing argued that Airbus had received over $100 billion of aid from European governments over its lifetime if the loans it received at below-market interest rates are recalculated at commercial rates. The United States formally filed a request with the World Trade Organization for the establishment of a dispute resolution panel to resolve the issues. The EU quickly responded, filing a countersuit with the WTO claiming that U. S. id to Boeing exceeded the terms set out in the 1992 agreement. The case is still pending. Ethical challenges that existed are as follows: 1) To have a level competitive field there has to be a competition in the market, but the strategies of both the companies was causing concerns regarding the competitive market. 2) Taking money from their respective governments at a highly subsidized rate to help the companies was another ethical issue that was faced in the case. Though both the companies had good arguments to do so, they blamed each other for the same reason. Roles of governments: The role of the governments is exceedingly obvious, and it was to prevent the interest of their personal economies. 1) EU: The European Union block was mostly concerned with the fact that the subsidiaries that The US government was providing Boeing was making it an unlevel playing field for Airbus. The mergers and deals that Boeing had managed to secure was further going to create problems to maintain a competitive market which in turn would create problems of pricing and controlling. The EU also supported the subsidiaries that were given to Airbus and argues that it was just making Airbus catch up and become as competitive as Boeing. ) FTC and the US government: The US officials were more concerned about the subsidiaries that Airbus was receiving at generous rates and conditions from the European government which was causing the US Boeing airlines to lose market share which in turn was affecting the US economy. The US side has given counter arguments about subsidiaries and justified their actions in this case. They have tried to support Boeing in its strategies and helped them in putting up a case in front of the EU. To conclude both the governments have been playing a blame game for a long time. They have been pointing out flaws in both the company’s financial and operational policies. But one of the main roles of both the unions is to protect their economy and to make sure the aircraft manufacturing industry runs without any bias and there is a fair competition in the market. Reference: Penelope Papandropolous, Alessandro Tajana, 2006: The Merger Remedies Study-In Divestiture We Trust? Retrieved from http://ec. europa. eu/dgs/competition/economist/divestiture. pdf on August 30, 2010 “Boeing versus Airbus: Two Decades of Trade Disputes”: Retrieved from https://ecampus. phoenix. edu/classroom/ic/classroom. aspx on august 30, 2010 Turnitin Originality Report * Processed on: 09-03-10 9:43 PM CDT * ID: 147163304 * Word Count: 1225 * Submitted: 1 bus By Gidion Adenew Similarity Index 06% Similarity by Source Internet Sources: 06% Publications: 0% Student Papers: N/A 1% match (Internet from 1/15/07) http://www. mancosa. co. za/academic_support/BOEINGversusAIRBUS. doc 5% match (Internet from 3/24/09) http://highered. mcgraw-hill. com/sites/dl/free/0072873957/121268/Hill4e_295_300. pdf The case "Boeing vs. Airbus: Two Decades of Trade disputes" deals with the dispute that has existed between the US aircraft giant and the European Aircraft manufacturing giant. Boeing has 57,000 workers in Seattle and an additional 100,000 employees in the country. Boeing has also provided 600,000 employments nationally and its consider to be a big force in US economy. Boeing attained its main competitor McDonnell Douglas and merged as one in 1996. Airbus is a European manufacturer of commercial airline and its backed by four European countries. Airbus was originally a minor contestant in the airline market and was believed as improbable to face up to U. S. control. However, in early 2000 Airbus has tranfered itself to a major corporation from an association. And in 2003 the company exceeds Boeing in delivery of aircrafts. Legal issues: To understand the problems in this case it is important to mention 4 points about the airline manufacturing industry and why only few competitors can exist in this market: 1) High Development costs involved in manufacturing aircrafts 2) Levels of breakeven that amount to a considerable proportion of global demand 3) considerable familiarity of level curve necessary for corporations to reach point of breakeven levels and turnovers 4) Unstable demands due to factors like fuel pricing, inflation, etc. After the success of the Airbus, the US officials and government criticized the heavy subsidies that Airbus had gained from the four European countries: Germany, Spain, England, and France. Boeing argued that these funding were in loans form and at under interest rates received from these countries, as well as airbus gaining breaks in tax. In addition, Boeing argues this subsidy has helped Airbus to offer striking financing terms for Airbus's clients. The Airbus camp responded by pointing out that Boeing had long been benefitting from US subsidiaries which weren't shared with the public. In 1992 the two parties reached an agreement where Airbus was allowed to receive launch aids from EU
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