TARIFF WARS: A New Hope?

Airbus tariffs

Each piece of news concerning the Airbus-Boeing tariffs conflict comes up as a new episode of a never-ending movie saga. As you probably know, in these films sometimes things are not usually as they seem to be at first glance. However, every now and then things are exactly what they seem to be. Can we expect the same plot twists in this tariff conflict between aircraft manufacturers? Let’s try to answer this and other questions through this article.

Current context:

The most recent and last episode of this conflict, which could be titled “Airbus strikes back”, happened a few days ago: the imposition of $4 billion in tariffs on United States goods by the European Union.

WTO (World Trade Organization) ruling issued last month entitled the EU to impose these tariffs based on the fact that Boeing had benefited unfairly from government support. People familiar with the matter stated that it had been an expected decision, but it is also true that it has been perceived for some sectors as an action only contributing to add more drawbacks in the path to finally get the conflict solved.

In the end, it is undeniable that this is a response in line with the first action taken by President Trump last year, who referred to the EU as a “foe” and complained about “what they do to us in trade” to finally impose tariffs on EU goods. Although this action was legitimately taken based on the WTO ruling issued last year, many stakeholders on both sides of the conflict would have chosen a negotiated settlement as a better approach.

Proof of the above mentioned was the disappointment expressed by the US-based airlines arguing that these measures put them into a difficult situation:

United Airlines, American Airlines, and Southwest Airlines (Boeing operators) were already struggling due to the mandatory grounding of the 737 MAX, and the stock market was not merciful with them after the tariffs announcement.

JetBlue and Delta (Airbus operators) stated that these tariffs would have an impact somehow on travelers due to the airline fleet strategy is not able to be changed overnight.

President Trump and Boeing’s chief executive, Dennis A. Muilenburg, discussed a long-running trade dispute in 2017 at the company’s plant in North Charleston. – Kevin Lamarque-Reuters.

On the other hand, and as expected, Boeing totally supported these measures as illustrates in the following statement:

“Europe is facing tariffs today because Airbus has refused for years to comply with WTO rulings.” “Unfortunately, Airbus’s noncompliance will negatively impact European member states, industries, and businesses completely unrelated to Airbus’s actions, as well as Airbus’s airline customers.”

Boeing’s written statement

In addition, before any tariff was imposed and right after WTO ruling, Airbus called for a settlement trying to avoid tariffs.

Airbus tariffs
Guillaume Faury, Airbus Chief Executive Officer. – GettyImages.

“Tariffs would be a barrier against free trade and would have a negative impact on not only the US airlines but also US jobs, suppliers, and air travelers.”

Guillaume Faury (Airbus CEO)

Even with the US tariffs imposition, there were some European leaders who had preferred a more conciliatory approach. Nevertheless, there was a clear motivation in the fact of imposing tariffs on US goods right after a new-elected US president arises (what is highly probable according to current predictions). This imposition results to be the most effective reminder of the fact that this conflict has to be addressed the sooner the better, and no matter who is in charge of US executive decisions.

Despite tariffs approval by the EU, it was clearly and intensely stated that this is not a matter of measures escalation:

Airbus tariffs
From left to right Valdis Dombrovskis, EU’s top trade official, and Peter Altmaier, German Economy Minister. – WTVB.

“We are not escalating anything. We are exercising our rights as awarded by the WTO. We are just here mirroring the US approach. Removing these tariffs would be a win-win for both sides.”

Valdis Dombrovskis (EU’s top trade official)

“We are ready to withdraw or suspend our tariffs at any time when the US is ready to do so on their side, whether it is the current or future US administration.”

Peter Altmaier (German Economy Minister)

Worth to mention as well Donald Trump’s last month statement in which threatened with a quick retaliation if the EU responded to US tariffs.

Airbus tariffs
President Trump giving a speech in a Boeing’s factory. – AERO Magazine.

“If they strike back, then we’ll strike much harder than they’ll strike.”

Donald Trump (US President)

Additionally, there has been news in the last few days that will have an impact somehow on Airbus and Boeing’s interests and decisions in the mid-term. They will hardly imply differences concerning the main strategies followed by each side to face a 16 years-long conflict, but they can lead to changes concerning the urgency or the character (more or less aggressive) of the actions to be taken. Some of them are listed below:

Timeline and highlights:

The origin of this conflict dates back to October 2004 when the George W. Bush administration complained about the fact that Airbus was receiving subsidies from EU governments to design and develop large civil aircraft. These subsidies would have been covered up as loans whose interest rates were below market and being even forgiven.

US and Boeing also state that without this substantial financial support, Airbus would never have been able to become a serious competitor for Boeing. A380 was the aircraft under major scrutiny at the beginning, but further investigations were extended to the rest of the Airbus commercial family including even the A350 in a future stage.

Finally, the figures claimed by the US to WTO in 2006 were $22 billion (€19.4 billion) which US officials estimated that had resulted in a benefit of more than $200 billion.

Airbus tariffs
World Trade Organization (WTO) headquarters in Geneva. – Reuters – Denis Balibouse.

In the meantime, the EU counteracted alleging that Boeing had received $23 billion in US subsidies. These subsidies in form of specific regulations, grants, tax breaks, tax deferrals, etc. would have impacted not only in large civil aircraft manufacturing but also in R&D (Research & Development) projects and contracts for the Department of Defence and NASA.

Airbus and EU claimed to WTO for these aids as its competitor did and in the same way, the investigations were extended to the design and development of a future Boeing aircraft: the 777X.

All the stated above was only the beginning of a trade conflict which has been estimated to reach up to $100 million in costs, and whose end will lead apparently to nobody’s victory.

Find below a summary of the most relevant events of this conflict as a timeline:

  • 2005: WTO initiates investigations of state support for Boeing and Airbus after failed bilateral negotiations.
  • 2006: New Airbus A350 is announced and further government loans from EU are sought.
  • 2009: WTO issues an interim ruling and states that some European aid provided to Airbus violated a ban on export subsidies.
  • 2010: WTO demands to stop immediately the government loans for Airbus commercial aircraft including the A380. These loans are categorized as prohibited export subsidies. However, it rejects including the loans for the A350 as requested by US.
  • 2011: A separate WTO panel partially supports the EU claims alleging $19 billion aid for Boeing from the US, ruling against it, and estimating its value in at least $5.3 billion.
  • 2012: WTO restates the ruling against US support for Boeing. Both sides accuse each other of failing to comply with the WTO’s rulings while stating its own compliance.
  • 2013: New Boeing 777X is announced and agreed to be manufactured in Washington state shortly after an $8.7 billion tax break for the aerospace industry was stated by the local administration.
  • 2014: EU launches a separate complaint against the 777X tax breaks.
  • 2016: WTO states that EU failed to comply with its earlier rulings on Airbus. It also agrees to rule against aid for the new A350 but not putting it in the prohibited category. Tax breaks of the Boeing 777X are categorized as prohibited.
  • 2017: After US appealing, the WTO reverses the ruling concerning 777X tax breaks giving clearance to US in maintaining support for Boeing. Further EU appeals in this regard are dismissed.
  • 2018: WTO states again that EU failed to remove all subsidies to Airbus. US threatens with billions of dollars tariffs on EU goods. Arbitration comes into play to determine the scope of tariffs.
  • 2019: WTO states US failed to remove subsidized tax breaks to Boeing in Washington state. Both sides disagree widely in public, accusing the other of refusing to negotiate any settlement. WTO arbitrators entitled US to impose tariffs on EU goods. US imposes tariffs on most Airbus aircraft and on other EU products. WTO also rejects EU claims that it no longer provides subsidies to Airbus, granting US to increase tariffs on a wider range of EU goods.
  • 2020: US announces an increase in tariffs on Airbus aircraft imported from EU. Washington state votes to remove tax break that had benefited Boeing. Following delays due to the COVID19 crisis, WTO grants EU to impose tariffs on US goods. EU offers not to impose tariffs if US withdraws its existing tariffs on EU goods, but the US refuses arguing that EU has no legal basis to impose tariffs due to tax break were already removed.

In addition, and if you feel like to deep inside in more detail, you can take a look at the official disputes on the official WTO site:

Tariffs imposed in a nutshell:

US tariffs on EU goods:

WTO in October 2019 granted the US to impose tariffs on $7.5 billion of annual EU goods. Therefore, right after the ruling US imposed 10% tariffs on Airbus aircraft made in Europe and 25% duties on several EU products. These products include French wine, Italian cheese, British cashmere, and Spanish olive oil among others.

tariffs
live farmers protest in Madrid against low prices and demand government protection against US tariffs plans on EU agricultural produce. – AP Photo/Bernat Armangue.

EU claimed that it no longer subsidized Airbus but WTO rejected the appeal. It allowed then US to increase tariffs on a wider range of goods to press up for EU compliance. So from March 2020 US announced an increase in tariffs on EU aircraft from the initial 10% to 15%.

This scenario could even be worse for Airbus if, as Boeing expected, the tariffs also had impacted aircraft parts coming from Europe. These parts are needed to feed its factory opened in Mobile, Alabama in 2015. However, it seems that US administration declined to move that way due to local employment reasons.

EU tariffs on US goods:

In October 2020, WTO entitled EU to impose tariffs on $4 billion of US goods, so they did it this November 2020. These tariffs are 15% on Boeing aircraft and 25% on several goods including spirits, dried fruit, tobacco, frozen fish and shellfish, handbags and suitcases, motorcycle parts and tractors, video game consoles, cotton, and so on.

As stated before, EU offered a common tariff withdrawal offer which was dismissed by US.

Conclusion:

It is clear that this conflict is having an impact and negative consequences not only on Airbus and Boeing as large commercial aircraft manufacturers.

Many small producers in EU and now in US are suffering because the export level of its products is drastically lowering due to tariffs. This is affecting directly their business bottom line making them even impossible to survive in some cases. The situation impacts also the end consumers who have to pay more for the same goods. All the above combined with the COVID19 crisis is unsettling the social and economic environment, which benefits nobody.

Stock markets registered strong rises after Biden seemed to be confirmed as elected President of the United States. This indicates that many socio-economic sectors have good expectations about Biden and it is undeniable that Donald Trump and Joe Biden are opposite from each other as night and day in several aspects. However, that is not the case concerning economic matters and with the huge impact of the COVID19 crisis in US, the shadow of protectionism is still present.

Joe Biden, in his first speech as president-elect, urges unity: ‘Time to heal in America’. – Andrew Harnik – Reuters.

Do not forget that with the Obama administration the negotiations of a free-trade agreement with the EU never led to a deal, and Biden’s approach to tariffs is not yet clear.

Moreover, Trump is not going to make things easy if he finally leaves the White House which is expected not to lead precisely to a smooth transition. If he finally remains as official President thanks to his army of lawyers, which seems increasingly improbable as time goes by, the hopes of solving the tariffs issue in a quick and clean way will be almost completely diluted.

Taking into account all these facts, with regards to US administration and its future actions concerning the tariffs issue, maybe the best approach is to lower or at least moderate the level of expectations. Actually, this seems to be the EU way of acting. “Hope the best and prepare for the worst” could be a good summary of the following statements made by the German Economy Minister Peter Altmaier, who led the discussions among the 27 EU nations which ended with the imposition of tariffs on US goods:

“Biden administration will contribute to world trade relations being more rules-based, being more multilateral, being less protectionist in the future.”

Peter Altmaier (German Economy Minister)

Therefore, and even being the negotiated settlement the most probable, hopeful, and expected way of putting end to the conflict by many of the stakeholders the path to follow and the end of this conflict is far from being clear yet.

Worth mentioning that this is not the only tariffs issue involving US and EU, and affecting the Aerospace Industry. In March 2018, Trump administration imposed tariffs on steel (25%) and aluminum (10%) from most countries, extending them to EU as well. The negative effects of tariffs imposition were extended even to Boeing in this case, which saw how its raw materials needed to build aircraft were limited and become more expensive due to tariffs.

Americans who work for international auto companies demonstrate against trade tariffs they say will negatively impact US auto manufacturing. – AP Photo/J. Scott Applewhite.

It seems that this will be neither the only nor the last legal issue between Airbus and Boeing. Wingtips design conflict, or Sharklets vs. Winglets (both known by increasing the efficiency and avoid turbulences at the end of the wings), can be named as other of the most recent ones.

Hopefully not, but who knows if the agreements reached to help Boeing with the 737 MAX grounding issue, or the ones reached in US and EU to help both aircraft manufacturers against the COVID19 crisis could lead to future legal disputes.

I truly think that it is high time US/Boeing and Airbus/EU stop to consider the large aircraft manufacturing industry as a chess match between them. While they are fighting against each other, the China/COMAC team is getting stronger and consistently achieving milestones to become a serious medium-large commercial aircraft manufacturer.

Furthermore, the COVID19 crisis has reinforced China in its path to get the title of world’s leading power, and the prospects of air traffic also position China as the area with most domestic flights and passengers in 2030. These facts should be enough to lead to a change of mindset and strategy of Boeing and Airbus. Maybe not today or tomorrow, but the trends are telling us that the status quo is going to change both: world and aerospace industry.

If you want to know more about COMAC the two following videos will give you a big picture:

China-made C919 successfully completed its first test flight.
The Rise Of Chinese Jets – ARJ21, C919, C929, C939 | COMAC’s Answer To Boeing And Airbus!

Data trends in the Aerospace Industry

It is undeniable that the Aerospace one is and has been always in the top of cutting-edge Industries, and even being historically linked to the so-called data sciences it has not remained indifferent to the huge Data wave recently happened.

Below, some of the most relevant projects and initiatives proposed in this regard for some of the main actors in this industry in recent times are introduced:

Boeing AnalytX

Applications using Boeing predictive analytics give customers a glimpse into the near future; more time to evaluate, plan and manage solutions.

Sky Wise

Skywise supports customer’s activity on every aircraft-related aspect of the industry. Integrating disparate data sources and connecting and enabling the complete digital aviation ecosystem to make the data shareable, open and transparent to create value for customers.

SmartForce

SmartForce enables military customers to improve operational readiness, exploiting the rich store of data gathered by military aircraft and helicopters, providing data-driven intelligence whenever and wherever needed. This leads to optimised maintenance practices; maximum fleet availability; better informed, data-driven decision-making; and predictive solutions that reduce workload and costs.

CIMON

CIMON (Crew Interactive Mobile CompanioN) is a mobile and autonomous assistance system designed to aid astronauts with their everyday tasks on the ISS (International Space Station). The first form of Artificial Intelligence (AI) on an ISS mission. CIMON is an experiment overseen by Space Administration at the German Aerospace Center (DLR) in cooperation with Airbus.

AODB

Amadeus Airport Operational Data Base holds the schedules for 95% of the world’s airlines, 365 days in advance, so it gives long-term visibility of passenger and traffic. It provides with automatic updates via a live flight information feed, improving data accuracy and traceability and helping to accurately predict costs and revenues for each future turnaround cycle.

Aviatar

Aviatar offers an extensive variety of digital products and services for airlines, MROs, OEMs, and lessors by combining multiple apps in one place. While every single app provides value in its stand-alone version, it is the interplay of those apps, which creates the unique value proposition for the individual user.

Up to now, only data related topics have been addressed in this article. However, data is only one of the fields belonging to digital trends which are currently on the rise and affecting the Aerospace Industry. There are uncountable proposals in this regard every one of them worth to mention. A summary of them has been compelled in the infographic below: 


Four digital trends in Aviation that will fly high. – EOS Intelligence

What to expect for the future ?

The progress of digital trends has been extraordinary in recent times. Data related trends can be considered the ones which contribute the most to this progress. Therefore it is difficult to predict what are going to be the next steps, or what the next amazing breakthrough is going to take place in this regard.

However, it might be possible to get a great advance based on a combination of enhancements in more than one discipline instead of a huge development in a single one. Chatbots, for instance, are the combination of Artificial Intelligence, voice recognition and text to voice synthesis.

Imagination has no limits and perhaps the following are waiting for us in the near future:

Maybe there will be embarked computers storing and updating all the mission data in real time, able to answer all the crew inquiries even proposing operation actions to the crew in a proactive way, and all of that managed by voice.

And what about fully automated command and control centres in which all the tactical and strategic decisions will be taken based on big data analysis performed by artificial intelligence?

Taking into consideration the recent developments, and in my humble opinion, this is no matter of science fiction anymore. It can be, literally, the reality of tomorrow.

By the way, ‘science fiction’ can be a source of inspiration in this regard. Just read again three paragraphs above after watching the following images.  Do they are familiar to you?

Digital Trends Data Analysis Artificial Intelligence Machine Learning Big Data Alien Film
 Mother Computer embarked in Nostromo spacecraft. – Alien (1979). (Click on the image to watch the film scene)
Digital Trends Data Analysis Artificial Intelligence Machine Learning Big Data WarGames Film
 Military central computer WOPR (War Operation Plan Response) referred colloquially as Joshua – WarGames (1983). (Click on the image to watch the film scene).

Spot the differences between partnerships: Airbus-Bombardier vs. Boeing-Embraer

Airbus Bombardier vs. Boeing Embraer

It is undeniable that the aircraft manufacturing industry is going through one of the most turbulent periods in its history. Difficult to predict what is going to be the next astonishing revelation, emotions go up and down like in a roller-coaster ride.

The deal announcement between Bombardier and Delta Air Lines, for the purchase of 75 CS100 jets in April 2016, can be considered the starting point of all the relevant events leading to the current situation. Some time afterwards, and trying to counteract the upcoming threat of new aircraft selling competitors within U.S. borders, Boeing complained about the deal price. It claimed that it had been lowered below real market one due to the unfair subsidies Bombardier received from Canadian Government.

Delta Bombardier CS100
Delta’s Bombardier CS100. / Delta

A year and a half after the deal announcement Boeing complaints were supported by Trump’s administration and by the U.S. Commerce Department, which finally imposed an outrageous 220% increment in customs duties to Bombardier in order to sell CSeries within U.S. borders.

This ruling put Bombardier in a very tough situation pushing it into Airbus arms in a desperate measure to avoid the bankruptcy of its CSeries programme and the consequent impact in the whole company. The partnership between Airbus and Bombardier announced on the 16th of October last year was truly a backfire for Boeing, whose actions eventually strengthened its main competitor.

Airbus Bombardier Boeing Embraer
Airbus A320 meets the new family member A220. / Airbus

The next relevant chapter of this story came from the U.S. International Trade Commission (USITC), a politically balanced independent body which investigates the effects of dumping and subsidised imports on U.S. industry. It ruled unanimously on 26 January to overturn last year U.S. Commerce Department decision. This was rightly foreseen by Delta Air Lines stating that the Commerce Department’s decision was preliminary being the USITC’s determination the ‘real decision.’

“We are confident the USITC will conclude that no U.S. manufacturer is at risk because neither Boeing nor any other U.S. manufacturer makes any 100-110 seat aircraft that competes with the CS100.” – Delta public statement

These setbacks forced Boeing to explore other options such as opening negotiations with Embraer, which finally led to a joint venture recently announced on beginning July this year.

Above mentioned facts are history, but what are the similarities and differences between each partnership apart from their origins? What can we expect will be the next steps of each one in the future?

Airbus Bombardier Boeing Embraer
Airbus Bombardier Boeing EmbraerBoeing and Embraer logos. / Boeing and Embraer

Type of partnership

Both partnerships have been conceived as joint ventures, neither merges nor acquisitions nor any other formula. It means each participant provides with resources to accomplish a common goal, keeping its identities and the rest of business lines and objectives independent.

Embraer’s airliner business will be the target of the partnership, whereas its defense and business jet operations will keep aside. Same as Bombardier’s one, whose CSeries programme will be the only business unit involved in the partnership.

Business strategy

The strategy behind both partnerships seems to be pretty similar: the big ones Boeing and Airbus will provide with their business support expertise (sales, marketing, procurement, customer services, and so on), whereas Bombardier and Embraer will contribute with their technical expertise in small airliners manufacturing.

Ownership structure

A similar business strategy does not mean necessarily similar ownership structure, and that is the case if both partnerships are compared:

CSeries Aircraft Limited Partnership (CSALP) is participated by Airbus in a 50.01% whereas Bombardier and Investissement Québec (IQ) own approximately 31% and 19% respectively. On the other hand, Boeing is planned to own the 80% stake in its partnership with Embraer which will hold the remaining 20%.

Decision making

Decision making is directly related to the ownership structure, and it is clear that the balance is in favour of the big ones in both partnerships, but in a different way:

CSALP will remain independent and led by seven directors composing the Board: four proposed by Airbus, two by Bombardier, and one by IQ, being Airbus entitled as well to name the Chairman. However, Boeing-Embraer partnership is going to be led by a Brazilian management team, President and Chief Executive Officer, having Boeing full management and operational control of it.

Embraer 190 Brazilian flag
Embraer 190 with the Brazilian flag in the background. / Embraer

Financial facts

The financial aspect could be defined as the more distant feature between both partnerships. The differences are considerable, which might even set different long-term strategies depending on the facing context:

CSALP partnership was agreed at no cost to Airbus which paid a token fee of one Canadian dollar for the majority stake. Nevertheless, Boeing will pay USD$3.8 billion of the total Embraer’s commercial aircraft operations valued at USD$4.5 billion. Besides, Embraer executives assure that much of its debt will be transferred to the new partnership and Boeing will contribute with a capital injection.

In contrast, CSALP will not assume any financial debt and there will be no cash contribution by any of the partners except Bombardier, continuing with its current funding plan and facing if required the cash shortfalls up to a certain amount.

Social perception

Although more subjective, this is one of the issues that can be a thruster or an anchor for the future of the partnerships. As in any big change, there is always resistance or even aversion to the change coming from some stakeholders involved.

CSeries partnership seems to have been received more willingly due to the context involving Boeing complaints and risk of unbearable custom duties. And although no job losses were assured since the beginning, some uncertainty still remains in the atmosphere and there is a lot of work to be done. This is a long-distance race and it is better not to be blinded by enthusiasm.

Slightly different were the feelings awaken, at least for the time being, by the Boeing-Embraer partnership: Boeing first intentions of acquiring Embraer as a whole were dismissed categorically by Brazilian government due to the strategic value of the Embraer’s defence arm. This movement, perceived as an aggression for some stakeholders, led them to support the veto of any related operation. Moreover, the feeling of price lowering of Embraer’s commercial aircraft unit compared to previous reports gives Embraer shareholders strong odds to demand a higher price for the stake.

Despite everything mentioned, recent signals suggest the Brazilian government is satisfied with the deal conditions, as long as the Brazilian jobs and the development of new technologies by Embraer are guaranteed.

Airbus A220-300 Toulouse Airport
Airbus A220-300 after its first landing at Toulouse Airport. / Airbus

Present and future steps

Some actions have been already performed by CSALP as it has the longest lifetime. The most remarkable are:

  • The decision of opening an additional CSeries FAL (Final Assembly Line) at Mobile Airbus site (Alabama, U.S.) to supply U.S. customers, keeping the primary FAL in Mirabel (Quebec, Canada).
  • The rebranding of the CSeries aircraft to A220-100 and A220-300.

The last one seems suitable to be followed by the Boeing-Embraer partnership according to its ownership structure similarities with CSALP, whereas a new FAL opening seems quite improbable in an early stage.

 
Embraer KC-390 military transport aircraft
Embraer KC-390 military transport aircraft. / Embraer

It is true that Boeing-Embraer passenger jet partnership has not been formally established yet, but some people familiar with the matter bet for an additional partnership in sales and services for the KC-390 military cargo jet. Despite being a separate partnership, it will strengthen the relationship.

One of the main expectations of both partnerships is a quicker and better expansion worldwide, being their products positioned to target the estimated 6,000 aircraft needed in the market segment at issue over the next 20 years. Additionally, and thanks to the partnerships agreed, the situation of duopoly in aircraft manufacturing industry seems to be maintained at least in the following years making difficult the entrance of new prospective competitors.

It seems nearly impossible to foresee what will be the amazing announcements unveiled in the future concerning this race between aircraft manufacturers. What seems more certain is that upcoming surprises are guaranteed, so keep on watching, hearing and reading news and publications like this one if you want to be up to date.