Rough ride for aviation deal

Date: 06/02/1997

By Chris Johnstone

BOEING'S proposed take-over of rival McDonnell Douglas is leading the European Commission to ask questions about the whole framework for its aviation relations with the US.

Talks have been launched within Sir Leon Brittan's Directorate-General for external economic relations (DGI) on whether the current bilateral aviation agreement with the US should be altered to fit market reality better. “Some internal reflections have begun,” said a source.

These have included preliminary talks between Brittan's officials and members of Europe's Airbus Consortium, the world's second-biggest aircraft producer after Boeing. The Airbus Consortium includes Germany's Daimler-Benz Aerospace (DASA), France's Aerospatiale, British Aerospace and Spain's Casa.

Current EU-US aviation relations are governed by a 1992 deal which sets limits on government aid to EU and US manufacturers.

“The 1992 agreement was based on the assumption of a diversified market and not single national champions,” said an industry source.

“It makes assumptions about how trading is conducted and how the industry is financed which the EU might want to look at again.”

But he added that the reflections might stop short of recommending the bilateral deal be scrapped altogether.

The US mega-deal has still to be officially notified for vetting by Commission competition officials. The disappearance of McDonnell Douglas as an independent competitor on the US side would follow the demise over a year ago of Dutch manufacturer Fokker as a player in the market for the production of planes with more than 100 seats.

Airbus is maintaining an official silence on the deal to create a single US aviation colossus with annual turnover of 45 million ecu, and its implications for the subsidies agreement, but adds that it is ready to comment when asked to do so by Brussels.

It is already clear that one of the consortium's main criticisms will be that the link-up reinforces Boeing's market dominance and ability to determine plane prices world-wide. Globally, Boeing already sells six out of ten commercial aircraft with more than 100 seats.

The 1992 subsidy agreement has always been a fragile formula for peace between the EU and US. It was put together in a hurry to avert a transatlantic subsidies war and has been the subject of on-and-off recriminations ever since.

Basically, the bilateral accord puts a ceiling on the use of European government loans to finance the launch of new aircraft models. Although Airbus has cut its reliance on such aid in recent years, it is likely to draw on the facility if it goes ahead with the super-jumbo A3XX - a 550-or-more-seat passenger plane which could be agreed as early as next year.

On the US side, the agreement curbs indirect spin-off aid to civil aircraft programmes from government defence and National Aeronautics and Space Administration (NASA) contracts. Such defence contracts had been a lifeline for McDonnell Douglas in particular as it tried to hold on to its position as the world's third most important producer of civil aircraft.

The EU-US bilateral deal was supposed to be widened as soon as possible to bring in other aircraft-producing countries such as Canada, Japan and Russia. Consideration was also given at one stage to extending the aid discipline to the hugely expensive area of aircraft engine development. However, this has never happened, with Union officials holding the US responsible for blocking any moves in these directions.

Europe has also accused the US of making a mockery of the subsidy discipline outlined in the agreement by declaring no spin-off benefits at all to its civil aviation industry. That complaint was underlined last year in the EU's annual report on US barriers to trade and investment. Earlier, the Clinton Administration was charged with stepping up export promotion for aircraft, squeezing the selling opportunities for Europe's Airbus.

“The number of sales open to EU products on the basis of price and technical merit has been reduced,” declared a Union report.

For all its faults, the agreement has not been seized upon as an issue by manufacturers in Europe or the US until now. Boeing's move on McDonnell Douglas appears to have changed all that.