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Airbus must leave the nest

October 08, 2005

Airbus will dip its toe into THE free market and finally compete with U.S. rival Boeing on a level playing field -- for now, anyway. The European aircraft maker announced Thursday that it would build its new A350, and to cool down a boiling trade dispute with the United States, it passed up more than $1 billion in government subsidies to develop the plane.

The move is a tentative step, akin to a spoiled child passing up his weekly allowance. Before it launched the A350 program, Airbus lined up commitments from Britain, France, Germany and Spain to front a third of the plane's $5.7-billion development cost. That infuriated Washington, which doesn't offer such sweet deals when Chicago-based Boeing develops new airplanes. For now, Airbus will go ahead without the aid, but the loan commitments from those governments are still there. Who's to say Airbus won't take the cash should the A350 program run into trouble?

If anything, Airbus' move to temporarily forgo A350 subsidies shows it has no credible legal case in a bitter fight between Europe and the United States. The U.S. has taken its case to the World Trade Organization, alleging that Airbus has received $15 billion in illegal government subsidies in the form of low-interest loans that don't always have to be repaid.

There's an expression that aircraft manufacturers "bet the company" when they develop new planes. Years of market research and technological innovation must take their course before a company ever decides to build a new airliner. Boeing says that the cost to develop the world's first truly successful commercial jetliner -- the 707 -- was about equal to the company's net worth in the 1950s. If the 707 hadn't succeeded, Boeing probably would have opted out of the commercial jetliner business for good.

So when the mega-jumbo, 550-seat A380 was launched in 2000, it looked like Airbus was comfortable enough to take a monumental risk on the new jet. But it didn't really have to bet the farm -- Airbus secured $3.7 billion in low-interest government loans before it ever built a single plane. In more than five years of sales, only 159 A380s have been sold.

By contrast, Boeing has firm orders for 174 of its new fuel-efficient 787 Dreamliners since it launched the plane in April 2004. In fact, Airbus launched the A350 mostly as a defensive move to compete with the 787, a plane turning out to be a runaway sales success for Boeing.

Airbus is now the world's largest aircraft manufacturer, not the tenacious European start-up of the 1980s that relied on government handouts to stay in business. The U.S. is prepared to fight an ugly but completely justified battle with Europe at the WTO if Airbus doesn't permanently give up its A350 subsidies.

It's time for Airbus to prove it can finally fly on its own.

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