U.S. airframers challenge subsidies for foreign OEMs

 - October 9, 2006, 6:15 AM

“We cannot compete with na-tional treasuries,” Gulfstream Aerospace president Bryan Moss testified at a May House aviation subcommittee hearing on foreign govern-ment subsidies for their civil aircraft manufacturers. He urged lawmakers to include all aircraft–not just large commercial aircraft–in any efforts to eliminate such subsidies.

According to a recent Commerce Department report mandated by the FAA Reauthorization Act two years ago, over the past 25 years U.S. companies involved in build-ing large civil aircraft have lost significant market share to their European competitors. U.S. aircraft engine manufacturers, too, have lost global market share to their European counterparts.

Moss said that U.S. business jet manufacturers also are experiencing increasing competitive pressures because of subsidies for foreign aircraft entering the business jet market, be they purpose-designed or regional jet conversions.

“Simply stated, government sub-sidy manifested in development loans, with low or no payback, and production start-up loans with simi-lar terms, results in severe competi-tive disadvantage,” the Gulfstream boss said. “Specifically, market risk is significantly diminished for the government-subsidized manufacturer.” He added that new aircraft are being introduced with little or no debt assumption, and aggressive pricing is prevalent without regard to return on investment.

Airbus Subsidies

Other witnesses from the Bush Administration focused particularly on the substantial financial assistance various European governments provide to Airbus. The EU aircraft-building consortium continues to be subsidized heavily at little or no risk, despite having achieved market share parity with Boeing and overtaking the U.S. airframer in aircraft orders and deliveries in recent years.

Rep. John Mica (R-Fla.), avia-tion subcommittee chairman, said the U.S. must take every possible measure to stop the unfair subsidization of the development, manufacture, promotion and financing of all commercial aircraft.

“I think most people in the U.S. would love to be in a position to borrow money to buy a business or a house, where they need not repay the loan if the person or company happens to be short of cash that year, or the owner loses his or her job,” said Mica. “Those terms have been available to Airbus since its creation in 1969.”

The Office of the U.S. Trade Representative contends that Air-bus has received subsidies in many forms, including launch aid, debt forgiveness, grants, equity infusions and dedicated infrastructure support. The trade office suggests that the $15 billion in launch aid alone is particularly significant because Airbus bears little or no commercial risk; repayment of the financing is based on how well the aircraft in development sells.

“The $3.7 billion in launch aid that EU governments committed for the Airbus A380 ‘super jumbo’ was the largest amount of funds committed for a single project,” said Deputy U.S. Trade Representative Peter Allgeier. “The EU pro-vided further loans and infrastructure that pushed the total amount of A380 subsidies to approximately $6.5 billion. Airbus is on the verge of launching another new aircraft, the A350, and it has requested $1.7 billion in risk-free launch aid for that aircraft as well, even though it has stated publicly that it could ‘easily’ finance the project itself.”

Addressing Ethics Violations

During the hearing, Mica warned that “those who may deal in the tactics of bribery or government inducements violate international standards and will be held account-able.” He said that his subcommittee is also investigating whether there is a link between a foreign airline buying aircraft from Airbus and receiving preferential treatment for landing rights or slots at airports.

“International intimidation as in the case of a Turkish airline [whose] purchase of Airbus aircraft last year was allegedly linked as a ‘condition’ for Turkey’s admission to the European Union is another practice that bears scrutiny,” he said.

Referring to allegations of bribery, Joseph Bogosian, Com-merce Department deputy assis-tant secretary for manufacturing, declared, “Our guys go to jail [for bribery]; their guys can take a tax deduction.”

Moss used the opportunity to urge the subcommittee to re-evalu-ate the FAA’s proposed cutbacks in aircraft certification services, which, if implemented, “would provide a severe economic hin-drance to our company’s ability to bring new products into service.”

He said any delays would inhibit directly Gulfstream’s ability to re-main competitive in the challenging global marketplace. “At this time of proposed reductions in U.S. cer-tification services, the European Union has enhanced its thrust in this area with the establishment of the European Aviation Safety Agency (EASA) and a robust operating budget,” he reminded lawmakers.

Meanwhile, Moss praised the lawmakers for passing and exten-ding bonus depreciation–which he said provided a “huge stimulus to increased sales which put the industry on the comeback trail”– but expressed concern about the issue of user fees for aviation services. While the FAA Reauthorization bill and the Airport and Airway Trust Fund excise taxes do not expire until Sept. 30, 2007, discussion about how the next reauthorization should proceed is already under way.

“Let me say clearly that we sup-port the current aviation excise tax on aviation fuel as the means for our industry to contribute to the [avia-tion trust fund],” he said. “We are not, however, supportive of increased user fees and excise taxes to make up for the shortfall created by a declining general fund contribu-tion. The aviation industry cannot bear the total burden of the funding disparity and remain healthy.”