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PURPOSE

BACKGROUND

WITNESSES

The purpose of this hearing is to receive testimony on competition, regulation, and global market factors affecting U.S. aircraft manufacturers.

Section 819 of the Vision 100-Century of Aviation Reauthorization Act (PL 108-176) mandated the Commerce Department to prepare a report, http://www.ita.doc.gov/td/aerospace/jet_transport_study.htm, examining the jet transport aircraft manufacturing industries and the impact of U.S. and European government policies and regulations on the global competitive position of U.S. aerospace manufacturers. The report focuses primarily on U.S and European manufacturers of civil jet transports with 100 seats or more, as well as aircraft engines and major components for those aircraft.

The report highlights the significant challenges facing the U.S. aerospace industry and the role government policies have on the competitiveness of U.S. industry. U.S. commercial aerospace companies involved in the production of large civil aircraft have lost significant market share over the past twenty-five years to their European competitors.

Two manufacturers of large commercial jet transports remain in the world: The Boeing Company of the United States and Airbus of Europe. Boeing and Airbus now offer similar product lines in terms of size and range. For the first time in history, European aircraft manufacturer, Airbus, announced that it had received more orders in 1999 than Boeing. With the exception of 2000, Airbus has announced more orders every year since 1999. In 2004, Airbus announced 370 orders vs. 272 orders by Boeing. In addition, for the first time, Airbus delivered more commercial aircraft than Boeing in 2003 (304 aircraft vs. 281 aircraft). It did so again in 2004 (320 aircraft vs. 285 aircraft), and is expected to do so in 2005.

Manufacturers of large commercial jet transports are also facing increased competition from Canadian and Brazilian manufacturers of smaller regional jets, which are being used more often by airlines on routes traditionally served by large civil aircraft. Global production of the smaller (30-90 seat) regional jets is dominated by two manufacturers: Bombardier of Canada and Embraer of Brazil. This market has grown significantly since the two regional jets were delivered in 1992. Some 300 were delivered in 2003, with substantial growth expected. Both companies are considering competing with Boeing and Airbus in the 100+ seat aircraft market, with Embraer’s first aircraft in this category expected to enter service in 2005. Bombardier and Embraer receive various forms of government financial support.

U.S. manufacturers of aircraft engines have also experienced losses of global market share to their European competitors. Three prime companies manufacture engines for both large commercial aircraft and regional jets: General Electric, Pratt & Whitney, and the UK’s Rolls Royce. They all supply engine overhaul, repair, and fleet management services, as well. Each also produces engines for military applications. Three other engine manufacturers are joint ventures of the big three: SNECMA, International Aero Engines, and Engine Alliance.

The U.S. aerospace industry currently employs 606,000 high-technology, highly-skilled workers in virtually every state in the U.S. Since 1990, however, employment has shrunk from 1.12 million to today’s 606,000, nearly a 50% reduction. The industry annually generates a greater positive trade balance than any other sector in the U.S. economy. In 2004, the industry exported $56.8 billion and imported $25.8 billion, for a positive balance of $31 billion.

U.S. AND EUROPEAN GOVERNMENT SUPPORT FOR JET TRANSPORTS

Financial Support

General

Government funding for commercial aircraft-related research and development (“R&D;”) and the launch of commercial aircraft programs has been a source of longstanding trade friction in the international civil aircraft industry. The U.S. and European governments fund R&D; related to commercial aerospace technologies in very different ways, which are rooted, in part, in philosophical differences. The European approach is more targeted at specific commercial products; the U.S. approach relies on more general, basic research that advances the science of flight, e.g., pre-competitive in nature.

Direct Assistance

In the late 1960s, European governments established Airbus Industrie. European governments fund the development of new large civil aircraft programs through launch aid. Such aid substantially reduces the commercial risk to manufacturers of developing or introducing new aircraft and engine models.

The Office of the United States Trade Representative (USTR) contends that Airbus has received subsidies in many forms, including launch aid, debt forgiveness, grants, equity infusions, and dedicated infrastructure support. The USTR suggests that the $15 billion in launch aid alone is particularly significant because it shifts the commercial risk of airplane development from Airbus to the European government treasuries. Had Airbus borrowed this $15 billion from a bank on commercial terms it is estimated that it would add another $35 billion in debt to Airbus’ balance sheet. On the other hand, Airbus claims that these figures are false and that they have actually repaid more than they have borrowed.

The USTR suggests that Airbus has used some level of launch aid to quickly roll out a succession of new aircraft, including the three new models developed since 1992: the A330-200, the A340-500/600, and the “superjumbo” A380. In the case of the A380, nine governments—France, Germany, the United Kingdom, Spain, the Netherlands, Finland, Belgium, Italy, and Sweden—are providing nearly $4 billion of the total $12-15 billion of anticipated development costs.

In contrast to European policy, the United States government does not offer loans or launch aid to U.S. aerospace companies for commercial aircraft development programs. This is a matter of longstanding practice as evidenced by Lockheed’s exiting the market and McDonnell Douglas’ merger with Boeing.

Indirect Assistance: Aeronautical R&D;

In addition to the national governments of Europe providing financial assistance, the central European Union government, itself, also invests in aerospace R&D.; This funding also targets development of new products for near-term application in the large civil aircraft market. This funding is part of a concerted effort by the EU to advance its aerospace programs. European national research labs and the European Commission are increasingly focused on funding R&D; projects intended to give European companies a competitive advantage in global markets.

Private sector companies in the U.S., including Boeing and other aerospace manufacturers, participate in many of the FAA and NASA research projects. In contrast to Europe’s approach, the results of most federally funded U.S. civil aeronautical research are made available to the public. Moreover, unlike in Europe, the results of the taxpayer-funded research in the U.S. do not become the property of the research participants. Rather, they are placed in the public domain to all market competitors, U.S. and European alike.

Differences between U.S. and European government aerospace-related R&D; funding priorities are compounded by diverging levels of funding. According to NASA, U.S. industry and government spending on aeronautics research and development has declined by around 50 percent since its peak in 1987. On the other hand, European Commission funding for aeronautics research has been on the rise for years.

In addition, Airbus parent companies, EADS and BAE Systems, are Europe’s two largest defense contractors. Together, they generate more revenue from defense operations than does Boeing. Therefore, any “indirect” benefits that may flow from defense-related R&D; contracts into commercial aircraft programs would flow to both Airbus and Boeing.

Airbus Ownership

Airbus is now jointly owned by the European Aeronautic Defense and Space (“EADS”) Company and BAE Systems. EADS—an 80% owner of Airbus—was established in 2000 through the merger of French Aerospatiale Matra, German DaimlerChrysler Aerospace, and Spanish CASA. EADS is the second largest aerospace and defense company in the world. In addition, both the French and Spanish governments retained ownership in EADS, 15% and 5.5% respectively. BAE Systems—a 20% owner of Airbus—is a major global defense contractor and the fourth-largest aerospace and defense company in the world.

Combined, EADS and BAE Systems generated some $65 billion in revenues in 2004, employed approximately 200,000 workers, with more than $300 billion in products yet to be delivered. Combined, they are considerably larger in all respects than The Boeing Company. The governments of France, Germany, the United Kingdom, and Spain have been the primary financial supporters of Airbus aircraft programs for decades.

Trade Action

In 2004, the United States called upon European governments to cease providing launch aid, citing the fact that Airbus is a mature company that has successfully captured more than half the global market, as measured by the number of aircraft delivered, and annual orders since 1999 (except for the year 2000).

Although Airbus and its parent companies have indicated publicly that they have the ability—without government assistance—to fully finance the development of any new aircraft, through internally generated profits and market resources, European governments appear poised to provide financial assistance for the development of the A350, which will be a direct competitor to Boeing’s new 787.

After the U.S. had again raised concerns in mid-2004 about European financing of Airbus development, on October 6, 2004, the U.S. government filed a challenge with the World Trade Organization and terminated the 1992 trade agreement. The EU filed a similar challenge against the United States on the same day, alleging the U.S. government had provided subsidies to Boeing for the development of its commercial aircraft.

On January 11, 2005, the U.S. and EU reached an agreement to postpone the litigation phase of the WTO proceeding for 90-days in order to consider, among other key issues, the U.S. government’s request that the EU cease from providing any future launch aid for aircraft development by Airbus.

During this 90-day period, the EU committed to not provide any additional funding for the launch of its new aircraft, the A350. However, the EU was unwilling to commit to the condition that it would not provide additional launch aid to Airbus in the future.

With Airbus anxious to launch a competitor to Boeing’s latest 787 aircraft offering, both sides are considering what steps to take next, including a decision by the four European governments to provide subsidies for the launch of its proposed A350.

Government Intervention in Sales Campaigns

The 1979 Agreement on Trade in Civil Aircraft precludes the use of government inducements in the sale of civil aircraft that might influence their purchase. In addition, the Anti-Bribery Convention of the Organization for Economic Cooperation and Development (“OECD”) disciplines the use of bribery by private citizens. Prior to the signing of the Convention, European anti-bribery rules were weak or non-existent. The U.S. government continues its work with the OECD’s Working Group on Bribery to eliminate remaining obstacles to the implementation of the Anti-bribery Convention.

Unfortunately, government inducements and bribery are very difficult to monitor and address. Although the U.S. government attempts to neutralize foreign government intervention in sales campaigns, ongoing attempts by foreign governments to influence recent aircraft sales campaign highlight the need for greater vigilance. To the extent that bribery and anti-corruption disciplines and enforcement in Europe remain weaker than under the U.S. law (Foreign Corrupt Practices Act), European aerospace companies may enjoy a competitive advantage in sales competitions to foreign governments or to government-controlled airlines.