AIRCRAFT SUBSIDIES

Should Governments subsidise the development of new commercial aircraft? That question is prompted by the recent ruling by the World Trade Organisation that Boeing receives illegal subsidies from the U.S. Government, mainly in the form of research grants channelled through the Defence Department. It follows an earlier ruling by the WTO in June that Boeing's arch-rival Airbus also receives illegal subsidies, in the form of launch aid from its shareholder governments. Since Boeing and Airbus dominate the passenger jet market, particularly for planes with more than 100 seats, that effectively means that the whole industry is subsidised.

The traditional industry argument for subsidies is simple. Large aircraft are undoubtedly expensive, so the risks of developing a new one are large, far too large for any one company to bear. Hence the need for governmental support. However, apart from the fact that that support is, under the WTO rules that everybody purports to uphold, illegal, there are two counterarguments. First, if all governments are subsidising, then the benefits tend to cancel each other out. Anecdotedly, that appears to be true. Yes, Airbus has managed to grab half of the market for big passenger jets in recent years; but that means that Boeing still has the other half.

More fundamentally, are those risks really so large? Compared with (say) introducing new car models worldwide, or a new computer chip, or a new drug, or a new nuclear power plant design? A new drug may turn out to be ineffective or have horrible side effects (i.e. demand will, literally, be zero). Yet air travel is booming, particularly in Asia; furthermore, both the number of people in the world and their desire to travel seems set to keep on growing (i.e. demand is, and will be, strong). True, airlines still have to pick one manufacturer's product over that of another. But there aren't that many manufacturers to choose from, airlines tend (for maintenance reasons) to stick with one manufacturer over time, and no manufacturer starts developing a new aircraft before it has carried out exhaustive market research amongst its existing airline clients. Not all of those factors apply in other business sectors.

Against that background, the WTO's two rulings come at exactly the right time. Smaller manufacturers of regional (50-100 seat) aircraft (eg Embraer of Brazil and Bombardier of Canada) are gearing up to start building bigger planes. A clear message that they have to do it on their own, withut government support, is to be welcomed. Governments can then use the savings to finance things that governments ought to support.

Walter Blotscher