Airbus aims to end subsidy tariff row at crucial time
In a chess game over tariff disputes in the aerospace sector in Europe and the United States, Airbus announced it made the “final step to stop the long-standing dispute” between the two countries at the World Trade Organization (WTO). The first move was made in 2004, when the United States Trade Representative (USTR) filed a case against the European manufacturer over unfair subsidies.
16 years later, the Toulouse, France-based aerospace giant shook hands with the French and Spanish governments to make changes to the Repayable Launch Investment (RLI) contracts dedicated to the launch of the Airbus A350 XWB.
“These additional amendments to the A350 RLIs demonstrate that Airbus has left no stone unturned to find a way towards a solution,” stated Airbus chief executive officer (CEO) Guillaume Faury.
The move to end the chess match, which rather looks like two toddlers throwing tantrums, could not come at a more crucial time, as from top to bottom, every part of the aerospace industry has suffered massively due to the COVID-19 pandemic.
“This is a clear signal of support to those who are suffering from the severe impact of the tariffs imposed by the USTR, especially at a time when industries are hard hit by the consequences of the COVID-19 crisis,” added Faury.
In a situation where every penny matters, the move to end the tariff dispute comes in crucial for both Airbus and its United States-based airlines.
Crucial United States market
Throughout its history, Airbus has always faced an uphill battle versus Boeing in the United States market. Starting with its first commercial aircraft product, the A300, the European aircraft maker exhibited its fair share of ingenuity to make sales over the other side of the Atlantic.
The first iteration of Eastern Air Lines was the first U.S. based airline that took the risky decision to purchase the Airbus A300 in 1978, after the manufacturer offered its first aircraft to the airline on a trial basis with no strings attached in 1977.
And still, throughout the history of the company, Airbus had little success in North America. Out of the total 16,214 narrow-body aircraft ordered, 2,267 of those orders came from North American airlines, including Canadian airlines. In the wide-body section, a total of 426 aircraft were ordered, out of the total 3,941 throughout Airbus’ history.
But securing crucial cash flow during the COVID-19 crisis, when almost every customer wants to defer their deliveries due to their lack of cash, is vital to the manufacturer.
An intake of aircraft
The two manufacturers have to face a harsh reality, as the pandemic ravages the aviation industry from the inside out. As airlines are unable to fly their full networks and passengers are unwilling to travel, whether it would be due to the associated risks or economic uncertainty, the result is that air transport companies are bleeding cash hard.
As a result, Airbus managed to deliver 196 during H1 2020, compared to 2019’s result of 389. For Boeing, which is in an even deeper crisis due to the situation with the 737 MAX, the COVID-19 crisis could not come at a worse time. In H1 2020, 70 aircraft left Boeing’s factories, while a year earlier, deliveries amounted to 239.
Nevertheless, a bright spot for Airbus was the fact that some U.S. airlines are still keen to take in deliveries. For example, JetBlue (JBLU) happily took in four new Airbus A321 aircraft throughout the year, three of which were delivered from March 2020 onwards, planespotters.net data shows. This is despite the fact that in Q1 2020, the New York-based airline negotiated with Airbus to revise its delivery schedule, resulting in a $1.1 billion capital expenditure reduction through 2022. It expects to take a further five new aircraft from Airbus, including four A321neos and one A220.
All four were delivered from Hamburg, meaning three out of the four were suspect to a 10% tariff. The amount increased to 15% effective March 18, 2020, meaning one of JetBlue’s (JBLU) newest aircraft was suspect to the 15% tariff, announced by the USTR in February 2020.
In Q1 2020, JetBlue (JBLU) spent $314 million on capital expenditures and a further $53 million on pre-delivery deposits for flight equipment, notes its Securities and Exchange Commission (SEC) filing from May 8, 2020. While the $314 million was spent on its restyling program and other investments, according to JetBlue’s (JBLU) investor presentation, if we were to assume that its whole capital expenditure was related to aircraft purchases, a 5% hike would increase its expenditure by $15.7 million, in a quarter where the company’s net loss was $268 million.
However, its contractual obligations for flight equipment purchases in 2020 amount to $0.9 billion, without including seven A321neos that were delayed due to the production issues at Airbus’ Hamburg, Germany plant.
Delta Air Lines is one other Airbus customer happily taking in aircraft from the manufacturer, including wide-bodies. In 2020, Delta took in eight new aircraft from Airbus: three Airbus A220, four Airbus A321 and one A330neo.
Delta, however, has been trying hard to avoid import duties. For example, its newest A330neo (registered N405DX) has only been cruising between Seattle-Tacoma International Airport (SEA) and Asian destinations, namely Tokyo’s Haneda International Airport (HND) and Seoul Incheon International Airport (ICN) in South Korea. Presumably, if the jet does not operate a domestic leg, it would avoid its import duty, reported PaxEx.aero.
Nevertheless, if there was a time to solve the 14-year-long tariff dispute over subsidies to aircraft manufacturers, this would be it. As both members of the duopoly are seeing their businesses crumble in front of their eyes, it is in the best interest of the two to reduce any possible extra costs borne by airlines, who themselves want to limit their cash expenditure.
“Especially under the current economic circumstances, the EU believes that it is in the mutual interest of the EU and the US to discontinue damaging tariffs that unnecessarily burden our industries and agricultural sectors,” stated a press release issued by the European Commission (EC) regarding Airbus’ agreement with France and Spain.
However, the Union is “ready to fully avail itself of its own sanction rights,” according to the EC’s Trade Commissioner Phil Hogan, placing tariffs on numerous products manufactured by businesses located in the United States, including commercial aircraft.
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