Washington is set to make good on its pledge to retaliate on European Union (EU) goods, including aircraft, in the long-running jet subsidy case. Following the penalty award by the World Trade Organization (WTO) arbitrator, the U.S. announced it will slap 10% tariffs on European-made aircraft as well as 25% duties on other industrial and agricultural products from the EU. Airbus together with its U.S. based customers have expressed deep concerns over the impact that trade sanctions will have on the aviation industry and airlines’ businesses.

On October 2, 2019, the WTO issued its decision on the amount of harm EU subsidies has caused the United States and the level of countermeasures the U.S. may request in the case. As anticipated, Washington was given the go ahead to impose tariffs on $7.5 billion worth of EU exports annually as punishment for the alleged illegal government subsidies to Airbus.

The U.S. President Donald Trump, on his official Twitter account, hailed the WTO ruling as a “nice victory”: “The U.S. won a $7.5 Billion award from the World Trade Organization against the European Union, who has for many years treated the USA very badly on Trade due to Tariffs, Trade Barriers, and more. This case going on for years, a nice victory!”.

The Office of the United States Trade Representative (USTR) was quick to announce on October 2, 2019, that it will be imposing tariffs of 10% on large civil aircraft and 25% on agricultural and other products from the EU “at this time”, stating that “the U.S. has the authority to increase the tariffs at any time or change the products affected”.

The USTR has drawn up a target list of $25 billion worth of EU items it could select from and states that the bulk of tariffs – set to take effect on October 18, 2019 – will be applied to large Airbus aircraft made in France, the UK, Germany and Spain – the four Airbus consortium countries and EU member states cited in the U.S. case before the WTO. 

“For years, Europe has been providing massive subsidies to Airbus that have seriously injured the U.S. aerospace industry and our workers. Finally, after 15 years of litigation, the WTO has confirmed that the United States is entitled to impose countermeasures in response to the EU’s illegal subsidies,” U.S. Trade Representative Robert Lighthizer said in an official statement.

“Accordingly, the United States will begin applying WTO-approved tariffs on certain EU goods beginning October 18. We expect to enter into negotiations with the European Union aimed at resolving this issue in a way that will benefit American workers”.  

The U.S. says that the $7.5 billion tariff figure was calculated based on WTO findings, representing the harm that illegal government aid for Airbus caused on sales of Boeing large civil aircraft, as well as, impeding exports of Boeing large aircraft to the EU, Australia, China, Korea, Singapore, and UAE markets. 

Implications across manufacturing

Airbus has responded to the WTO decision on October 2, 2019, stating that the imposition of tariffs on EU-made aircraft and/or components will create “insecurity and disruption” to the aerospace industry as well as the broader global economy.

“Airbus will continue working with its US partners, customers and suppliers, to address all potential consequences of such tariffs that would be a barrier against free trade and would have a negative impact on not only the US airlines but also US jobs, suppliers, and air travelers,” said Airbus CEO Guillaume Faury in an official statement. Airbus is urging the U.S. Administration and the EU to find a negotiated settlement to the dispute to avoid what it says will be a “serious damage to the aviation industry”.

We are concerned about the detrimental impact aircraft tariffs will have on the ability for low-cost carriers like JetBlue (JBLU) to grow and compete, which will harm customers who rely on us to offer competitive, low fares, - spokesman for JetBlue (JBLU)

The European Union has drawn up its own list of $20 billion worth of U.S. goods, including imported Boeing aircraft, it seeks to tariff in a subsequent case before the WTO. The trade watchdog is due to determine the amount of these countermeasures the EU can impose on U.S. products in the coming months. Airbus maintains that the sanctions on both sides “will severely impact US and EU industries, putting high costs on the acquisition of new aircraft for both US and EU airlines”.

Airbus states it sources about 40% of components and materials from U.S. suppliers, totaling $50 billion in spending in the last three years since 2019. In addition, the European plane maker’s U.S.-based operations support 275,000 American jobs. If tariffs were to be imposed on aircraft parts, it would hurt Airbus’ production at its Mobile, Alabama, site, resulting in higher costs and the loss of U.S manufacturing jobs, since Boeing also uses European-made plane parts in its U.S. production.

However, according to a report by Reuters, the new 10% tariffs will not hit Airbus’ Alabama plant, as semi-finished fuselages and wings are exempted from the USTR’s target list. “Earlier today [October 2, 2019], we received confirmation from Airbus of very positive news that parts and components used at the final assembly plant in Mobile will not be subject to tariffs,” George Talbot, spokesman for the city of Mobile, was quoted as saying by the news agency. Airbus produces its wide-body planes in Europe, while its single-aisle jets are built both in Europe and at the Mobile plant (namely, the A320s and the A220s).

While we are pleased that aircraft production and deliveries from Airbus’ Mobile, Alabama plant will not be affected, the proposed 10 percent tariff on aircraft from the EU that are already under contract for purchase is just an unfair tax on U.S. consumers and companies, – Delta spokesperson

Implications across the airline business

U.S. airlines operating Airbus aircraft have spoken out in tandem against the tariffs, suggesting the sanctions would eventually result in higher cost of travel as well as cut into profits. Airlines order planes years in advance, which means that switching contracts to another supplier would be very difficult. To compensate for the costs, carriers could increase fares. Airlines may also urge the plane makers to pay the tariffs, contrary to the norm, as Boeing and Airbus are directly involved in the subsidy dispute, as CNBC writes.

All three largest U.S. carriers have Airbus planes in their massive fleets. According to the latest figures by the European manufacturer (as of August 31, 2019), American Airlines (A1G) (AAL) operates 168 Airbus aircraft in both single-aisle and wide-body categories, with another 114 A321neo jets on order. United has 177 Airbus planes in its fleet, all single-aisles (the A319ceo and A320ceo), and has ordered 45 A350XWBs (the A350-900).

By far the most important U.S. customer for Airbus is Delta: the airline operates 292 Airbus jets and has around 200 planes on the way, including a total of 137 A321s in both ceo and neo versions, as well as, 32 A330-900s and 12 A350-900s ordered for its long-haul wide-body fleet.

“While we are pleased that aircraft production and deliveries from Airbus’ Mobile, Alabama plant will not be affected, the proposed 10 percent tariff on aircraft from the EU that are already under contract for purchase is just an unfair tax on U.S. consumers and companies,” a Delta spokesperson said in a statement to AeroTime. “We hope that the Administration and the EU are able to resolve this 15-year trade dispute in a manner that respects existing contractual rights.”

Delta has provided a lifeline for the A220 program both in the U.S. and worldwide. In October 2018, the airline became the first in the U.S. to take delivery of the A220. The first A220 built in the U.S., an A220-300, is also destined for Delta, scheduled for delivery in the third quarter of 2020. Currently, the Atlanta, Georgia-based carrier has an order for 23 A220-100s and 50 A220-300s.

Low-cost airlines, such as JetBlue (JBLU) and Spirit, which both fly Airbus single-aisle aircraft, may face even bigger hardships as a result of the sanctions, in efforts to remain competitive and continue to offer low fares. JetBlue (JBLU) has operated exclusively the A320 and A321 jets (as well as Embraer 190s), but is ready to introduce 70 A220s (A220-300s) and 84 A321neo into its fleet. Meanwhile, Spirit flies the A319, A320, A321 (all in the “ceo” versions), and has placed an order for 30 A320neos.

“We are concerned about the detrimental impact aircraft tariffs will have on the ability for low-cost carriers like JetBlue (JBLU) to grow and compete, which will harm customers who rely on us to offer competitive, low fares,” a spokesman for Jetblue told AeroTime. ”As we wait for more information on these tariffs, JetBlue (JBLU) will continue to work with U.S. carriers and manufacturers to advocate for a resolution that would help avoid the negative consequences tariffs could have on customers and commercial aviation in the U.S.”