Time For the U.S. to Consider a Bit of Launch Aid for Boeing
How some public assistance can help get America's vital but beleaguered commercial aircraft industry back in the air.
Boeing, once a leading example of American engineering excellence and manufacturing skill, is in serious trouble.
Boeing’s long-standing reputation for building quality planes has been damaged by the 737 MAX’s crashes and groundings, the well-documented difficulties in the 787 Dreamliner line that forced the company to accumulate an inventory of hundreds of planes while waiting for FAA approval, and more recent failures of factory quality control.
No quick fix is in sight. Boeing’s product lineup is also now dated—it has not launched an all-new design since 2004. As aerospace analyst Richard Aboulafia noted on Odd Lots, a generation of Boeing engineers will never have designed a plane from scratch. Its cash cow—the latest update of the 737, a plane that first flew in the 1960s—sells at a major discount to its competitor, the Airbus A320.
Indeed, the main selling point of the 737 series is that there are no comparable Airbus aircraft available for sale until the 2030s. Boeing doesn’t currently have a jetliner offer in the “middle market”—leaving this lucrative niche to Airbus. And the current reality is that Boeing has no current plans to launch a new plane. Its departing CEO has said that he didn’t see an all-new plane this decade.
Boeing’s financial position is also far weaker than that of Airbus. It has over $52 billion of debt on its balance sheet, and net debt of over $35 billion. Airbus is in a much better position, both commercially and financially, with only €15 billion in debt and €25 billion in cash. Boeing’s decision not to take government aid during the pandemic because it didn’t want to take on a related commitment to maintain salaries for its workforce has proven a financial and operational mistake, contributing to the company’s difficulties with maintaining the skilled workforce needed to safely build planes.
To right the corporate ship and regain a reputation for competence, Boeing needs a new design to show that it remains capable of building the world’s best airplanes. But Boeing’s capacity to afford the $15-20 billion it takes to develop a new clean sheet design is unfortunately an open question.
Boeing’s new CEO and management team accordingly need to make a set of critical, bet-the-company type decisions.
Even in its current weakened state, Boeing still matters. It has long been the United States’ biggest exporter and the anchor of the nation’s civil aviation manufacturing ecosystem. Those parts manufacturers and suppliers also help support the production of military equipment, particularly aircraft. Any startup aerospace company also would need to draw on the same supply chain that Boeing uses—competition would develop inside the sector, not from the outside. It’s easier to revitalize an existing industry than to create a new supply chain from scratch.
Put simply, the United States has a stake in Boeing’s success.
As a concrete reflection of Boeing’s importance to the broader economy, the U.S. government should be prepared to co-finance a new Boeing model, with risk-sharing in which the U.S. government gets a stake in the success of the new design in return for its financial support. And Boeing needs to swallow its pride and accept that it now needs what aviation insiders will recognize as “launch aid,” or—in dry European bureaucratic jargon, repayable launch investment.
A bit of history: launch aid was the tool the governments of France, Germany, Spain, and the UK—but not Italy, which is a Boeing supplier— used to support the development of the current Airbus family of jets. Boeing has long viewed this launch aid as an unfair subsidy, and, after many years of litigation, the WTO agreed. The U.S. has a suspended right to impose $7.5 billion of tariffs on European goods to offset the damages created by European launch aid. The EU’s counter litigation against Washington state subsidies generated an also suspended right to put tariffs on $4 billion of U.S. exports.
Both the U.S. economy and the civil aviation industry have evolved since the original dispute with Airbus began back in the 1980s. The two aircraft central to Boeing’s case (the A340 and A380) are no longer in production. China is emerging as a potential new competitor— backed no doubt with far more state support than Airbus ever received, even if China’s subsidies have not been disclosed.
And the U.S. government is no longer a paragon of industrial policy purity. Large subsidies have been offered to other key sectors—most notably semiconductors and clean energy production. Indeed, many of these subsidies are outright grants—not loans that offer the government the chance to recover its money if the firm succeeds. It is now common for the government to pick up a large share of the cost of a project—say a new semiconductor “fab”—without getting any of the potential upside to the project.
In fact, the European launch aid model has several features that are worth considering. As it evolved, launch aid was typically limited to a defined share—say, a third—of the research and development costs of a new aircraft. As a result, the company itself has to put up the majority of the funds. Launch aid also involved a reasonably symmetric balance between risk and return. If an aircraft backed by launch aid succeeds, the government gets its money back with interest and an ongoing share of sales. Of course, if the model doesn’t succeed—not enough planes are sold to recoup development costs—the government doesn’t get paid back in full. EU governments have made money on the A320, the A330, and the A350, but lost money on the A340 and the A380.
The case for rebalancing the American aerospace industry with a bit of launch aid to offset the legacy of European support for Airbus is particularly compelling right now. Boeing currently risks falling ever further behind the industry leader without any plans to launch a new plane. Sustaining a culture of engineering excellence takes more resources—and in Boeing’s case, there is a real argument that the company can only rebuild its reputation for engineering and manufacturing excellence with a new plane.
Launch aid is, of course, a subsidy. No commercial bank offers a comparable product. But it actually isn’t much of a subsidy, and it would be linked to a clear deliverable: the accelerated development of a new plane. It has true risk-sharing. Any new plane should be designed to run on sustainable aviation fuel—the bridge civil aviation industries need as part of the green transition.
Frankly, there should be funds available to launch two planes, so if a competitor can raise two-thirds of the cost of a new plane, it would get its chance to add competition to the sector.
Government help tied to investing in a future green(-ish) plane would reward Boeing for taking a commercial course that has substantial spillovers to the broader U.S. economy. Acting proactively, before Boeing enters such a steep downward spiral that guts its capacity to foot the majority of the cost of developing a new aircraft, has much to commend it. Not acting preemptively creates a risk that the main challenger to Airbus in the 2030s will be a state-owned or state-backed Chinese firm.
There is, of course, reluctance to admit that a policy which the U.S. has long criticized and challenged in the WTO actually has any virtues. But compared to the subsidies China provides the C919, its own narrow-body jetliner, or the gifts now commonly handed out through the tax code to support strategic sectors, launch aid provides a better balance between downside protection for the firm and upside for the government.
The real debate shouldn’t be over the tested launch aid model. It should be over what additional changes are needed at Boeing to right the ship and reestablish its reputation for design and manufacturing excellence. But any revitalization at this stage has to be about more than making safe 737s and 787s. It needs to include a plan that lets Boeing once again compete for technological leadership.
Brad W. Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations (CFR), where he focuses on global trade and capital flows, financial vulnerability analysis, and sovereign debt restructuring.
Yikes … Take a 15-20 billion dollar problem, add “free money”, and turn it into a 100 billion dollar gravy train. No thanks.
From Former Congressman Peter DeFazio and chairman that led the investigation of the Max disaster. Before this is even considered all the McDonnell Douglas and GE Harry Stonecipher clones need to go from Boeing management. As Stonecipher said years ago Boeing is an engineering company and I will make it a business. He and his acolytes did. When a major American airline told former Ceo Mullenberg in 2010 they were going all Airbus unless they could match fuel consumption and no pilot training. Mullenberg scrapped the work on a new design and fatefully decided to put larger engines on an obsolete airframe leading to the max tragedy. His successor Calhoun with his BA in accounting made the stock ticker the most important aspect of Boeings work disastrously outsourcing and rushing planes through production. Yes Calhoun is finally leaving (I expect with a similar golden parachute to disgraced Mullenberg $63million) with no sense of urgency - end of the year. Unless the Board cleans house or perhaps the stockholders clear out the incompetent board they should not get a penny of taxpayer money.