Executive Summary
Airbus and Boeing have constituted a duopoly in the large jet airliner market since the 1990s, leading to fierce competition. Boeing is an American company while Airbus began as a consortium of European aviation. The two are presently facing issue that tarnish their political, legal, and ethical reputations. Airbus argues that Boeing has received over $16 billion from the US government in addition to help from countries like Japan. The U.S. fires back arguing that since 1992, Airbus has been receiving EU government loans. Boeing’s scandal with Lockheed and the discovery of wing cracks in the Airbus A380s have damaged both companies’ ethical reputations. The following recommendations will ensure that, while Boeing and Airbus compete in the commercial airline industry, their actions will be ethical and legal, while adapting within the current cultural and political bounds of the global market.
Introduction
Boeing: the world’s largest aerospace company
Since its foundation in 1916 in the Puget Sound region of Washington State, Boeing has become the largest aerospace company and a leading producer of military and commercial aircraft. Boeing’s military aircraft come equipped with satellite, missiles, launch vehicles and advanced information, and communication systems. The number one U.S. exporter have about 160,000 employees across the United States and in 70 countries, making it one of the most diverse and talented companies that thrive through their innovative workforce.
Airbus: the fastest growing aircraft manufacturer
Airbus is a consortium of European aviation companies in an attempt to compete with their larger American counterparts. Airbus was officially formed in 1970 after France’s Sud-Aviation agreed to combine with Germany’s Deutsche Airbus. The name Airbus was chosen because it was a term used by the airline industry in the 1960s to refer to commercial airplanes and because this term was acceptable for the French Linguistically. Airbus and Boeing’s management must understand the importance of the ethical, legal issues, and social responsibility of their organizations.
Boeing has been in the market for much longer than Airbus, but the sheer fact that Airbus is considered Boeing’s competitor after only a few short years is a remarkable feat. Even though Boeing and Airbus aircrafts do not necessarily compete head to head with planes of the same specifications, if Boeing had the 747, Airbus created the A380, a bigger aircraft, creating a never-ending cycle in which the two companies constantly compete by filling in the shortcomings of their competitor's previous aeroplane.
Key issue 1: Political and Legal
Strategic trade theory / strategic trade policies
The political and legal aspect is especially crucial to conducting a business on an international level. Firms involved in global business must be familiar with and obey not only the laws of their home country, but also the local laws of each country in which they do business, and international laws. From a different perspective, governments may also utilize different regulations, such as exchange rates, interest rates, taxation, and subsidies, to create an environment more favorable for conducting businesses and thus increasing one country’s competitiveness in the global market. This concept is known as strategic trade theory, which suggests that strategic intervention by governments in certain industries can enhance their odds for international success. In the following section, we will discuss the use of strategic trade policies and government aid in the aircraft industry and how it has escalated into a tense feud between Boeing and Airbus for years.
Boeing’s aid from the US government
As recently as eight years ago, Boeing was a commercial aviation giant with just a relatively small defense business. Boeing is now one of the nation’s leading defense contractors, whose operating division, Boeing Defense, Space & Security (BDS), accounts for 53% of the company’s total revenues in 2011 (The Boeing Company, 2012). The close relation between the US government and Boeing based on these defense contracts allows the latter to receives different forms of support from the US federal and state governments.
Over the last two decades, Boeing has received over $16 billion in federal government research and development (R&D) subsidies from NASA and Department of Defense programs and contracts as well as funds from the Department of Commerce and the Department of Labor for in-depth research and development on composite materials and advanced software tools that could help the company manufacture fleets of lighter, faster, and more efficient aircrafts (Airbus Americas, Inc., 2010).
Although originally received for technological improvement in the field of military and space, these subsidies have become an unintended source of benefit to Boeing’s civil aircraft division. The company was able to effortlessly transfer the technology used to the development of composite materials with federal R&D subsidies and apply it to its commercial aircraft production, which in turn increased the sales and revenue of those planes. Boeing also took advantage of the Department of Defense’s testing facilities to work on the design and wings of many of its civil planes, including the B787 Dreamliner, a highly popular choice for many airlines due to its fuel efficiency.
Boeing’s aid from the Japanese government
Aside from the US government, Boeing has also sought help from other countries due to the rapidly growing trend of globalization. Statistics provided by The Economist in 2005 points out that “Boeing planes are becoming progressively more Japanese” (How Japan learned to fly, 2005) as Boeing began broadening its search for subsidies and the Japanese government has been “willing to pay in order to get a share of an industry long closed to its manufacturers”. The following graph illustrates the increasing share of Boeing’s aircraft manufactured in Japan from 3% in 1960 to 70% in 2005.
In order to meet Boeing’s needs in designing the B787 Dreamliner, the Japanese government and the Japanese Aircraft Development Corporation provided the company with $1.6 billion worth of launch aid after a year-long negotiation and Boeing’s risk-sharing partners have received financing from the government of up to 70% of the R&D costs (How Japan learned to fly, 2005).
Boeing’s subsidies deemed unfair
It is clear that all the government aid we have discussed above have created an unfair advantage for Boeing in the global market, which eventually led to multiple complaints filed by the European Union (EU) on behalf of Airbus to the World Trade Organization (WTO). The rulings of WTO earlier this year in March (European Commission, 2012) confirms that certain subsidies to Boeing have damaged the interests of the EU and Airbus, notably:
R&D funding granted by NASA to Boeing – US$2.6 billion;
R&D funding granted by the US Department of Defence to Boeing – up to US$1.2 billion;
Foreign Sales Corporation export subsidies – US$2.2 billion; and
Washington State tax breaks for the period of 2006-24 – around US$0.9 billion
Of course, Boeing would not go down without a fight and the company would respond to many counts of its competitor’s accusations by filing even more complaints, turning the scandal spotlight on the european consortium.
Airbus - the not-so-innocent victim
The series of lawsuits leading to the recent rulings of the WTO can be traced back to 2004, when the EU authorities claimed that Boeing has received over $19 billion of illegal federal and state subsidies between 1989 and 2006. What would come as a surprise to Airbus was that its plan has backfired tremendously: the WTO has only deemed 34% of the amount suggested by the EU as “illegal,” while the counter-complaint filed by Boeing in the same year has revealed a shocking figure of $18 billion worth of subsidies received by Airbus from European governments.
An example of infant industry argument
EU’s assistance to Airbus is indeed a perfect example of the infant industry argument, promoting temporary support to young domestic industries which are crucial to the general well-being of the people of the country and which cannot compete with its giant competitors for want of level playing field. In fact, since 1992, Airbus has been receiving government loans, which have covered up to one-third of the development cost of new planes, including the A380 and new versions of the widebody A340. The EU says $5.2 billion in such loans are now outstanding and Airbus has already repaid $6.5 billion. Boeing contends that the deal gives Airbus an advantage by lowering its commercial risk, making it easier to obtain financing.
One of the cases filed by Boeing in 2011 was the WTO dispute in EC—Aircraft, which has been both lengthy (six years from the first consultations request to the circulation of the Appellate Body report) and complex (in terms of both legal and factual issues). In this dispute, the United States, on behalf of Boeing, challenged the legality of alleged subsidies by the European Union and certain member states to the various Airbus companies under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). The U.S. complaint alleged "more than 300 separate instances of subsidization, over a period of almost forty years, by the European Communities and four of its member States, France, Germany, Spain and the United Kingdom, with respect to large civil aircraft developed, produced, and sold by the company known today as Airbus SAS (World Trade Organization, 2012).” As reported by the American Society of International Law, the Panel grouped these measures into five general categories: Launch Aid / Member State Financing
Design and Development Financing Loans
Infrastructure and Related Grants
Corporate Restructuring Measures (Debt Forgiveness, Equity, and Grants)
Research and Development
Having determined which of the measures challenged by the United States are specific subsidies, the panel proceeded to evaluate whether these subsidies to Airbus cause adverse effects to the US interests. With regard to “financial contribution,” the Panel focused on issues of “direct and potential direct transfers of funds” and “provision of goods and services ‘other than general infrastructure’” under Article 1.1(a)(1), which have established that a "benefit" exists if government financial contributions are provided on terms more favorable than those available on the market (Lester, 2011).
Finally, the Appellate Body confirmed in May 2011 that EU subsidies to Airbus cause adverse effects to Boeing; and recommended that the subsidizing Member granting each subsidy found to be prohibited withdraw it without delay.
The endless cycle
Soon after the six-month compliance deadline expired, The United States said that it had carefully reviewed the European Union's report on compliance but, in its view, the steps taken by the European Union did not bring it into compliance with the Dispute Settlement Body(DSB)'s rulings. Therefore, The US initiated proceedings against the EU and also requested the DSB authorization to retaliate against $7-10 billion per year in imports of EU goods and services. In April of this year, the DSB examined the EU‘s alleged failure to comply with the May 2011 Appellate Body report in the EC—Aircraft case, which had found that EU subsidies to Airbus breach EU WTO obligations. On August 13 2012, the Chairman of the panel informed the DSB that the panel, after consultations with the parties, had adopted a timetable in which it expected to issue its report in 2013.
Recommendations
What we have discussed so far is an indication that the controversy over government funding has unnecessarily cost both Boeing and Airbus valuable resources that could have been utilized to make their airplanes safer, more fuel efficient, or more reliable. Boeing and Airbus also owe an explanation to their stockholders for misusing their hard-earned investments.
It is obvious that Boeing and Airbus have matured enough over the decades to be able to stand on their own strength without an immoderate amount of financial support from their governments. The practical aspect of the solution is to figure out a way to limit subsidies to these well-established businesses. Although it would be the easiest way to go by eliminating government subsidies once and for all, jeopardizing the technological improvement in the aircraft industry would not be a smart decision.
WTO should act as the middleman between these two companies and pass new rules that transparentize government subsidies for easier monitoring and regulation. On top of that, the organization should also restrict the amount of maximum subsidies a company can receive so that it is negatively correlated to the seniority of that company.
Another to ease the tension between the two companies with regards to the subsidies issue is for them to expand their markets. With the traffic growth between advanced and emerging markets, the companies can focus more on countries like India and Germany whose demand for commercial aircrafts have been spiking. Boeing and Airbus will then be able to rely less on government subsidies and instead be funded by the private sector using the profits generated from increased sales.
Key issue 2: Culture and Ethics
Culture, Ethics and the Code of Conduct:
Culture has brought together people of the same country and also region together for millions of years and continues to do so, but also clearly highlights the differences between two different cultures. In my own words, culture is defined as the different mindset of a group of people compared to another group. As defined in Global by Geert Hofstede, culture is “the collective programming of the mind which distinguishes the members of one group or category of people from another (Peng, 2012).” Ethics is the principles, standards, and norms of conduct that govern individual and firm behavior (Peng, 2012). Legal issues are sometimes viewed as ethical but can also be unethical in the views of the same society. Many companies have what is called a “code of conduct”. They use this to have set rules and beliefs for a company while dealing with global business where what may be ethical to the company, may not be ethical with the foreign companies they are dealing with. Ethics is dealt with on a formal level and has led to many issues for companies when they seem unethical in local and global business.
Boeing’s scandal with Lockheed
Whether something is ethical or unethical can be disputed, but whether something is legal or not cannot be questioned (Peng, 2012). Boeing is the world's largest commercial aircraft maker and the nation’s third largest defense contractor (Pae, 2003). Boeing faced a lawsuit by Lockheed Martin (LM), claiming that they have used documents belonging to LM in order to win a contract deal with the US Air Force. The multibillion dollar US Air Force contract was for a purchase of military rockets for the Evolved Expendable Launch Vehicle (EELV) program. Boeing won the contract, and that did not sit well with LM and eventually led to the filing of the a lawsuit.
The issue began when a former LM employee released over 37,000 confidential documents to Boeing in 1996. These documents, which included details on how the company would bid for the EELV program, were given and used by three of Boeings employees and were said to be only seen by them. When Boeing became aware of these actions, they fired the three men and shortly after received the lawsuit. LM stated that Boeing could not have won the EELV contract without these documents and took this issue to the court of law in 2003. This was not going to be let go by Lockheed, being the nation's number one military contractor, they deserved to win this deal and Boeing would not have won without LM’s involuntary help that closed the deal.
Once again guilty, Boeing’s ethics questioned
Boeing has faced many issues involving their ethical stance and has tried to erase this view of their company, but too many times the same types of issues return. Another problem they have faced involves an ex-Pentagon officer, Darleen Druyun. She and the CFO of Boeing at the time, Michael Sears, negotiated a deal to hire her on and in return will receive inside information that Druyun had access to while still employed for the Pentagon. Ethics was being abused, corruption is at full effect and any morality is completely forgotten by Boeing leading up to more public awareness of Boeings unethical actions. Druyun faced a nine month sentence after the discovery of her actions and the Pentagon cancelled a $20 billion deal they had made with Boeing for a lease of a number of aircrafts. Boeing also paid fines for their involvement.
Boeing’s future planning
Boeing was not happy with these allegations against them, this has happened more than once and they are not going to let it happen again. After this happened, they made a long and detailed code of ethics so that they would never fall into this issue again. The code of ethics for Boeing was worked on by many members of the company and mandatory classes to learn these company ethics are held every year and are mandatory for all Boeing employees. Facing more ethical issues was the last thing Boeing wanted again. They also worked on globalizing Boeing by opening offices in different countries and hiring locals that are knowledgeable about the culture and the legal regulations of those counties. By hiring locals, they are significantly decreasing their chances of appearing unethical and facing any legal issues from the laws of those countries.
Recommendations
Boeing needs to rebuild their company views and shows that they have learned from their mistakes. Changing the perception that they now have is difficult but can be done. First they must have a manager or employee in charge of every project and department in the company. Groups can sometimes negatively influence each other because of one rotten seed. Having control over all departments and awareness of this watchful eye will decrease the chances of issues. Boeing’s response to ethical issues should follow the accommodative strategy in order to have a better public perception of the company. By doing so, they will build a larger respect than if they were to implement the reactive or defensive strategies. Corruption is another issue they faced and when the company becomes more ethical, the amount of corruption possibility decreases. When Boeing has a more watchful eye and a stronger grip on their company and ultimately their employees, these ethical issues will not appear anymore.
Key Issue 3: Airbus - Cracks in A380 Wings Lead to Cracks Reputation
Airbus has created the largest commercial airplane in the world, the A380 to compete with Boeing’s 747. The comparison below puts this aircraft in perspective (Waugh).
However, this Titanic of the air is recently causing Airbus some issues. Reports of cracks in the wings of the Airbus A380s from Singapore Airlines and Qantas started emerging in January. This led to the call to ground some planes from Australian aircraft engineers. 'We can't continue to gamble with people's lives and allow those aircraft to fly around and hope that they make it until their four-yearly inspection,' said Steve Purvinas, secretary of the Australian Licensed Aircraft Engineers Association (Waugh). Both the airlines and Airbus admitted that the cracks existed, but Airbus continued to insist that this would cause no danger and flights could continue as scheduled. According to Airbus, it is enough to inspect and fix any wing attachment issues during the routine four year inspections. Singapore Airlines, Lufthansa, and Qantas found the cracks on the wings, but agree they were not detrimental to the flight (Waugh). However, engineers are worried about the risk; even if the cracks are miniscule, these aeroplanes are in the air sometimes for more than a day.
Repairing the Wing Cracks
Repairing all the A380s in one go could ground these airlines for up to 8 weeks, but the EADS subsidiary expects the airlines to conduct repairs in steps, claiming this would only add a few days to the overall procedure (BBC). Either way, the repairs are a loss for both the airlines that utilize these aircrafts and Airbus. The estimates for Airbus to repair the mistakes vary, but final estimates reach 500 million euros. Although, Airbus has said they will not pay any compensation during the time the flights are being repaired, reasoning that the flights are still safe to fly (BBC). In May, Airbus finally decided to take an active role by inspecting the cracks. The frequency of inspections has been increased and Airbus has decided to change the design of the wings. It will take at least a year for the new wings to enter the production system, which means that the earliest a new A380 can be completed is in 2014. Also, the new aircrafts will be put through much more rigorous testing during development which may further delay the actual delivery of these aircrafts to the airlines that ordered them. Airbus now also faces loss of reputation and the struggle to patch up their “superior quality” image. While some airlines may be more lenient or forgiving, there are many that are not willing to take the risk with Airbus.
The Roadblocks for Repair
Due to the differing opinions of Airbus, the airlines, and other regulation groups worldwide, there was confusion as to how and when the repairs of the SAS superjumbo would be conducted. According to the European Aviation Safety Agency (EASA), the cracks could cause the wings to detach, which could injure people on the ground. However, Airbus contests that the issue is not critical and repairs would begin next year. The Cologne, based in Germany, is requesting detailed and repetitive inspections. The EASA has issued airlines a 15 month time period to deal with and fix the current issues (Wall). Airbus, the airlines, and the regulating agencies from different countries cannot seem to agree on the criticalness of the issue. Because of differing opinions, the actual time that repairs should take place is an object of disagreement. As of now, EADS has decided to postpone physical repairs until 2013.
The Causes and Recommendations to Fix Them
The CEO of Airbus, Tom Enders, says the attempt to design lightweight materials 10 years ago was the cause. Engineers had worried about the ability of the carbon and metal fusion wings’ ability to withhold high temperatures, but Airbus had to take the risk and use technology to withstand in this competitive market (Hepher). Airbus should have better risk management system to anticipate or avoid negative events. They should also utilize scenario planning so when these events take place, they will have multiple backup plans. For a multinational corporation, communication is essential. The A380s are assembled in Toulouse, but the wings are built in Broughton, Wales (Waugh). If there were concerns with the design of the wings in Wales, that issue should have been detected and reported back to headquarters. Airbus needs to practice proactive response strategies. Instead of backing away from the blame or procrastinating in repairs, Airbus should take a proactive role and fix the issue immediately. This will not only show their responsibility and reliability, but it will boost their overall image. When participating in the competitive commercial aircraft market, the guaranteed safety of the aircraft is most important. Airbus should have implemented stricter regulations and more inspections and tests during the development of this new wing type. This will ensure that future losses do not occur.
Conclusions
To summarize, both Boeing and Airbus had their fair shares of problems in the political and legal as well as the cultural and ethical aspects of their businesses. Fortunately, the former issues can be effectively resolved with the help of WTO as the middleman to pass new rules that help limit and monitor the use of government subsidies for mature businesses. The two companies should also focus more on generating resources from their operations in the private sector to reduce the chance of misusing government funds. In regards to the culture and ethics, Boeing and Airbus should ensure all employees’ awareness and understanding of the Code of Ethics, encourage communications between departments, and enforce strict regulations to eliminate unethical behavior in the future.

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