EADS, Subsidies & Free Markets
CENTER FOR SECURIT Y POLIC Y
T H E O C C A S I O N A L PA P E R S E R I E S
EADS/Airbus Government Ownership,
Protection, Intervention & Subsidies
THE EFFECT ON AMERICAN FREE ENTERPRISE AND NATIONAL SECURITY
Septrember 1, 2010
1
Copyright © 2010 The Center for Security Policy
All rights reserved. This Center for Security Policy Occasional Paper, “EADS/Airbus Government Ownership, Protection, Intervention & Subsidies” is published in the United States by
the Center for Security Policy Press, a division of the Center for Security Policy.
THE CENTER FOR SECURITY POLICY
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EADS, Subsidies & Free Markets
CONTENTS
Foreward: Defending Freedom with Free Enterprise 5
Executive Summary7
EADS/Airbus Government Ownership, Protection, Intervention & Subsidies
EADS/Airbus Government Ownership9
EADS/Airbus Government Control10
EADS/Airbus Government Protection12
EADS/Airbus Government Intervention 14
EADS/Airbus Government Subsidies 17
WTO Ruling Against EADS/Airbus Subsidies
18
The WTO Process and Ruling Insights
20
The European Communities’ WTO Case Against the U.S. 21
Conclusion 22
Appendix: Case Studies of Prior EADS Tanker Selections25
United Kingdom25
Australia27
United Arab Emirates28
Saudi Arabia28
United States: The Cancelled 2008 KC-X Tanker Competition
29
Endnotes31
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EADS, Subsidies & Free Markets
FOREWARD:
DEFENDING FREEDOM WITH FREE ENTERPRISE
P
rior to 1941 the U.S. military relied on its government-owned arsenals and
shipyards for much of its
procurement needs. Since
vate companies are, by nature, better suited
to adjust to customers’ needs and, through
fair competition, to provide a better product.
then, the Department of
Defense has transitioned to a predominant
reliance on private commercial arms-makers
for its needs during both war and peace.1 This
Post WWII belief in private enterprise was
so strong that, during the height of this transformation in 1960, the Air Force procurement Chief testified, “All things being equal,
the man without the Government facility
will get the award.”2 The privatization of U.S.
military procurement since World War II was
not simply an exercise in the principles of
free enterprise; it was a recognition that pri-
cost to the government was specifically
rejected as a justification for their continued support. Continuation of these government owned “businesses” was viewed
as an “injury to the vitality of the whole
private enterprise system.”3 As a 1956 Budget Bureau memorandum to President
Eisenhower stated, “Above all, the decision whether to continue or discontinue a
Government activity solely on an apparent
cost basis runs counter to our concept that
the Government has ordinarily no right to
compete in a private enterprise economy.”4
The possibility that governmentowned companies might provide a lower
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That belief in free enterprise, free
market competitors and fair competition is under assault today. The European
Aeronautic Defense and Space Company
(EADS)—an enterprise owned, controlled,
and protected by foreign governments—
has been welcomed to the U.S. defense
market with open arms by the Pentagon
and may be selected for U.S. Government
contracts as a result of European government subsidies and activities that enable
it to underbid truly private companies.
To allow EADS to compete for
U.S. Government contracts, without additional conditions, requires that U.S. officials
overlook past years of documented corrupt
practices, as well as current anti-free market
activities that have allowed EADS and its subsidiaries to develop their products in the first
place. If American policy makers allow this to
happen, they do so in direct contradiction of
past and current national security strategy. ■
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EADS, Subsidies & Free Markets
EXECUTIVE SUMMARY
P
resident Obama’s new
National Security Strategy begins with a pledge
of American leadership
and the assertion that “the
industry. The WTO ruling on June 30, 2010
flatly stated that Airbus’ success wouldn’t
have been possible without over $15 billion
in illegal launch-aid loans and $5 billion in
other illegal support from European govern-
center of [its] efforts is a
commitment to renew our economy, which
serves as the wellspring of American power.”5
If this commitment is to be taken at face value, the recently released World Trade Organization (WTO) ruling on large Commercial
Aircraft (LCA) should be cause for action.
The WTO has ruled that for over forty years
the European government owners of Airbus
and its later formed parent the European
Aeronautic Defense and Space Company
(EADS) have been have been undermining
that wellspring and harming the U.S. aviation
ments. The impact on American workers
and businesses for the last decade has been
lost production, lost profits and lost jobs.6
The full extent of EAD/Airbus activities undercutting free enterprise goes well
beyond the WTO ruling and the topic of government subsidies it covers. EADS was created, and remains tightly controlled, by the
French, German and Spanish governments.
These governments, along with that of the
U.K. in the original EADS partnership, have
a direct financial interest in EADS. As a result, these nations regularly protect EADS—
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and its subsidiary Airbus— from competition, interfere in the market on its behalf
and provide it launch aid and research grants
conditions comes at great cost to our prosperity and our overall national strength.
that are prohibited under World Trade Organization agreements. In addition, EADS/
Airbus’ owners regularly employ prohibited
political pressure and inducements such as
airport landing rights in their sales tactics.
concerns raised in this paper are in addition to those based on EADS/Airbus’ history of questionable business practices and
behavior that runs counter to U.S. foreign
and defense policy. A previous Center for
Security Policy paper, EADS: Welcome to
Compete for U.S. Defense Contracts – But
First It Must Clean Up Its Act (online at se-
U.S. Department of Defense (DoD)
officials have stated that government contracts are not jobs programs. However,
The economic and free market
EADS/Airbus is in fact explicitly intended as
a European jobs program created at the expense of U.S. companies and their workers;
U.S. companies are routinely excluded from
European defense contracts. In spite of this
completely overt protectionism, DoD has
refused to take into account these anti-free
enterprise activities that allowed EADS/Airbus to develop its products in the first place.
By overlooking, and in fact rewarding, such
actions the Pentagon neglects to uphold the
President’s pledge to support the economy.
The National Security Strategy calls for an
curefreedom.org),
covers
these
areas.
integration of our economic and military
power, but DoD has shown it is more interested in taking advantage of cost savings
provided by foreign government subsidies.
Our prosperity “pays for our military, underwrites our diplomacy and development
efforts, and serves as a leading source of
influence in the world.”7 This paper concludes that allowing EADS/Airbus to compete for U.S. government contracts without
by contract award conditions that were
highly preferential from the very beginning
of the bidding process. The Government
Accountability Office ruling on the 2008
U.S. Air Force KC-X tanker competition
is also highlighted as part of this review. ■
The appendix included with this
paper is a review of previous EADS tanker
selections. An analysis of these selections
clearly shows that rather than an endorsement of the EADS/Airbus tanker’s ability to
win contracts in a competitive market, there
is instead a pattern of EADS/Airbus taking advantage of non-competitive markets.
These non-competitive market bidding conditions ranged from advantages conferred on
EADS/Airbus by European governments’
subsidy largesse, or advantages conferred
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EADS, Subsidies & Free Markets
EADS/AIRBUS GOVERNMENT OWNERSHIP,
PROTECTION, INTERVENTION & SUBSIDIES
T
EADS/Airbus Government Ownership
view of free market operations and EADS.
he current KC-X refueling tanker contract,
in which the European
Aeronautic Defense
and Space (EADS)
company and its subsidiary Airbus are competing, has been aggressively publicized as an example of the
Airbus was created from an agreement by European governments in the
late 1960s with the express purpose of
competing against the successful American manufacturers Lockheed, McDonnell Douglas and Boeing in the aerospace
industry. From the outset, Airbus, and its
later formed parent company EADS, were
never “private enterprises,” as Americans
understand the term. Instead, they were established as tools of state industrial policy.
free market working as it should. Some
groups have even gone so far as to lobby
Congress not to act on its tanker contract
concerns, arguing any Congressional action
would be anti-free market and tantamount
to “an earmark” for EADS’ American competitor.8 These self-professed champions of
free enterprise and the free market, for whatever reason, have promoted an erroneous
While EADS presents itself as a now
publicly traded company, it is in fact tightly
controlled by the French and German states
through a contractual partnership. The partnership gives 22.46% of the share capital of
EADS to each Daimler AG and Sogreade.
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(Société de gestion de l’aéronautique, de la
défense et de l’espace is owned by the French
state and Lagardère.) SEPI (a Spanish state
ments sustain a massive international company, shielding it from having to face the consequences of true and fair competition. The
holding company) is also party to the contractual partnership and holds 5.48% of the
share capital of EADS. The remaining 49.6%
of EADS stock is publicly traded.9 Of this
publicly traded amount, the sovereign wealth
company Dubai Holding owns 3.12% and 5%
is owned by Russia’s Bank for Development
and Foreign Economic Affairs.10, 11 Government sources have indicated the Russians desire to double their share of EADS to 10%.12
While France and Germany have so far been
results are predictable and, in a free market,
would lead to business failure: inefficiency,
mismanagement, lack of accountability and
red tape. Yet due to the generous subsidies
and preferential treatment of its government
owners, EADS/Airbus—Europe’s original
“too big to fail” conglomerate—continues to operate and even thrive, while doing
great harm to free enterprise competitors.
P
EADS/Airbus Government Control
able to keep Russia from having representation in the EADS directorship there are no
guarantees this will remain so in the future.
olitical influence is also a problem associated with govern-
ment ownership. This is quite
separate from any apprehension
over national security concerns regarding
U.S. military equipment being built by a
foreign government-owned company. Most
Americans would be shocked to learn how
differently the European state-run or statesubsidized industries operate. As the Center for Security Policy’s previous paper on
EADS showed, the state ownership of these
companies can create something of a whirlpool effect; corruption, patronage and cronyism cancels what would be, in a free en-
Government ownership of a company, whether partial or total, is the very opposite of free enterprise. Popular economists,
from Friedrich Hayek (whose works are
enjoying a new popularity) to Milton Friedman, have tried to educate policymakers and
an often more receptive public on the terrible effects of bureaucratic inertia on a nation’s wellbeing. In spite of a recent history
in which the U.S. has experienced the largest
government bailouts in U.S. history, and a
historic expansion of the national debt, the
virtues of free enterprise are still self-evident
to most: competitive businesses survive
or fail by their own skill and efforts. With
EADS/Airbus, a non-competitive set of
conditions prevails, in which several govern-
terprise environment, promotion based on
merit, achievement and productivity. After
fostering this atrophied corporate culture,
the state steps in to do what it can through
subsidies in order keep pace with leaner,
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EADS, Subsidies & Free Markets
Construction de Moteurs d’Aviation (Snecma), where “critics noted that Gallois was
unsuccessful in resolving many … basic
better managed companies. The Financial
Times summed up the situation as thus:
The French and German governments will
have to take some forceful action rather
problems, including an overabundance of
workers, inflexible work practices, protectionist pricing and corporate extravagance.”14
than continue tinkering with [EADS’s]
unsatisfactory structure and governance. If
they finally heed the lessons of the past, the
governments and their hand-picked representatives should acknowledge they pose
too many dangers for a company that has to
respond to the pressures of global competi-
Seeking the view of an old comrade in the
radical student protests of the 1960s, a 2006
BBC profile cited the glowing review of
Gallois by French Socialist leader Francois
Hollande, who said, “He has a sense of duty
tion. They should all get out and let this
to the state and in this company [EADS]
you also need to talk about a sense of duty
to the state and the national interest.”15
company live as a normal, albeit strategic,
private sector enterprise.13
In the case of European governmentowned companies like EADS, the management to date has been able to ignore those
“pressures of global competition” due to
political influence. Decision-making that
should be in the board room shifts inexorably to the “hand-picked representatives” of government bureaucracies.
Many executives of state-run enterprises are appointed by their former colleagues
in government, so it is not surprising to find
Even French President Nicolas Sarkozy—the great hope of Americans and
Europeans supportive of free trade and economic liberalization—does not deviate from
the protectionist mindset of his French predecessors concerning EADS and Airbus. In
2007, he promised his government would
continue the flow of cash into EADS if new
shares were issued, saying, “the French state
will do its duty if there needs to be a capi-
that companies like EADS and Airbus are
led by seemingly unaccountable technocrats. Because of the company’s ownership
structure, politicians have a direct voice in
selecting their representatives on the EADS
Board of Directors. For example, the latest appointee is Louis Gallois, who moved
from Airbus to EADS in 2007. Prior to that
job, he was at another French government
holding, the Société Nationale d’Étude et de
At the heart of Sarkonomics is a contradiction: Mr. Sarkozy promises both to create an
entrepreneurial, risk-taking society and to
protect workers, factories and jobs. When
he was running for president, his campaign
stop of preference was the factory floor,
where he would surround himself with
industrious-looking men in hard hats and
promise never to let France lose its factories,
because, “Once the factories go, everything
tal increase.”16 The Economist, taking stock
of the rhetorical changes in Paris, noted that
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tration’s bent towards nationalizing U.S.
industries. A facile comparison has stated
that “American fosters competition [while]
goes.” He may call himself a liberal but he
also believes in national champions and in
a strong industrial policy to defend them.17
Particularly in France, Airbus, and
now EADS, is foremost of those “national
champions.” France’s dirigiste dealings with
EADS and Airbus have caused constant
wrangling about the precise continental
makeup of the EADS Board of Directors.18
Europe protects competitors.”21 To be clearer: Europe protects its own competitors.
A striking comment representing
European protectionism was made by former European Union Competition Commissioner (EUCC) Neelie Kroes, who went
as far as suggesting specific market shares
for large American corporations. Speak-
At issue is the creation and maintenance of
jobs in Europe, always a competition between manufacturing plants in Germany and
France. A different mix of corporate directors
can tip the scales to one nation or the other,
factoring in which nation has just provided
the most subsidies for a new EADS venture.
ing about Microsoft in 2007, she said, “you
can’t draw a line and say exactly 50 percent
is correct, but a significant drop in market share is what we’d like to see...”22 In a
less protectionist regime, the goal of any
business would be for its product to be the
choice of consumers. If an American company or manufacturer is successful and takes
market share from European competitors,
European Union officials assume a prerogative to impose the market share they prefer.
U.S. Secretary of Defense Robert
Gates has stated that government contracts
are not jobs programs.19 But EADS is in fact
a very explicit European jobs program. Political support in return for maintaining this
jobs program is crucial for re-election for
Sarkozy and his counterparts in Berlin, Brussels, and Lisbon. Even in London, the power
of retaining EADS jobs trumped the Tories’
previous criticisms of Airbus launch aid.20
An abundance of news sources have,
for years, reported on European governments’ subsidies to EADS and Airbus, enabling them to be more competitive against
American aerospace companies. EADS
Chairman Louis Gallois has declared that,
in order to compete, Europe needs to become united and cultivate “a domestic market with alliances in order to create common industrial interests.”23 Commitments
to create a common defense policy to rival
NATO, the co-called European Security
A
EADS/Airbus Government Protection
wide gulf of economic philosophy has traditionally
separated the continents.
Generalizations about Ameri-
can laissez-faire and European socialism
remain true despite the current adminis-
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EADS, Subsidies & Free Markets
and Defense Policy, include the creation of
a common military procurement policy so
that member-states can be both supplier
given the contract valued at $4 billion.27
•• The NH90 medium transport and anti-submarine warfare helicopter was
and customer. The intended outcome is to
edge firms based in the United States out
of the continental market. EADS, “benefits
from closed European defense markets, despite professing a desire for competition.”24
developed with no competition by a
consortium of EADS subsidiaries Eurocopter France, Eurocopter Deutschland, as well as Agusta and Fokker.
The contract is valued at $2.6 billion.28
This aim is no secret. European chauvinism with regard to domestically manufactured goods is well documented. Indeed, in
•• The Scorpion, France’s planned future combat vehicle system was ini-
2004 when the French Ministry of Defense
sought a lease deal for two long-range military transport planes, the tender stated, “the
aircraft proposed must be of European conception.” Those are words quite clear: “No
American planes or companies need apply.”
A brief list of other well-known defense
purchases where EADS’ owners have purposefully kept out U.S. companies includes:
but when Boeing teamed with one of
the French competitors, the French
Defense Procurement Agency applied
pressure until Boeing was dropped.
A suitable French company, Thales,
was the hand-picked replacement.29
tially open to American companies,
•• The nEUROn UCAV (Un-manned
Combat Aerial Vehicle) demonstrator is
being developed without competition as
a collaboration between France, Sweden,
Greece, Italy, Spain and Switzerland. Initial funding was $484 million dollars. If
brought to production, the value of the
•• The Rafale combat aircraft contract for
the French Air Force and Navy was awarded without competition to Dassault and
is valued at more than $40 billion.25
•• The A400M contract was given to
EADS’ subsidiary Airbus without
competition; and seemingly without
need as American built C-17s and C130s provide similar capability. The
contract is valued at $24 billion.26
contract will be in the billions. EADS is
a partner in the Neuron’s development.30
•• France’s infantry combat vehicle replacement program VBCI (Véhicule
Blindé de Combat d’Infanterie) was
awarded without competition to the
French government owned company NEXTER. The value of the
contract is estimated at $4 billion.31
•• The Tiger advanced attack helicopter for European armies was developed without competition. Eurocopter, an EADS subsidiary, was
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None of the above programs has
been cost-effective, but the EADS/Airbus
partners’ national priorities are not about
unless the Czech Republic imposed a higher
tariff on imported Boeing aircraft than on
imports of comparable Airbus aircraft. This
getting the best deal for their money. As
one of Britain’s oldest think tanks has noted, even when a “whole new manufacturing base must be created first…Purchasing existing equipment from America is
always seen as the least favorable option.”32
publicly available report stated, “The Czech
Republic has unilaterally applied a suspension of MFN tariffs levied on imports of 12
civil aircraft products. Despite the Commission’s strong opposition, this exceptional
measure, introduced in 2000, and due to
end in 2001, was prolonged until December 2002. The Czech Republic will need to
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EADS/Airbus Government Intervention
ensure that this tariff suspension will not
be prolonged beyond 2002.” In the same
document, the Commission praised the
Czech Republic for taking steps to quickly
suspend tariffs on imports in other sectors.
ot content with merely pro-
tecting its industry, EADS’
government owners have
used coercion and actively
intervened to ensure other countries purchase EADS and Airbus products. The U.S.
Commerce Department reports that U.S.
aerospace companies have routinely have
lost sales to foreign competitors whose
governments seek to influence purchase
decisions with political or economic pressure. The following examples of EU political intervention and extortion in support
of EADS/Airbus are listed in a 2005 Inter-
Russia: According to various press reports,
the French government sought leverage
over the Russian government approval of
Airbus sales to Aeroflot by offering Russia the use of a space-launch facility, assisting Russia in a visa dispute with the
European Commission concerning Kaliningrad, and easing aircraft noise restrictions for Russian aircraft landing in Europe.
Turkey: Several press articles link Turkish
Airlines’ (THY) purchase of Airbus aircraft,
announced at the July 2004 Farnborough Air
Show, with pressure on Turkey from European governments in connection with Turkey’s
pending accession to the European Union.
According to one article, in June 2004, German Foreign Affairs Minister Fischer told a
member of the Turkish Parliament to “let 80
national Trade Administration report:33
Czech Republic: In a 2002 report on countries seeking accession to EU, the European
Commission admonished the Czech Republic for eliminating a tariff differential that
favored Airbus. The report implies that the
accession of the Czech Republic to the EU
(now completed) could have been impeded
14
EADS, Subsidies & Free Markets
percent of the airplanes you purchase be Airbus.” THY’s aircraft order announced at the
Farnborough Air Show was split by value 80
prior to a report that PIA was finalizing a
new long-term “Business Plan” including
purchase of new aircraft, the EU dropped
percent for Airbus and 20 percent for Boeing.
the
Additional reported cases of EADS’
government owners’ retaliation over
aircraft sales include the following
EADS’ owners have no shame in
their “buy Airbus” agenda as illustrated by
their conduct after the deadly 2004 Indian
Ocean Tsunami. While aid workers were
arriving and nations around the world were
sending help to rebuild disaster-struck Thailand, the European Commission (EC) was
Taiwan: During the heated 2002 airplane
sales competition in Taiwan, the government of France threatened to terminate its
satellite cooperative program if purchases
anti-dumping
tariffs
completely.40
sending it threats to complete a purchase of
six A380 Airbus aircraft.41 The deal was allegedly on hold over EC discrimination against
Thai seafood and poultry exports.42 Five days
after the Tsunami, the EC raised the stakes
and enacted billions of dollars in additional
tariffs. The British aid group Oxfam called
the action criminal. Faced with the possibility of even more taxes on its exports, the
Thai government made the planes-for-EUmarket access swap. Thai Airlines is schedule to take delivery of its A380s in 2012.
of Airbus aircraft were not made.34 France
claimed a verbal commitment to Airbus had
been reached and hypocritically claimed
that U.S. political interference had sunk the
deal. The Taiwanese government countered
that the most probable reasons were that
it might wish to replace its fleet of planes
with aircraft from the same manufacturer
to simplify maintenance work and Taiwan’s
history of major contracts with France
had all ended in litigation or scandal.35
Pakistan: In 2003 Pakistani business leaders claimed that the EU member states
The European Commission’s most
blatant act of pro-EADS/Airbus intervention though may have been against Boeing
itself. In order to approve Boeing’s merger
with McDonnell Douglas in 1997 the EC
demanded that Boeing give up its exclusive sales agreements with American, Delta
and Continental Airlines. Faced with the
threat of being shut out of Europe, Boeing cancelled these agreements. U.S. officials at that time characterized the EC
retaliated against Pakistan International
Airlines (PIA) purchase Boeing 777s instead of Airbus planes.36 The EU reportedly
denied previously approved Pakistani textile export quotas and later implemented
anti-dumping duties on imports of bed
lines from Pakistan.37 The anti-dumping duties were reduced in May 2006 as PIA took
delivery of EADS built ATR aircraft from
Toulouse, France.38,39 In March 2009, just
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actions as an unwarranted intrusion outside the EC’s jurisdiction and a blatant attempt to boost the prospects of Airbus.43
port landing rights in exchange for an order
of 32 additional A380 superjumbo jetliners.46 Budget airlines AirAsia and easyJet
European trade policy continued to target U.S. industry, according
to the 2005 U.S. Department of Commerce Jet Transport Industry Report:
have also received favorable landing rights
upon completing large Airbus purchases.47,48
A former Airbus director of international affairs has detailed how ingrained and pervasive the EU nations
government support to EADS/Airbus’ is:
European government trade policy reflects,
in part, the view of a market participant…
Measures practiced by the European Commission and individual EU member state
governments have given rise to the appearance of a coordinated strategy aimed
at boosting Airbus’s competitiveness,
at the expense of Boeing, across many
fronts… cabinet-level officials from European governments coordinate their aerospace trade policies (sometimes noted as
meetings of the “Airbus ministers”). The
result of this coordination appears to be
a pan-European strategy linking together
the efforts of individual European governments to support their industries.”44
French government support has been most
vocal because it encompasses a lot of politically orientated activities. When the Prime
Minister or President of France goes to a foreign country where there is a running sales
campaign, the Prime Minister will raise
the Airbus issue. And it comes from every
related department. When a French minister goes anywhere, the first question is “Is
there a running Airbus campaign?” And my
job is simplified, because I don’t even have
to investigate where or when the visits are.
I am informed. This political support, …
is wide ranging, is traditional and open…
we have no qualms about the support.49
The preferential granting of landing rights and the apportionment of airport
slots has been a very successful political tool
in securing airplane sales by EADS’ government owners. After a five year wait, in January 2003 Malaysian Air was only granted
landing rights at Charles de Galle airport
While the Europeans have no
qualms about the political support given to
EADS/Airbus, the “unreasonable pressure”
and “inducements” they regularly employ in
their sales tactics are prohibited by the provisions of the World Trade Organization Agreement on Trade in Civil Aircraft (ATCA).50
after it ordered six jumbo Airbus A380s.45
Emirates and Qatar Airways also received
extra landing rights in France after they purchased A380s. Emirates in particular has
become so accustom to this arrangement
that it is now banking on EADS/Airbus’
government owners to open German air-
16
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F
is left to private enterprise and investors.
EADS/Airbus Government Subsidies
The launch aid money is paid back through
royalties on aircraft sales—which, in practice, and in contrast to loans from banks
to more standard private companies,
means that Airbus does not need to refund money for planes that don’t sell. So
the financial risk Airbus incurs in developing a new model plane is notably less
than the risk that would exist without support… Recently, Airbus has requested $1
billion in aid for a new mid-sized plane.52
ormer French Prime Minister Lionel Jospin, in 2002, articulated
what has long been the policy of
EU member states with regard
to the aerospace industry by declaring, “We
will give Airbus the means to win the battle
against Boeing.”51 The “means” to which
the Prime Minister was referring—in addition to long-held European protectionism
and hostile attitude to American competition—is the unaccountable research grants
and generous EU government loans for aircraft development known as “launch aid.”
The market distortions of launch aid
are exacerbated by the large unaccountable
grants for research EADS and Airbus receive
from their bureaucratic allies in European
capitals. While governments on both sides
of the Atlantic provide their aerospace companies research funding, there are important differences in the nature of the research
When developing a new commercial aircraft, American manufacturer
Boeing, and previously Lockheed Martin
and McDonnell Douglas, must raise the
needed capital through private investment
and wait years before turning a profit. It
persuades investors and lenders through
its company reputation, quality products
and the promise of economic rewards.
and the commercial value of the research.
European national research labs
and the European Commission increasingly are focused on funding R&D projects intended to give European companies a competitive advantage in global
markets. Many grants are given without restriction or with goals directly aligned with
Airbus and EADS commercial interests.
Research project descriptions frequently
make specific reference to Airbus aircraft.53
Since its inception, Airbus, and
now its parent EADS, have taken billions
of dollars in government launch aid instead of relying on purely private financing . EADS prefers launch aid because the
loans are at below market rates and are paid
back only upon successful sale when the
production of an aircraft makes a profit.
This means the German, French, British
and Dutch taxpayers have been assuming
the risk, which—in a truly free market—
Another major difference between
the U.S. and EU funded research pertains
to access to results. The U.S. utilitarian research goals dictate that, except in limited
circumstances, research results are placed
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in the public domain available to all. Airbus has even benefited from this policy
as its much touted fly-by-wire technol-
companies, so called “launch aid”;
• the provision of grants and government provided goods and services to
develop, expand, and upgrade Airbus
manufacturing sites for the development
and production of the Airbus A380;
ogy was developed initially through U.S.
research.54 In contrast, reports on EU government aeronautical funding have been far
less transparent. European research details
are rarely publically available and much
of the research is considered proprietary
due to its immediate commercial value.
• the provision of loans on preferential
terms,
equity
infusions, and forgiveness of debt;
• the provision of research and development loans and grants in support
of large civil aircraft development, directly for the benefit of Airbus, and any
other measures involving a financial
contribution to the Airbus companies.
A
WTO Ruling Against EADS/Airbus Subsidies
fter decades of watching—
and at times even partially
condoning55—illegal EADS/
Airbus subsidies harm U.S.
industry, the U.S. Government finally confronted the European Communities (EC) in
October of 2004. The U.S. Trade Representative (USTR) began two years of consultations with the EC with the goal to eliminate
EADS/Airbus subsidies. The EC ultimately
refused to eliminate launch aid. As a result,
on November 15, 2006, the USTR initiated
litigation against subsidies to EADS/Air-
On June 30, 2010 the WTO publically released its final ruling on the EADS/
Airbus subsidies, ruling overwhelmingly in
favor of the U.S. government. The U.S. won
on 52 of its subsidy challenges57—73% or
almost three-fourths of all challenges. The
most import aspects of the ruling dealt with
the subsidies that have done the most harm
to the U.S. Airspace industry, launch aid.
On launch aid the WTO panel ruled that:
bus that certain EC governments had provided in violation of the obligations under
the Subsidies and Countervailing Measures
Agreement (SCM) and the General Agreement on Tariffs and Trade (GATT 1994).
The U.S. challenged 71 distinct subsides that
can be grouped into following broad areas56:
•• “the United States has established that
…each of the challenged [launch aid]
measures constitute a specific subsidy.”58
•• “all of the challenged [launch aid]
contracts may be characterized as unsecured loans granted to Airbus on
back-loaded and success-dependent
repayment terms, at below-market
• the provision of financing for design and development to Airbus
18
EADS, Subsidies & Free Markets
interest rates, for the purpose of developing various new models of
[Large Commercial Aircraft] LCA.”59
launch aid. These WTO non-compliant
subsidies are “actionable” or allow the U.S.
to take countervailing measures if they are
•• “ it would not have been possible for Airbus to launch all of these models, as originally designed and at the times it did,
without [launch aid]…relying on only
market financing, the increased level of
debt Airbus would have accumulated
over the years would have been massive.”60
not eliminated or their adverse effects are
not removed. Moreover, the panel found
that in three out of the four challenged nations’ A380 launch aid subsidies were export contingent and therefore “prohibited.”
As prohibited subsidies are considered the
most damaging, the WTO placed an immediate deadline to remedy these A380
•• “It is in our view that Airbus would have
subsidies. The WTO report stated that
“taking into account the nature of the prohibited subsidies we have found in this dispute, we recommend that the subsidizing
Member granting each subsidy found to be
prohibited withdraw it without delay and
specify that this be done within 90 days.”64
been unable to bring to the market the
LCA that it launched but for the specific
subsidies…without subsidies, it would
be a much different, and we believe much
weaker LCA manufacturer… with at best
a more limited offering of LCA models.61
•• “Thus, under either scenario, Airbus would not have had the market
presence and ability to win orders
for LCA that it did…and the United
States’ LCA industry, at a minimum
would not have lost sales…and would
have had a larger market share…”62
The only challenged launch aid
subsidy that was not sustained was for the
yet-to-be built A350.65 The reason it was
not sustained was that although the EC had
promised to provide EADS/Airbus launch
aid for the A350, the promised monies
were themselves still subject to negotiation
and no actual payments had yet occurred.
The WTO determination, “that the [A350]
commitments which did not exist, did not
confer any benefits...” is neither surprising nor is it an endorsement of the planned
A350 launch aid.66 If any A350 launch aid
is structured in the same manner as all
previous launch aid, it too will be illegal.
•• “that the effect of the subsidies is
significant lost sales …constituting serious prejudice to the interest of the United States…”63
The WTO ruling makes clear that
all past and present Airbus models, including the A330 which EADS/Airbus hopes to
sell to the Pentagon, were developed with illegally subsidized low-interest government
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tween 1989 and 2001 the WTO panel found
that France, Germany and Spain provided
more than one billion euros in illegal infra-
R&D grants, Spanish research loans under
the PROFIT and PTA programs and UK
R&D grants under the CARAD and ARP
structure subsidies, including the creation of
land in Hamburg to allow Airbus to expand
production facilities, extending an airport
runway in Bremen to allow Airbus to transport wings to other facilities for aircraft assembly, and transforming agricultural land
in Toulouse into industrial facilities for the
assembly of the A380. Only the Toulouse
programs.68 Only the further German government commitment under the LuFo III
program and the UK Technology program
grants were not considered subsidies.69
T
The WTO Process and Ruling Insights
he WTO report firmly establishes that the EADS/Airbus
sponsor governments have
area road improvements, the Broughton,
Wales regional payment and the Andalusian government Puerto Santa Maria grant
were found not to be specific subsidies.67
undeniably distorted the market in favor of EADS/Airbus and adversely
affected U.S. industry and U.S. interests.
Surprisingly, EADS/Airbus and the EC initially claimed the ruling a victory.70 A full
understanding of the WTO dispute process
and its technical aspects (not to mention the
plain text of the ruling) exposes these claims.
The WTO panel found also that
France and Germany provided billions of
dollars of share transfers and equity infusions to Airbus between 1987 and 1998. The
European Investment Bank (EIB) loans from
1988-2002 and the 1998 German Debt Settlement were found to be WTO compliant.
One key to understanding the ruling is that the WTO definition of “injury”
is that a company or industry must be damaged nearly beyond recovery—this is assessed under a “material injury” standard.
In the area of R&D, the WTO panel
found that the EU, France, Germany, Spain
and the UK provided over one billion euros in funding between 1986 and 2005 for
research and development (R&D) directed
specifically to the development of Airbus
aircraft. The WTO ruled against dozens of
individual grants made under five European Commission Framework Programs,
French government R&D grants, German
federal government grants under the LuFo
I, II, III programs, German sub-federal
The WTO ruled that U.S. industry was not
injured under this test, since Boeing remains
a strong competitor in the industry.71 That
U.S. industry’s harm did not meet the technical standard for “material injury” is of little
consequence. To find the subsidies were illegal, the WTO had to find that the Airbus/
EADS subsidies caused “adverse effects.”
Adverse effects are demonstrated in a vari-
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EADS, Subsidies & Free Markets
ety of ways (only one of which is by showing that industry has been injured to the
point of there being nearly no conceivable
retaliation. The EC has appealed the ruling
against it and has filed its own WTO large
commercial aircraft case against claimed
recovery.) The WTO found that the European subsidies did cause adverse effects on
multiple accounts. It declared the Airbus/
EADS subsidies caused serious prejudice
to U.S. interests. EADS/Airbus attempts to
equate the “no injury” finding to a conclusion that no harm occurred is simply false.72
U.S. subsidies. Together these actions ensure
there that the launch aid trade dispute will
continue for some time, though if the U.S.
is prepared to take forceful action, retaliation could be implemented within a year.
The European Communities’ WTO Case
against the US
O
A second key to understanding the
ruling is that the WTO complaint process
focuses mainly on a limited time prior to and
during the complaint. In this case, while the
WTO panel reviewed the whole 40 years of
Airbus subsidies, it limited its main analysis
to the years 2001 to 2006. Although it was
easy for all to see that forty years of Airbus
subsidies caused real harm to U.S. industry it
is extremely hard to prove subsidies, in and
of themselves, caused significant price undercutting, price suppression or depression
in a short five year period. So while the WTO
panel did conclude that it was apparent there
ne day after the U.S. initi-
ated litigation in the WTO
against EC provided EADS/
Airbus subsidies, the EC reacted by initiating a separate case against
claimed U.S. subsidies to Boeing. The EC
case makes three main subsidy challenges:
Infrastructure grants; Tax breaks, especially from Washington state; R&D contracts
from the U.S. government, especially NASA
and Department of Defense contracts.74
The EC case is built on a number of
false calculations, including the mathematic
impossibility that Boeing received NASA
had been significant price undercutting, suppression and depression in the marketplace, it
was not willing to go further and to conclude
that those effects had been directly caused
by the subsidies in and of themselves.73
subsidies valued greater than the total value
of all contracts to all contractors during the
time in question.75 Furthermore, none of
the challenges is comparable to the launch
aid received by EADS/Airbus. As such, it
would be surprising if more than a few of the
challenged measures were found to be specific subsidies. Moreover, since the WTO
threshold to determine adverse effects is so
A third key to understanding the
ruling is remembering that the WTO process is lengthy and in the end the WTO enforcement power resides wholly in its power
to authorize government to government
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L
high, it is fairly certain that even if the U.S.
is determined to have provided some limited amount of specific subsidies to Boe-
Conclusion
ockheed Martin CEO Robert J. Stevens issued a warning
to European protectionists in
ing, none will be actionable or prohibited.
2008 while addressing a conference on NATO in the Next Decade:
Given the above, it appears the EC
WTO case against the U.S has two main
purposes. First it provides the EC a forum
by which to make sweeping claims that all
aerospace companies are subsidized and
further argue that such subsidies should not
be illegal. Second, the EC’s case has effec-
The notion that European markets
should first be “protected in order to
be strengthened” is misguided. Protectionism is not now, and has never been,
a substitute for competitive strength.
With each passing opportunity, those
companies who linger under this veil
will only grow weaker — until they will
be quite literally “protected to death.”76
tively drawn U.S. resources and energies way
from challenges to EADS/Airbus subsidies.
On 7 July 2010, the WTO reported that it expects to issue its confidential
interim report to the EC and U.S. governments by mid-September 2010, and that it
will not complete its work until the first half
of 2011.75 If the EC complaint progresses
on a similar timeline as the U.S. complaint,
the earliest the public release of the ruling can be expected is Summer 2011. Until that time EC and EADS/Airbus claims
of victory should greeted with the same
Stevens went on to mention the
number of European contractors competing
in the United States defense market as proof
of American openness and commitment to
the free market, even in the highly-sensitive
area of military procurement. Indeed, neither
the U.S. military or American companies
have a “protectionist problem” of the sort
that is commonplace in Europe. However,
while Stevens’ warning of companies being
“protected to death” may certainly have mer-
great skepticism as has now been proven to
have been appropriate for their similar, and
completely disproven, claims in the U.S.
case against EADS/Airbus own subsidies.
it, it does not always hold true. As this paper
has shown, EADS/Airbus’ government support and protection is so extensive and so ingrained in EU member industrial policy that
unless the U.S.— and WTO—take forceful
action, EADS/Airbus will continue to thrive
at the expense of U.S. aerospace companies and workers for the foreseeable future.
22
This information is not news to the
EADS, Subsidies & Free Markets
U.S. Government. The toll EADS/Airbus
has taken on America’s economy has been
evident as far back as 1985, when President
ingly against EADS subsidies and launch
aid, which arguably should have disqualified
them for this second round of bidding on the
Regan established a White House team to
identify unfair trade practices and take action against them. European subsidies and
protection of Airbus was quickly identified
as the first target.77 Unfortunately, then, as
now, most U.S. government officials chose
to look the other way. In 1985 the reason
given was the fear that NATO would be
tanker project. The President’s 2010 Trade
Policy Agenda provides equally sensible guidance that should be used on the tanker bid:
shattered if Europe was taken to task over
its subsidies of Airbus; today, it is the shortsighted view of some in the Pentagon that
if they can get a lower initial cost because
a foreign government is subsidizing an
EADS product, then so much so the better.
With the release of the conclusive
WTO ruling, it should finally be clear that
EAD/Airbus’ government owners do not
play by these “established rules.” It should also
be clear to all Americans, in government and
outside it, that the actual cost of EADS/Airbus aircraft is far higher than the list price being considered. The cost to our national prosperity of allowing EADS/Airbus to compete
for U.S. government contracts without conditions—or without consideration of the subsidies it receives— is simply unaffordable. ■
“The American people expect firm pursuit of our rights in the rules-based trading
system in order to ensure fair competition
with global trading partners. Americans
succeed in global completion when partners play by the established rules…”78
The U.S. Congress has been forced
to take action given this policy vacuum. In
May 2010, the House in a 410-8 vote passed
a defense-bill amendment that requires the
Pentagon to review any subsidies affecting
the tanker contest and to determine whether
they provide “an unfair competitive advantage to any bidder.” Senate supporters plan
to get identical language attached to their
defense bill before the 2010 session ends.
American companies and their
workers expect a more carefully planned U.S.
government procurement policy and deserve action against the unfair trade practices of EADS/Airbus. The Pentagon and the
private sector received very clear guidance in
the June 2010 WTO decision, overwhelm-
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24
EADS, Subsidies & Free Markets
APPENDIX:
CASE STUDIES OF PRIOR EADS TANKER SELECTIONS
E
ADS has promoted the
prior sales of Airbus
330-200
Multi-Role
Transport and Tanker
(MRTT) to Austra-
EADS/Airbus clever marketing copy for
its U.S. tanker campaign, but they raise
more questions about EADS/Airbus’ commitment to competing fairly and within
“established rules.” In each case, it is clear
lia, Saudi Arabia, the
United Arab Emirates and the United
Kingdom as proof of the superiority of that
aircraft. These relatively small sales have
been used to argue for the much larger
U.S. Air Force contract for 179 tankers.
that free enterprise and free markets had
little, if anything, to do with the awards.
U
United Kingdom
nder pressure to “buy European,” the UK Ministry
of Defence spent 10 years
and nearly $100 million to
devise a leasing scheme for EADS/Airbus.
A close analysis shows that rather
than an endorsement of the EADS/Airbus tanker, there is instead a pattern of taking advantage of closed markets, subsidy
largesse and highlighting sales where its
receipt of the contract was never in doubt.
These engineered selections may provide
The EADS tanker deal for the UK’s
Royal Air Force (RAF) was belabored and
far from transparent. It was the first contract
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involving the Airbus A330 frame, but negotiations delayed the final signing almost ten
years. The Financial Times reported that
nal competition was less than rigorous and
London deferred to the manufacturer more
likely to sustain and provide European jobs.
“most people involved would concede it
should not have taken a decade to close the
deal ... the decade of negotiations has cost the
taxpayer £47.5m.”79 In the end this has been
an experiment with public and private funds,
without adequate oversight or accountability.
[A] reason that the budget is under such
strain is the political constraint to buy British or European whenever possible … This
virtually guarantees that the [Ministry of
Defence] must buy products which will
only be made in small quantities, causing unit costs to skyrocket and enhancing
the difference in budgets. As a rough rule
of thumb, the British expenditure in any
given area will be a tenth of America’s;
and the items purchased often have unit
costs ten times higher owing to a lack of
competition and economies of scale.82
Initially, EADS/Airbus (as AirTanker Ltd.) and a consortium including
Boeing competed for the contract; the two
bids were received in February 2003.80 The
UK Ministry of Defence announced the
award to AirTanker in January 2004. However, as early as April of that year, press reports stated that the UK’s Defense Procurement Agency delivered an ultimatum to the
victorious bidder demanding they lower the
price. Nearly another year of closed-room
negotiations went by until revisions to the
original bid were agreed on by the two parties. As the press reported at the time, the
Ministry of Defence “called for a reduction
Unfortunately for the UK, its politicians and procurement officials were so
focused on selecting EADS that they failed
to manage requirements properly; the
tanker they chose did not have the protective armor or anti-missile systems needed
to operate in combat areas such as Afghanistan.83 According to the UK National Audit Office, fixing these oversights will likely
cost an additional several hundred million
pounds. Due to this mistake, and a five-year
in price in the £13 billion program [sic] to…
between £120 million and £230 million.”81
delay in the program, the National Audit
Office has also reported that it is unable to
conclude that the Ministry of Defence has
achieved value for money from the procurement phase of the EADS tanker deal.84
Common sense would dictate that
the EADS tanker either provided the best
“value for money” or was too expensive, not
both. If the UK was concerned with bringing the tankers in at a lower cost, fostering
competition before the bidder was selected
would have been the sensible thing to do.
This has led some to suggest that the origi-
Not only has the quality of the
EADS tankers been under recent scrutiny,
but the UK has now determined the quantity of 14 tanker order is more than the RAF
26
EADS, Subsidies & Free Markets
requires.85 Fortunately for the UK, France
has once again stepped forward to ensure
an EADS order is not cut short. France,
would accommodate greater airlift capabilities. Indeed, Australian defense analysts initially favored a 747-based tanker that Boe-
which has already made known it will not
buy Boeing tankers, has reportedly been in
contact with the British about the possibility
of using some of their tanker over capacity.
ing had sold to pre-revolutionary Iran in the
1970s.87 Boeing, however, could not offer the
747 tanker without prohibitive development
costs for the RAAF. The Australian Air Force
was looking for a larger plane, and Airbus offered to provide refurbished Quantas A330s.
The EADS supporter’s version of the
“free market” is in evidence here as merely disguised protectionism. As the chief executive
of EADS’ UK tanker bid stated, the procure-
Although EADS did not possess
boom technology at this time, they were
ment was “about breaking Boeing’s global monopoly in air-tanking … and making Britain,
and not the U.S., the centre of airtanking.”86
able to underbid Boeing. Given EADS’
government owners’ history of generously
subsidizing its new products, it is not unreasonable to question if, once again, the free
market had been subverted. The Australians
wanted to avoid paying high research and
development costs on the new and untested
refueling technology, and European subsidies would have been an acceptable way
to save on the Australian defense budget.
N
Australia
ever a serious customer for the smaller Boeing 767, the Australians
went with the Airbus
product, which offered -reduced—and,
arguably,
subsidized—development
costs with retrofitted Quantas A330s.
From all indications, Australia tried
to get the best tanker deal for their money
and took advantage of the stock of Airbus
After losing tanker competitions in Japan and Italy, EADS saw the
products in the Quantas fleet to cut the cost
of service to the tankers.88 They took the substantial risk, however, of choosing the untested product which may ultimately prove
to be more expensive. The tankers have already experienced several delays and are now
planned to be delivered 15 months late.89
Royal Australian Air Force (RAAF) competition as its last chance to develop the
boom technology it had never possessed.
According to Australian defense analysts at the Air Power Studies Centre, Boeing’s 767 was not the optimal tanker frame
for the RAAF. The need was for a significant
cargo capacity and the larger Airbus A330
To help ensure A330 tanker costs
are held lower, for years Australians in Washington have lobbied for EADS/Airbus to
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O CC A S I O N A L PA P E R S E R I E S
get the U.S. Air Force deal. A representative
from the Australian embassy was quoted
as saying Australia would welcome a deci-
shareholders in European Aeronautic
Defense & Space on Thursday, taking
a 3.12 percent stake in the company.92
The close relationship between the
UAE and EADS goes back much earlier than
this deal in 2007; indeed, Dubai and the
other Emirates have purchased scores of Airbus products in the past. The governmentowned Emirates airline currently has 57
sion by the Air Force to choose the Airbus
tanker, since that would lead to much lower maintenance and (operating) costs for
their A330s in the longer term … “It would
be great for us.”90 Unfortunately, the same
cannot be said for the American taxpayer.
Airbus planes, with a further 150 on order.
It is the biggest customer for Airbus’ A380
super-jumbo jet, with total of 90 ordered.93
The relationship also extends into aircraft
parts, because Mubadala Aerospace, part of
the investment vehicle owned by the government of Abu Dhabi, has a $1 billion deal
to make Airbus plane parts in the UAE.94
O
United Arab Emirates
ne Emirate is an Airbus parts
supplier and another owns
3% of EADS. As a result
UAE could not be expected
to purchase anything but the EADS tanker.
The UAE tanker saga begins over a
decade ago, when the country issued its initial Request For Information. Throughout
the late 1990s and into the early part of this
decade more requests and informal briefings
on proposed tankers occurred. However, it
was not until 2005 that the UAE released its
first formal tanker Request For Proposals.
Arms deals in many Persian Gulf
nations often short-circuit the usual trappings of a free market. In this case, there is
every reason to believe that the decisionmakers in the UAE were determined to
hand EADS the contract. However, it is
not apparent that getting the best tanker for
the money was the UAE’s highest priority.
In early 2007 the United Arab Emir-
ates announced it had selected the Airbus
A330 MRTT, and ordered three tankers.91
The award of the tanker contract to EADS
came a short time before the announcement
that EADS also a large capital investment:
M
Saudi Arabia
ilitary procurement by
the House of Saud is of-
ten politically-driven, untraceable and controlled
tighter than OPEC’s grip on the price of oil.
Dubai International Capital, an investment company owned by the emirate’s
ruler, Sheik Mohammed bin Rashid Al
Maktoum, became one of the biggest
The level of transparency in defense
procurement in Saudi Arabia makes the ac-
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EADS, Subsidies & Free Markets
tivities in the UAE appear straightforward. A
closed world of patronage and questionable
‘offsets’ is the cost of doing business in the oil-
ertheless, political concerns appear to have
trumped cost savings, as EADS announced
the contract with Saudi Arabia in January
rich Kingdom, and both the government and
foreign contractors have an interest in keeping details quiet. As former CIA operative,
Robert Baer observed in the Atlantic, “Practically every deal with the Saudis eventually
becomes hard to trace, lost in some desert
sandstorm back near the wellheads where
the money sprang from in the first place.”95
2008, just ahead of what was expected to be
the U.S. Air Force’s decision.97 Stranger still,
in July 2009 before receiving any of its initial tankers, EADS announced that the Saudis had ordered three additional tankers.98
The limitless oil wealth of Saudi
Arabia often obscures economic prudence.
Leaders in the Kingdom are often unaccountable to their citizens, especially when
a large spending project is in order. Where
does long-range aerial refueling come into
the strategic requirements of what is, primarily, a deterrence force? No matter.
for a drop in price, Saudi Arabia for other
than market reasons chose to allow EADS
to benefit from tanker sale publicity that
could influence the far-larger U.S. deal.
The similarities to the earlier tanker
deal with the UAE are apparent: again, despite incentives that should cause it to wait
United States: The Cancelled 2008 KC-X
Tanker Competition
T
he U.S. selection of the
EADS tanker was cancelled
after the Air Force admitted to five calculation errors—which when corrected showed
Boeing, not EADS, provided the low-cost
solution—and a number of prejudicial er-
As Baer points out: “In off-budget
spending, revenue from oil sales goes directly to special accounts, bypassing the Saudi
treasury altogether. The money is then used
to pay for pet projects, from defense procurement to construction, with no government audits or accountability of any sort.”96
rors were uncovered by the GAO that
called in to question whether the EADS
tanker met the Air Force’s requirements.
The strange thing about the Saudi
contract is that officials there had reportedly
shown indications of waiting until the U.S. Air
Force contract was announced. This makes
sense, especially in light of Australia’s concerns about development costs. The winner
of the U.S. KC-X bid would be in a position
to lower prices on a per-tanker basis. Nev-
EADS and its supporters have used
the flawed and now cancelled 2008 KC-X
tanker award to perpetuate an inaccurate
narrative that EADS overwhelming won the
competition, but a “politically connected
Boeing” had Congress cancel the contract.
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The facts do not support EADS’ oversimplified and self-serving public relations efforts. A factual accounting instead shows that
it can refuel all currently compatible planes
using current Air Force procedures, which
was a mandatory minimum requirement.103
the previous KC-X contract was terminated
by the Department of Defense in the wake
of recommendations and findings by the
Government Accountability Office (GAO)
that “the Air Force had made a number of
significant errors that could have affected the
outcome of what was a close competition.”99
The GAO’s scathing report made
clear that the 2008 KC-X competition decision was not based on the merits of the EADS
tanker, but instead was the result of an unsound evaluation process rife with irregularities and questionable judgments. Similarly,
the cancellation of EADS’ contract was not
due to political pressure, but instead was the
While defending its selection of
the EADS tanker to the GAO, the Air Force
admitted it “discovered five errors in its assessment … which, when corrected, would
result in Boeing displacing [EADS] as the offeror with the lowest evaluated [most probable life cycle cost] MPLCC.”100 Not only
was the evaluation flawed, but the GAO
determined that the EADS tanker was not
even eligible to compete as EADS did not
fulfill several requirements for submission.
The GAO ruled that the “Air Force improperly accepted [EADS’] proposal, where that
proposal clearly took exception to a mate-
result of DoD finally realizing the contract
decision was significantly and fatally flawed. ■
rial solicitation requirement” to plan for and
support establishment of an Air Force depot
maintenance capability within two years after delivery of the first full-rate production
aircraft.101 The Air Force repeatedly told the
EADS team it did not meet these “minimum
program tasks,” yet the EADS team refused
to address this discrepancy.102 The GAO also
ruled that EADS’ proposed tanker “could not
be accepted” because it failed to establish that
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EADS, Subsidies & Free Markets
NOTES
15. “Profile: Louis Gallois.” BBC News. October
10, 2006.
1. “The Unseen Cost: Industrial Base Consequences of Defense Strategy Choices.” Aerospace Industries Association Special Report
(2009): 3-5. Web. 5 Aug 2010. <http://www.
aia-aerospace.org/assets/report_industrial_
base_consequences.pdf>.
16. “Sarkozy pledges conditional help for ailing
EADS.” International Herald Tribune.18 May
2007.
17. “The Presidency as Theatre.” The Economist.
May 3, 2008.
2. Friedberg, Aaron L. In the Shadow of the
Garrison State. United States: Princeton University Press, 2000. 291. Print.
18. “Berlin talks tough on planned Airbus cuts.”
Der Spiegel. 5 Feb 2007.
19. Rosenberg, Eric. “Gates warns on tanker
contract.” Seattle Post Intelligencer. 20 May
2008.
3. “Business Enterprises.” Report to Congress
by the Commission on Organization of the Executive Branch of the Government, U.S. GPO.
1955. p. xii.
20. Jones, David. “Shadow Chancellor George
Osborne says Airbus funding is safe with the
Conservatives.” Daily Post (UK) 16 Apr 2010.
4. Friedberg, p. 259.
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33
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103. Ibid. p. 52.
104. Ibid. p. 38 note 54.
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