Brussels v Boeing
The European Unions competition commissioner still wants to veto Boeings merger with McDonnell Douglas
NEITHER side wants it, but Europe and America are squaring up for an angry trade dispute over civil aircraft. Barring a last-minute cave-in by Boeing, the European Union will next week block the merger between the world leader in civil aircraft and the number three contender, McDonnell Douglas.
Ever since the deal was announced in December, Karel Van Miert, the EUs competition commissioner, has been vocal in his opposition to it. He thinks it will significantly reduce competition in Europe, leaving airlines a choice only between Boeing and Europes Airbusand with the odds stacked heavily in Boeings favour. The merger takes Boeings share of the world market from 64% to 70%, against Airbuss 30%. Boeing has attempted to win Mr Van Miert over with various minor concessions, but this week he brushed such sops aside.
First, he got his fellow commissioners to make clear that they were all united with him on his tough stand. Then on July 16th he won the support of antitrust experts from the 15 EU member countries, and from both President Jacques Chirac of France and Günter Rexdrodt, the German economics minister. Unless something dramatic happens in the next few days, the European Commission will formally rule against Boeing on July 23rd.
A European veto of an American merger of this scale is unprecedented. Although the commission claims to be serene, the aftermath of a negative ruling by the EU could be a dirty trade war. If Boeing and McDonnell Douglas proceed with their merger regardless, it would be deemed illegal in Europe. The EU would then have the power to fine the combined company up to 10% of its turnover, a sum of around $4 billion. Or the commission could punish Boeing by fining any European airline that bought Boeing jets or by impounding new aircraft as they fly into Europe from Seattle.
This would start to shut Boeing out of the European market for airliners, 26% of the world industry. The last transatlantic row over aircraft was five years ago, when America attacked subsidies to Airbus. Boeing eventually urged the White House to seek peace, because it feared its European customers would side with their local manufacturer and stop buying Boeings. Soon afterwards the two sides agreed to limit subsidies to 30% of the cost of a project, or 3% of a companys turnover.
Why is Mr Van Miert risking a trade war? He has three main concerns. The first is the sheer dominance of the combined group. Although McDonnell Douglass share of the big jet market has halved to 6% (and is only 2% in Europe) in the past ten years, it used to be a significant competitor. Passenger jets have a working life of about 25 years, and almost one in four jets in the air today is a McDonnell Douglas. Airlines remain in close contact with the supplier, buying spares and dealing with technical issues. The European Commission argues that this will give Boeing an inside track in selling jets to these airlines. On the widest definition of the market, including spares, the Europeans calculate that the true weight in the world market that Boeing will acquire with the merger is over 80%.
Second, the Europeans complain that acquiring McDonnell Douglas will increase Boeings defence and space business so much that it will strengthen its commercial-aviation side too. The bulk of McDonnell Douglass business is military aircraft, and this is the main reason Boeing wants to buy it. The Europeans assert that some $3 billion spent each year by various American-government defence and space programmes ends up as indirect subsidies to develop commercial aircraft. Because Europes defence industry is so fragmented, the European aircraft industry does not enjoy the same spillover of technology from military to civil aviation.
Given that European governments still stump up around 30% of the cost of launching new Airbus aircraft, and that it is entirely their own fault that their defence industry has not consolidated, this argument looks a bit rich. But Boeing has offered to make potential spillover contracts more transparent by filing an annual report on them to the Europeans for approval. This may form the basis of an eventual compromise on this issue.
But the third complaint of the Europeans is the real sticking-point. Mr Van Miert objects to Boeings 20-year exclusive deals with airlines to supply all their aeroplanes. Boeing has signed three such deals since the merger with three big American carriers, Delta, Continental and American Airlinesall of them hitherto big users of McDonnell Douglas aeroplanes. It claims that it is merely benefiting customers willing to enter into long-term deals by giving them discounted aeroplanes and a favoured place in the queue for delivery when the industry is booming (as it is now). But Mr Van Miert thinks that these deals are fundamentally anti-competitive.
In so far as they could stop Airbus talking to Boeings airlines about new models, he is clearly right. Exclusive deals could limit the number of potential customers for, say, Airbuss planned 550-seat aircraft, which would mean that that aeroplane (bigger and better than Boeings jumbo) might not even come to market. Passengers would be deprived of the aircrafts technical and economic benefits. And Boeing would continue to milk its jumbo-jet monopoly.
Even the American authorities were nervous about these deals. The FTC, which voted by four to one to approve the Boeing merger, called the exclusive deals potentially troubling, and said it intended to monitor the potential anti-competitive effects of these and any future long-term exclusive contracts. The American officials think Boeings access to McDonnell Douglass customer base would make it easier to sign more exclusive deals.
So far Boeing has merely offered to shorten the deals from 25 to 15 years and limit new ones to ten years, a concession Mr Van Miert regards as feeble. Boeing now has three options. It can cave in, promising to renegotiate existing exclusive contracts and to refrain from signing any more. It can wait until the verdict on July 23rd, then put the merger on hold while it works out a compromise. Or it can barge on regardless, hoping that the Clinton administration will help it clear up the mess later. But somebody will get a bloody nose.
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