Boeing Versus Airbus: Two Decades of Trade Disputes

Case Study: Boeing versus Airbus: Two Decades of Trade Disputes

The Boeing-McDonnell Douglas Merger

As the two largest producers in the commercial aircraft industry, Boeing and Airbus have been in a long rivalry for over two decades. Because of its huge research and development cost and a volatile market demand situation, the large commercial aircraft industry has only a few viable producers that can successfully operate in this industry. At the end of 1996, there were three competitors in the industry вЂ" Airbus, Boeing, and McDonnell Douglas (MDC). When Boeing announced in December 1996 the merger between Boeing and McDonnell Douglas, the dispute has again started between Boeing and Airbus. The merger was expected to go under investigations from antitrust authorities as it was bringing two of the three firms in the industry together. In fact, it was not an ordinary antitrust issue. Instead, it became an issue where the antitrust authorities of the US and the EU both fought to protect the interests of their own domestic firms, the Boeing and Airbus Industrie, while appearing to comply with international trade agreements.

The merger announcement

By 1996, the US’ Boeing Company was the largest producer of large commercial aircrafts with Airbus second and MDC third in the market . The announced merger would combine the N.1 and N.3 producers in the industry. As it is described in the Federal Trade Commission’s (FTC) regulations on competition, the Bureau would investigate any mergers and acquisitions that are likely to reduce competition and lead to higher prices, lower quality goods or services, or less innovation . Although the market share of commercial airplanes of MDC was only 10 percent and represented only 3 percent of new orders in 1996 , the effect of the merger would be significant both in the US and EU markets. In the investigations of the EC’s Competition Committee, it is stated that European airlines will account for about 30 percent of cumulated forecast world demand over the next ten years. The average market shares of Boeing and MDC in the European Economic Area (EEA) over the last 10 years have been 54 percent and 12 percent respectively. As far as the existing aircrafts in service in the EEA is concerned, Boeing has a share of about 58 percent, MDC about 20 percent, and Airbus about 21 percent .

Disparate Decisions of the Antitrust Authorities

After investigating the merger, the antitrust authorities reached different conclusions. The investigations were concerned with whether McDonnell Douglas is still a viable competitor in the commercial aircrafts industry and whether it could make a considerable amount of sale to commercial airlines. The FTC’s conclusion was that Douglas (the commercial aircraft division of MDC) on its own had no prospects of making and selling commercial aircrafts successfully . U.S. merger law is consumer oriented and it is concerned about whether the merger will make consumers worse off by raising the price of airplanes to the airlines (FTC rules). Therefore, if McDonnell Douglas was not a competitive force in the industry, there was no antitrust problem.

However, the European Commissions disagreed with this conclusion. The EC decided to declare the merger illegal with a condition for certain commitments to make on Boeing’s side. The Commission argued that “the proposed concentration would lead to the strengthening of a dominant position through which effective competition would be significantly impeded in the common market.... Although DAC, which operates the commercial business of MDC, is no longer a real force in the market, the concentration would nonetheless lead to a strengthening of Boeing's dominant position in large commercial aircraft ” The EC law is concerned not only with consumers, but also with unfair competitive advantages of large dominant firms. One of the conditions set for Boeing required Boeing to cancel its contract with 3 major US airlines to be a sole-supplier for the next 20 years .

Analysis

In the era of globalization, the antitrust authorities’ preventing the formation of few large dominant firms in an industry through mergers and acquisitions is a practice that represents a liberal trade policy perspective. From the liberal point of view, the FTC and the EC should recognize the Boeing-McDonnell Douglas merger as an international issue, not a national issue, so that it should restrain autonomy of state, in this case the U.S., preventing from intervention to protect domestic interests. However, in the case of Boeing-Mc Donnell Douglas, both antitrust authorities, specifically the European Commission, acted in a protectionist manner keeping domestic interests. In a study on 290 proposed acquisitions screened by the EC during 1990, it was found that although European merger and acquisition regulators claim to be protecting competition and consumers, in fact, the more harm suffered by European rival firms when the acquire is coming from the outside the EU, the greater the likelihood of European regulatory intervention against the proposed