We decided to take a deeper look at what is at stake as the WTO case starts to play out. October 18 is when the US starts to impose its tariffs.  The EU appears to be in no rush – the US played its card.  The EU can respond when it is ready with equally or more focused tariffs of its own.

Looking at current models we created this chart.

The Airbus numbers are impacted by the C Series to A220 switch – Delta’s original order was for the CS100 and does not show up as an Airbus order, hence what appears to be a negative for the A220-100. The A220 volumes are small so their impact is not especially large.

However, what we see is that the US has a larger backlog in Europe than the Europeans have in the US. Given that many of the aircraft that fall under the Airbus flag are going to be US-made, excluding them from the new US tariffs, this makes the US overhang larger and more vulnerable.

This puts the EU in a strong position to inflict greater damage on the US.  And that’s just focusing on aircraft.  Just on a tit for tat basis, the US (Boeing) loses more than Airbus.  Then the EU can pour salt on the open wound.

  • Airbus has already integrated the A220 into its offering.  Boeing has yet to accomplish this with Embraer.  Slow walking the approval of that deal is almost certainly happening with the European anti-competitive review.  Last week Embraer and Boeing announced an expected delay in the closing of the deal into 2020.
  • As the chart shows Boeing’s largest overhang is in the .  The largest customer in the overhang is Ryanair.  That airline is 737 focused. Its recent acquisition of LaudaMotion’s Airbus is way too small to help.  Ryanair is not a customer you want to irritate.  Brussels, however, will not concern itself one iota with any frustration in Dublin.  Indeed, slow-walking the MAX re-entry into service conveniently accomplishes two things:  making the US pay dearly and putting Mr. O’Leary down hard.  That helps Airbus and other EU-airlines in one stroke.

Boeing’s leadership made a poor decision to complain to the US government about the “dumping” of the C Series. This lead to the disintegration of Bombardier‘s commercial business,  something the Canadians have yet to extract fair value for.  The MAX re-entry to service could be a potential target for this revenge, albeit that would harm Air Canada and Westjet.  But the C Series, a strong product, now lives on as the Airbus A220 and has moved to financial strength.

While the WTO complaint predates the ITC complaint by many years, the pattern is amazingly familiar.  This time it won’t just be a little loss of face in Washington.  The WTO Pandora’s Box is a dark and scary place.  Even Airbus fears what comes next.

In Game Theory for a duopoly to be efficient and effective, you need some sort of balance.  That does not necessarily need to be 50/50, but sufficient to expect rational behavior between the two players.  The balance is currently out whack because of MAX.  Now it is going to get appreciably worse.   Clearly, the industry risk is rising just as pundits predict an economic slowdown is approaching.

The Bottom Line:

The WTO dispute will end up with both sides having similar claims when the decision on Boeing is rendered early next year.  So why bother with tariffs for half a year, that won’t make an iota of difference in the market between Airbus and Boeing?  The answer also has an element of politics, and the specter of Washington and Brussels having a larger influence on aviation should scare everyone.  Both sides have cheated, and been found guilty.  Accepting that fact and moving on to a negotiated solution will save jobs on both sides of the Atlantic.

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