Why WTO’s Ruling Against Boeing Is Irrelevant

When the World Trade Organization (WTO) ruled this week that the billions of dollars Boeing (NYSE: BA) received in “illegal” government subsidies hurt European rival Airbus’ sales, it almost appeared that a trade dispute that has roiled the aircraft manufacturers for two decades was finally settled. Nothing could be further from the truth.

The WTO’s appeals body ruled on Monday that Boeing had received $5.3 billion in U.S. government subsidies that are banned by international trade rules and that gave the Chicago-based aircraft manufacturer an unfair advantage. The good news: Before its successful appeal, Boeing was alleged to have received $19 billion in prohibited aid.

Although the companies have been duking it out for decades, this latest battle has played out over the past couple of years. The WTO ruled last June that European governments had given Airbus $15 billion in below-market-rate loans that it used to develop the A380 superjumbo jet.

Boeing and Airbus parent EADS both claimed victory in Monday’s ruling, with each side trying to spin the outcome to its advantage. But because the WTO does not have the power to enforce any of its rulings — and nations usually find ways to support homegrown manufacturers — the prospect of ongoing trade disputes between the two companies looms large.

But Boeing and Airbus face far tougher competitive contests. The global commercial-aircraft industry likely is entering a “prolonged upcycle of orders and production,” according to a report released by DeLoitte Touche Tohmatsu Ltd.

The study estimates that over the next 20 years, aircraft manufacturers will produce 26,900 to 33,500 commercial aircraft. Because airlines struggle with razor-thin margins and fuel accounts for up to 40% of operating costs, planes that have fuel-efficient, next-generation engines will be in great demand — particularly on single-aisle, medium-haul planes. Airbus targets that market segment with the A320neo; Boeing is offering its 737-MAX.

Last year, Airbus beat Boeing in number of orders: 1,419 to 805. Airbus also delivered more aircraft in 2011: 534 to 477. Single-aisle narrow-body jets were the top sellers for both companies: Airbus sold 1,226 of its A320neos, while Boeing sold 551 of its 737s.

While it’s common to think of Boeing and Airbus as the duopoly of commercial-aircraft manufacturing, the competitive landscape is changing fast. The biggest challenger is Commercial Aircraft Corp. of China (COMAC), which plans to roll out its new C-919 narrow-body in 2016. COMAC already has 215 orders for the C-919, which boasts the fuel-efficient LEAP-X engine from CFM International, a consortium of GE Aviation (NYSE:GE) and Safran subsidiary SNECMA.

Canadian regional-jet manufacturer Bombardier (TSE:BBD.A) is getting into the single-aisle, medium-haul market with two CSeries aircraft models that are expected to enter service in 2013. The jets will be outfitted with the PW 1000, a fuel-efficient, geared turbofan engine built by United Technologies (NYSE: UTC) subsidiary Pratt & Whitney. Bombardier has received 158 orders for the aircraft so far.

The bottom line: While Boeing lost on the WTO ruling, so did Airbus. And the outcome could have been worse for both companies. Ultimately, the future of trade relations resides in the purview of diplomats, not aircraft companies.

While both governments will make moves to comply with the trade rules (no one wants a full-blown trade war), subsidies of one sort or another will continue on both sides of the Atlantic, particularly once China starts flooding the market with C-919s.

But the real battles will be fought with newer, more advanced aircraft. Although Boeing was pummeled by Airbus last year in sales, it’s off to a strong start in 2012. In January and February, Boeing wrote 385 commercial aircraft orders, 370 of them 737s. Airbus booked 97 sales, 88 of which were A320s.

For investors, the WTO ruling is mostly a non-event. The impact has been priced in and the appeal turned out a little better than Boeing expected. But the competitive issues do matter. Consider the more than $500 million Boeing must pay Air India for delivery delays on the 787 Dreamliner. That loss is not only a hit to Boeing’s finances but also its reputation. That’s something Boeing can ill afford now that Airbus and others are stepping up their games.

As of this writing Susan J. Aluise did not hold a position in any of the stocks mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/03/why-wtos-ruling-against-boeing-is-irrelevant/.

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