The battle threatened to erupt in an all-out transatlantic trade war that was only averted after long drawn-out negotiations that resulted in a 1992 bilateral agreement on subsidies for the development of large civil aircraft (LCA). The agreement limited direct support to 33 percent of development costs. Twenty-five percent of this was to be at an interest rate no lower than the government’s cost of borrowing, with the remainder at a rate 1 percent higher. The loans also had to be repaid within 17 years, while the benefits of the indirect support (loosely defined as reductions in research-and-development costs resulting from government-funded civil and military research work) were also limited to 4 percent of any of the company’s annual commercial turnover.

The agreement worked well in principle but not in practice for two main reasons. First, no true definition was agreed to as to what exactly “indirect support” meant. Second, there were no means of enforcing any of the provisions of the agreement, which instead relied on biannual meetings to review all publicly available information on direct and indirect government support. The agreement also called for a progressive reduction in launch aid, but again this was not clearly defined.

By 2001, with the LCA agreement nearing 10 years old, the A380 launched, Airbus gobbling up a unprecedented amount of market share, and the Sonic Cruiser project emerging, Boeing began to review the subsidy issue once more. Its research revealed that Airbus had received at least $15 billion in government subsidies since the start of the 1970s, and it believed that the low interest and lenient repayment terms for one-third of the estimated $12 billion A380 development costs had effectively allowed it to make a convincing business case for launching it in the first place.

In addition, Boeing questioned whether the launch aid for the A380 even fell within the bounds of the LCA agreement, which it said had been violated through state and local infrastructure improvements in France, Germany, Spain, and the United Kingdom. Furthermore, Boeing claimed that the LCA agreement had been biased in favor of Airbus, which was then a start-up company requiring some sort of protection. When the deal was negotiated, Airbus was delivering just 20 percent of the world’s civil aircraft. By 2001, the picture was quite different, with Airbus taking more orders than Boeing. By 2003, Airbus had taken the lead in both orders and deliveries.

Leading the rhetoric was Harry Stonecipher, the former chief executive of Boeing. Speaking to Flight International in 2004, he said, “As soon as it came to launching the A380, then all the hosepipes were hooked up to the treasuries of three countries in particular and $4 billion came zooming through. This whole subsidization thing has gone on long enough. They keep trying to turn it into a globalization issue. But this is about transparency and subsidy.”

Europe, naturally, saw quite another side of the coin, particularly by 2004, when Boeing was preparing the ground for launch of the 787. All along, Airbus maintained that Boeing (and before the merger, McDonnell Douglas) has benefited directly and indirectly from massive U.S. government aeronautical engineering research-and-development spending with NASA and the Department of Defense (DoD). Representatives of the European aviation industry believed that Boeing still received indirect government support through reimbursement of independent research and development money by the U.S. Defense Advanced Research Projects Agency (DARPA) and the DoD, and estimated the company had received $18 billion in indirect support since 1992.

EADS, with 80 percent of the newly relaunched Airbus, also countered with claims that any advantage from lower interest rates on the collective €4.3 billion (U.S. $5 billion) of government loans on its books, worked out at about $100,000 to $120,000 per aircraft. Given the multimillion-dollar price tag of the Airbus range, this was considered as the proverbial drop in the bucket.

At the 2004 Farnborough Air Show, the dispute about government subsidies became highly volatile with both sides firing salvo after salvo at each other. Airbus Chief Executive Noel Forgeard accused Boeing of having a hidden agenda, and that all the noise over subsidies was designed to stir anti-Airbus sentiment in the United States ahead of the award of key U.S. defense contracts. Boeing responded by saying that the agreement was out of date and sloppy.

By October 2004, the pot boiled over, with Airbus and Boeing both filing complaints to the World Trade Organization (WTO) over alleged abuses of the 1992 agreement. In a nutshell, Airbus wanted to see tighter controls on indirect support for Boeing, elimination of the tax breaks that Boeing received from the state of Washington to secure the location of the 7E7 (later 787), and fairer access to the U.S. defense market. Boeing, on the other hand, wanted to stop any more government loans to cover A380 cost overruns, and no more launch aid for any new Airbus programs.

It was the latter issue that caused problems in the talks, particularly after October 2004, when the United States decided to terminate the 1992 bilateral agreement and filed a formal complaint over illegal subsidies to Airbus with the World Trade Organization. The European Union responded with an immediate counterclaim alleging that Boeing had been receiving similar illegal subsidies from the U.S. government.

“The U.S. move in the WTO concerning European support for Airbus is obviously an attempt to divert attention from Boeing’s self-inflicted decline,” said EU Trade Commissioner Pascal Lamy. “If this is the path the U.S. has chosen, we accept the challenge, not least because it’s high time to put an end to massive illegal U.S. subsidies to Boeing which damage Airbus, in particular those for Boeing’s new 7E7 program.” Robert Zoellick, the U.S. trade representative, retorted the move was “about fair competition and a level playing field. Some Europeans have justified subsidies to Airbus as necessary to support an industry in its infancy. If that rationalization were ever valid, its time has long since passed.”

As the dispute rolled into 2005, now with new EU Trade Commissioner Peter Mandelson at the head of the European delegation, it threatened to become the most expensive trade dispute in WTO history. It also looked likely to entangle the Japanese government, which had openly subsidized its own manufacturers, which, in turn, took large contracts for the new 787 program. The intensity grew with preparations for the launch of the A350, the Airbus countermove to the 787 that Boeing had both expected and feared. At the time of the A380’s first flight, it seemed as if a full-blown trade war could well be looming on the horizon. Some hope emerged at the 2005 Paris Air Show, however, when Airbus delayed the industrial go-ahead of the A350 until later that year. Both sides hoped the move would give time for a negotiated settlement through the WTO.