The Next Big Thing?

Airbus is ready roll out its monster jet…

This new plane has the potential to cement Airbus’s position as the world’s leading producer of commercial aircraft. Figures released this week show that, for the second year in a row, Airbus delivered more new aircraft than Boeing. In addition, Airbus continues to land more orders for future deliveries.

Why has Airbus been able to surpass Boeing? Boeing argues that it is the result of the tacit subsidies that Airbus still receives from EU governments. But Airbus counters by saying that Boeing effectively receives just as many subsidies from the US government through its military contract work, which pays for a lot of Boeing’s R&D and human capital development.

My sense is that it’s plausible that these two types of subsidies roughly cancel each other out, so that Airbus’s success is probably mostly due to the fact that they have been able to provide comparable (some would say slightly better) airplanes at lower prices. But this is something that may well change in the next year or two, thanks to the strong euro and weak dollar, which should give Boeing a price advantage. Consider it a case of the J-curve effect in action. When the value of a currency changes, it takes some time for new import and export contracts and relationships to be established to take advantage of the new prices, leading to a (possibly considerable) lag between changes in the currency and its effect on the trade balance. If it has any effect at all, that is. But that’s another story.

Kash