Re: Subsidies ...

From:         Alain.Deckers@man.ac.uk (Alain Deckers)
Organization: PREST, University of Manchester
Date:         30 Mar 96 16:01:08 
References:   1 2 3
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On 29 Feb 96 02:04:11 , rna@gsb-crown.Stanford.EDU (Robert Ashcroft)
wrote:

>In article <airliners.1996.162@ohare.Chicago.COM>,
>Michael Carley  <mjcarley@maths.tcd.ie> wrote:
>>bosc@perige.eis.enac.dgac.fr (Jean-Francois Bosc) writes:
>>
>>>However, living in a country where opinions are biased the other
>>>way, I've heard and read many times that the only difference
>>>between government subsidies in Europe and the US is that
>>>European ones are called subsidies ...
>>
>>>Any comment ?
>>
>>Think of it this way---would there have been a B707
>>without heavy subsidy from the USAF? Does anyone
>>know roughly what the value of hidden subsidies to
>>the US aero industry from military development
>>contracts and NASA work is? Just wondering.

>You'd still have to explain the DC-8 (very few bought by the US military),
>and, for that matter, the Convair 880 and 990 (707-class jets produced
>by Convair simultaneously).

>And that's even assuming there _were hidden subsidies, which has yet to
>be proven.

>In fact the Convair 880/990 is an excellent example of the market at
>work.  They weren't competitive with the 707/DC-8, and so the company
>exited the market.  No subsidy from the US govt, just the old heave-ho.

I missed the beginning of this thread, so please forgive me if I am
going over old ground. I also realise that RNA may no longer be able
to state his case in this forum, so what follows is intended as a
general statement of my views rather than a rebuttal of his arguments.
I'd just like to make two points:

1) The US government has been known to intervene when important
defence contractors and/or aerospace firms experience financial
difficulties. I have two cases in mind: the merger of Douglas and
McDonnell (in 1967?), which was trigered by Douglas's difficulties and
made possible by a federal loan guarantee, if I remember correctly;
the US govt. also intervened to save/help Lockheed during the 1970s
when it messed up its contract on the cargo aircraft it was producing
for the USAF (again, with a federal loan guarantee? I don't have the
details; perhaps some older s.a.a hands may be able to provide the
info).

2) I think that to question the importance of defence contracts in
allowing Boeing to establish its pre-eminence in the commercial
jet-aircraft field is simply disingenuous. Let's look at some facts --
as provided by Herman O. Stekler in "The Structure and Performance of
the Aerospace Industry" (Berkeley: University of California Press,
1965). This is a bit long, but in my opinion it makes very interesting
reading. ;)

Ranked by sales (in millions of US dollars), the largest US airframe
producers in 1949 were: Boeing (286.8), Consolidated Vultee (196.8),
North American (124.7), Lockheed (117.7) and Douglass (117.0)
(Stekler, p. 15). The pattern was, however, very different once one
distinguishes between civil and military aircraft. During the early
1950s, Douglas continued to dominate the civil transport market, with
over two-thirds of the aircraft in US scheduled domestic and
international service.  By 1955, this figure had declined somewhat,
but still represented just under 60%. Over the same period, Boeing was
only a small player in the commercial aircraft market with a small
(5%) and _decreasing_ market share, as measured by number of aircraft
in service.

Boeing's pre-eminence in the sales ranking was due almost entirely to
its role as contractor to the US Air Force, for which it was engaged
in the development of several jet-powered heavy bombers. [I seem to
remember reading that Boeing actually had an in-house jet-engine unit
at the time (?)] This allowed Boeing to acquire a level of expertise
in jet-powered large transports which was largely unavailable to other
airframe manufacturers, and permitted it to exploit 'first-mover'
advantages. How else do we explain the wholesale transformation of the
industry rankings in the late 1950s and early 1960s? By 1961, Boeing's
707 and 720 models "accounted for 170 out of 302 jet-powered
transports which were in operation by US-owned, scheduled, domestic
and international airlines" (Stekler, p. 23).

Of course other manufacturers followed suite (including Convair,
Fairchild and Grumman, and we know how well they did). Douglas in
particular had little option but to follow Boeing once the latter had
decided to introduce jet-powered commercial aircraft _and_ it became
clear that these would be economically competitive (Douglas did in
fact wait for a while before commiting to jet aircraft, not entirely
surprising given its position as the leading player in the pre-jet
market. Would it have experienced the same doubts if it had had access
to data from jet-powered large bombers?).

Arguing about whether or not we call Boeing's defence contracts a
"subsidy" is to engage in hair splitting. Competition is a dynamic
process, and the fact is that Boeing's role as a defence contractor
significantly affected the terms of competition in the commercial
aircraft manufacturing industry during the 1950s.

This is not to say that the same arguments apply _today_. I accept
that defence contracts are not nearly as important to Boeing nowadays,
and that they certainly don't explain Boeing's _current_ success at
making and selling commercial aircraft. But this is now and that was
then. Even so, there are still _some_ spill-overs from defence to
civil aerospace technology today (e.g. in avionics and materials) and
NASA also finances significant ammount of research in civil
aeronautics. These factors may be more or less important to US
coomercial aircraft manufacturers, but they cannot be dismissed out of
hand.

Sorry about the rant.

Cheers,

A.

--

Alain Deckers				Tel: +44 (0)161 275 5943
PREST, The Universiy of Manchester	Fax: +44 (0)161 273 1123
Manchester M13 9PL			Email: Alain.Deckers@man.ac.uk
United Kingdom				<URL:http://www.man.ac.uk/%7Embzalgd/>