Between a Rock and a Hard Place: Are WTO Subsidy Rules Suitable for the Aviation Industry?

​By James Freirich
James Freirich is a guest writer for The Roundtable and a sophomore majoring in Finance at Boston College’s Carroll School of Management. 
 
Since the 1990s, World Trade Organization (WTO) members have seriously questioned the legality of various types of subsidies utilized within the aviation industry [1]. This can be seen by General Agreement on Tariff and Trade (GATT) violating German export subsidies in 1992, Canadian-Brazilian trade disputes regarding “export-financing programs for regional aircraft” from 1996-2001, and United States (US)-European Union (EU) trade disputes regarding state and investment bank funded launch aid, state tax breaks, and preferential government contracts since 2004. While the use of certain adverse subsidies that distort market competition should undoubtedly be avoided, the aviation industry, since its inception, appears to have been dependent upon subsidy utilization for its survival. Moreover, as seen in the early stages of US aviation industry development, it “lived and died by [government] airmail contracts” (Thomas, Geoffrey) [2]. Accordingly, as “the U.S. Postal Service began selling its airmail routes to private carriers [3]” (Boeing, Lombardi) by virtue of the Contract Air Mail Act of 1925 [4] and the Air Mail Act of 1934 [5], companies like Boeing Air Transport [6] would transform these mail routes to eventual passenger routes-giving way to the domestic airline network. Furthermore, in World War II (WWII), government programs such as the Air Transport Command (ATC) [7] furthered the domestic airline industry by way of awarding contracts and funding.

Aviation subsidization on the European front has been prevalent as well. Dating back to as early as 1919 [8], there consisted of [government] subsidy policies supporting European Flag Carriers. Moreover, in the decades to come, aviation subsidy utilization would be furthered when EU powers came together in the 1970’s [9] to form the aircraft manufacturing giant Airbus and subsequently utilized launch aid type subsidies to build [then] state of the art aircraft that are known today as the A300 family. While the aviation industry initially enjoyed the subsidy benefits that came from being an infant industry, unopposed subsidy protection eventually wore away as the industry developed. Moreover, by the 1950s [10] the aviation industry “could no longer be classified as an ‘infant industry’. Additionally, though regulations such as the Airline Deregulation Act of 1978 certainly fought to limit the use of adverse and market distorting aviation subsidies [within the US], WTO subsidy laws have taken greater steps to regulate subsidies utilized internationally-in an attempt to ensure a free and fair global market. This can be seen by the statutes and articles of the GATT and Agreement on Subsidies and Countervailing Measures (SCM) referenced in every aviation related trade dispute the WTO has ever handled: DS46 [11], DS70 [12], DS71 [13], DS222 [14], DS316 [15], DS317 [16], DS347 [17], DS353 [18], DS487 [19], DS501[20], and DS522 [21]. Furthermore, when reviewing the aforementioned statutes and articles, what seems apparent is that members involved appear to consistently cite the use of prohibited export-contingent [22]; export-competitive [23]; and grant, equity infusion, loan guarantee, and tax credit [24] type subsidies. This means that subsidies such as grants, equity infusions, loan guarantees, or tax credits that are given to an aviation company on the predication that repayment is contingent upon the successful performance of inputs or outputs, for example, would be classified as an adverse and illegal subsidy.

It is important to recognize however, that although various aviation subsidies such as some of the aforementioned are technically classified as illegal under WTO law, they are utilized within one of the most expensive industries in the world. This begs the question can aviation companies survive without receiving the types of subsidies they do? Thus, the following market data will give a picture of just how impactful and expensive the aviation industry can be:

“Oxford Economics [25] suggests, for instance, that aviation directly contributed 8.4 million jobs and US$539 billion to global GDP in 2010 (Currency amounts are given in US$; where other currencies have been transferred into US$ equivalents, values are provided in brackets and refer to May 2016). Adding indirect and induced effects the Air Transportation Action Group estimates that the sector contributed 22 million jobs and US$1.4 trillion in GDP to the world economy in 2010… Doganis [26] suggests that in the period 1990–1993, global airlines made a loss close to US$25 billion, while in the period 2000–2005, losses may have been in the order of US$30 billion, of which a considerable share was covered by government bailouts, i.e., government grants without payback demands. More specifically, this includes US$9.6 billion in ‘state aid’, provided to airlines in the EU in the early 1990s, with recipients including Iberia (£590 ($857) million in 1992, and £460 ($666) million in 1996), Aer Lingus (US$175 in 1993 to 1995), Air France (£2.4 ($3.5) billion in 1994), Alitalia (US$1.7 billion in 1997), LTU (€120 ($137) million in 2003), and Austrian Airlines (€500 ($571) million in 2009). All these subsidies assisted loss-making airlines, and were often classified as Sustainability 2017, 9, 1295 7 of 19 ‘restructuration aid’ for formerly state-owned carriers… In the aftermath of 11 September 2001, some US$5 billion [27] was given in direct grants to US airlines, and supplemented by up to US$10 billion in loans. These subsidies cover losses caused by an external event, and were also awarded to airlines in some European countries. In another case of exceptional circumstances, i.e., the shutdown of large parts of the European airspace during the Icelandic volcano eruption, compensation payments to airlines (and airports) were made by Slovenia. These examples indicate the wide range of subsidies in the form of grants, equity infusions, loans, and guarantees being made to airlines.”

Additionally, it was reported in June of 2014 [28] that airlines make an average $5.42 profit per passenger. In October of 2015, it was estimated that Boeing [then] had accumulated $32 billion in sunken costs due to the production of the 787 [29] aircraft series. To give the reader a better idea of the level of seriousness that encompasses aircraft research and development (R&D), when aircraft manufacturers develop new models they often bet their future on the success of the aircraft. Thus, when Airbus [30] was developing the A350, for example, they insisted on sharing some of the development costs with their industrial partners. This just goes to show that even aircraft manufacturing titans can be put in financial jeopardy when faced with behemoth level operation costs.

Since its inception, the aviation industry has been reliant upon subsidies. This is undoubtedly due to the inherently expensive nature of the industry. Moreover, the industry is so expensive that fluctuating market components can drive costs up to levels that would appear to cripple un-subsidized airports [31], airlines, or aviation companies. Thus, as it appears that the systemic nature of the aviation industry dictates that subsidies will always be prevalent within its walls, I would find it incredibly interesting if, in the name of trade efficacy, law makers and aviation corporations (i.e. aircraft manufacturers, airlines, airports, etc.) reshaped prevailing WTO subsidy regulations by allowing the increased utilization of aviation corporation preserving subsidies in order to better serve the aviation industry in a practical manner.
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This author would like to post face the article with the clarification that any and all suggestions made or given, as it relates to the suitability of certain classifications of subsidies within the aviation industry, are by no means indicative of personal policy beliefs as they [the suggestions] merely serve to provide an academic analysis and pose possible courses of action for increasing the efficacy of international trade.

References:

[1] Gössling, Stefan, Frank Fichert, and Peter Forsyth. “Subsidies in Aviation.” Sustainability Vol. 9, no. Issue 8 (July 2017). http://www.mdpi.com/2071-1050/9/8/1295/pdf.
[2] Discovery, and Boeing. “The Age of Aerospace.” Accessed August 17, 2018. https://theageofaerospace.com/discovery/watch/ep1/ch2.
[3] Lombardi, Mike, and Boeing. “The Legacy of Lindbergh’s Flight.” Boeing Frontiers Online, 2002. https://www.boeing.com/news/frontiers/archive/2002/july/i_history.html.
[4] Smithsonian National Postal Museum. “AIRMAIL CREATES AN INDUSTRY: Postal Act Facts.” Accessed August 17, 2018. https://postalmuseum.si.edu/airmail/airmail/public/airmail_public_postal_long.html.
[5] Smithsonian National Postal Museum. “AIRMAIL CREATES AN INDUSTRY: Another Chance.” Accessed August 17, 2018. https://postalmuseum.si.edu/airmail/airmail/public/airmail_public_chance_long.html.
[6] Id. 3.
[7] Smithsonian National Air and Space Museum. “World War II and the Airlines.” America by Air. Accessed August 13, 2018. https://airandspace.si.edu/exhibitions/america-by-air/online/heyday/heyday01.cfm.
[8] Id. 1. See Page 4.
[9] Thompson, Loren. “European Aircraft Subsidies: A Study of Unfair Trade Practices.” Lexington Institute, March 2010. http://www.lexingtoninstitute.org/wp-content/uploads/EuropeanSubsidiesBrochureFinal.pdf.
[10] Id. 1. See Page 4.
[11] World Trade Organization. “DS46: Brazil — Export Financing Programme for Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds46_e.htm.
[12] World Trade Organization. “DS70: Canada — Measures Affecting the Export of Civilian Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds70_e.htm.
[13] World Trade Organization. “DS71: Canada — Measures Affecting the Export of Civilian Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds71_e.htm.
[14] World Trade Organization. “DS222: Canada — Export Credits and Loan Guarantees for Regional Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds222_e.htm.
[15] World Trade Organization. “DS316: European Communities — Measures Affecting Trade in Large Civil Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm.
[16] World Trade Organization. “DS317: United States — Measures Affecting Trade in Large Civil Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds317_e.htm.
[17] World Trade Organization. “DS347: European Communities and Certain Member States — Measures Affecting Trade in Large Civil Aircraft (Second Complaint).” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds347_e.htm.
[18] World Trade Organization. “DS353: United States — Measures Affecting Trade in Large Civil Aircraft — Second Complaint.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds353_e.htm.
[19] World Trade Organization. “DS487: United States — Conditional Tax Incentives for Large Civil Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds487_e.htm.
[20] World Trade Organization. “DS501: China — Tax Measures Concerning Certain Domestically Produced Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds501_e.htm.
[21] World Trade Organization. “DS522: Canada — Measures Concerning Trade in Commercial Aircraft.” Accessed August 17, 2018. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds522_e.htm.
[22] World Trade Organization. “Agreement on Subsidies and Countervailing Measures-Article 3: Prohibition.” Accessed August 17, 2018. https://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm#art3.
[23] World Trade Organization. “Agreement on Subsidies and Countervailing Measures-Article 27: Special and Differential Treatment of Developing Country Members.” Accessed August 17, 2018. https://www.wto.org/english/docs_e/legal_e/24-scm_03_e.htm#art27.
[24] World Trade Organization. “Agreement on Subsidies and Countervailing Measures-Article 1: Definition of a Subsidy.” Accessed August 17, 2018. https://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm#art1.
[25] Id. 1. See Page 1.
[26] Id. 1. See Page 6.
[27] Id. 1. See Page 7.
[28] Irvine, Dean. “How Airlines Make ‘Less than $6 per Passenger.’” CNN Travel, June 3, 2014. https://www.cnn.com/travel/article/how-airlines-make-less-than-6/index.html.
[29] Gates, Dominic. “Will 787 Program Ever Show an Overall Profit? Analysts Grow More Skeptical.” The Seattle Times, October 20, 2015. https://www.seattletimes.com/business/boeing-aerospace/will-787-program-ever-show-an-overall-profit-analysts-grow-more-skeptical/.
[30] Lagorce, Aude. “Airbus to Tap Partners for A350 Development Costs.” MarketWatch, December 4, 2006. https://www.marketwatch.com/story/airbus-to-tap-partners-for-a350-development-costs.
[31] Id. 1. See Page 6.
Photo Credit: Wikimedia Commons/Giorgio Montersino

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