Aviation: Battle for the Sky

Boeing CEO Harry Stonecipher spent last Christmas at his St. Petersburg, Fla., home. He wasn't happy about that. Angered because key airlines like AirAsia and Air Berlin were buying rival Airbus planes, all too aware that the European manufacturer would soon be rolling out its new 555-seat, double-decker A380 jumbo liner, Stonecipher had told his salespeople he would travel anywhere in the world, even on Christmas Day, if he was needed to close a deal. Yet no one called. "The whole idea is that I will go anywhere for them," he says.

Stonecipher stayed home last month too when five European leaders, 12 airline CEOs, scores of journalists and more than 5,000 invited guests gathered at Airbus headquarters in Toulouse, France, to celebrate the unveiling of the A380, which cost $12 billion to launch. The roll-out of the world's largest passenger plane is a powerful symbol of the coming of age of 35-year-old Airbus and underscores that the world's two major commercial-airplane makers--Airbus and Boeing--are at each other's throats as never before. Although the U.S. government and the European Union reached a temporary deal last month to avoid a World Trade Organization (WTO) fight over government subsidies, the two sides were sniping at each other again less than 24 hours later. When Airbus CEO Noel Forgeard said aircraft launch aid (the no- or low-risk loans that European governments have historically provided the company to help finance plane development) wasn't "part of the past," a spokesman for the U.S. trade representative fired back, "The U.S. will not agree to permit new aircraft subsidies that are illegal under WTO rules. That certainly covers launch aid." The two sides have to reach a new agreement by March, or a nasty legal battle will break out.

Competition in the commercial- airplane market--estimated to be worth $2 trillion over the next 20 years--is expected, but this feud has bigger implications. At its core is a debate about the relationship between the state and private enterprise--specifically, what sort of helping hand can a country legally give its friendly local planemaker? Because of the big money involved and the critical role that aircraft play in national security, the spat threatens already tense U.S.-E.U. relations and could hurt the huge aerospace industry and its thousands of employees on both sides of the Atlantic.

The dispute also illuminates the painful decline of Boeing, the 90-year-old aerospace company created by Bill Boeing from modest beginnings in a Seattle barn. Although its 156,000 workers produce thousands of products, from Internet equipment to satellites, the Boeing name has always meant aircraft. Yet for the second straight year, the $50 billion firm, based in Chicago, has been outsold by Airbus. In 2004 Boeing saw its market share fall to 43%, from 67% just five years ago.