Jet-propelled dogfight over Paris pits Washington against Brussels

Tomorrow, at around 12:10pm, the world's largest passenger jet will fly over Le Bourget airport near Paris. The rare fly-by of the double-decker Airbus A380, which is due to enter service in 2007, will be the climax of the opening ceremony of the Paris Air Show.

Tomorrow, at around 12:10pm, the world's largest passenger jet will fly over Le Bourget airport near Paris. The rare fly-by of the double-decker Airbus A380, which is due to enter service in 2007, will be the climax of the opening ceremony of the Paris Air Show.

With an address by French President Jacques Chirac, the biannual showcase of aeroplanes will have something to celebrate - as the civil aviation sector is returning to rude health. But also on display at the ceremony will be deep unrest in the sector.

While Airbus executives cheer the A380 as it flies overhead, the executives at Boeing will be gnashing their teeth. This is more than healthy rivalry between two giants: the industry is gripped by a row which has got so out of control that it could spark the largest-ever transatlantic trade war. This isn't just Airbus versus Boeing, it is Europe versus America.

The row stems from the A380 and the hundreds of millions of euros that Britain, France, Germany and Spain have lavished on Airbus to help develop the mould-breaking project.

The money has helped the European company overtake Boeing since 2003 by delivering more commercial jets. This year, Airbus expects to deliver up to 360 planes - against the American giant's expected 320.

Boeing has had enough. With the full support of President George Bush, it has lodged a formal complaint with the World Trade Organisation (WTO).

Lew Platt, the chairman of Boeing, says: "It is time to end the subsidies. Airbus is a mature business and it doesn't need the subsidies as it distorts the market."

Bob Novick, the senior legal counsel to Boeing, adds: "Airbus is getting the money upfront to develop the planes. Therefore, the development risk shifts from the company to the government. Boeing, because it does not receive launch aid, must take on all that risk itself."

Airbus and the European governments, represented by the EU Trade Commissioner, Peter Mandelson, have hit back at Boeing. They have branded it as hypocritical because it has received billions of dollars worth of tax breaks from Washington State.

Boeing is unflinching and it has set Airbus an ultimatum: the company will only negotiate with its European rival if it promises to give up all the aid it receives. Then, Boeing will only "consider" reducing the amount of money it receives in tax breaks. Anything short of this and the issue will be left for the WTO to resolve.

The consequences of this could be enormous. Most industry analysts expect that the WTO would order both Europe and America to reduce the amount of money that they give to the companies. The WTO, though, has no power of enforcement. So, if either side refuses to abide by the ruling, this would trigger a trade war.

A senior American lawyer familiar with the WTO says: "The US reserves the right to impose economic sanctions on Europe and offset the harm done to Boeing. The US will figure out where the maximum political leverage is, to encourage compliance. Given the magnitude of the harm done, we need to look at the really big-ticket items."

Airbus's proposed new mid-range A350 jet is the cause of the current dispute. Airbus, which is shortly expected to announce chief operating officer Gustav Humbert as its new chief executive, has put in requests for aid to cover up to a third of the €4bn (£2.7bn) development costs of the plane. What rankles with Boeing, which is also seeking a new chief executive, is that the A350 will be in direct competition to its proposed 787 jet, dubbed the "Dreamliner".

Airbus had hoped to launch the A350 at Le Bourget this week, but it has postponed that until September. The delay is down to the British, German, French and Spanish governments dithering over the announcement of their aid packages for the plane. Alun Michael, the Industry minister, will be visiting the air show tomorrow, but will refuse to comment on Airbus's request for £389m from the UK Government, as did the Secretary of State for Trade and Industry, Alan Johnson, in his interview with us (see page 5).

Tony Blair is keen to see the aid paid to Airbus. It would secure 32,400 jobs in Britain, where the A380's carbon-fibre wings would be built. It is understood that the Prime Minster is now planning to ensure a swift decision on Airbus's application.

Mark Tami, the Labour MP for Alyn & Deeside, one of the areas that would benefit from the work, held a 20-minute meeting with Mr Blair on Wednesday to discuss the Airbus application. "It is vital we secure the wing work," he says. "Not only will this safeguard the future of Airbus in Britain but the whole composite industry in this country."

To soften its disappointment over the delay, Airbus will announce this week that it has received commitments for more than 100 A350s from potential customers. Executives refuse to comment ahead of the air show, but Airbus will announce an order from the company that is emerging from the merger of American West and US Airways. To secure the deal, Airbus is understood to have promised to hand over a $250m (£137m) unsecured loan to the company in return for the order.

Boeing, on the other hand, isn't expected to announce any big orders for its 787. But Mr Platt explains: "We took a decision some time ago to announce orders when we get them. You should not expect a blizzard of orders at the show."

In the past, the rivalry between the two companies has been tempered by their differing strategies. Airbus predicted that, in the future, airlines would want to move large volumes of people in one go to major airports and then feed them out on smaller planes - in a system dubbed "hub and spoke". This view shaped the development of the A380.

Boeing came to the opposite conclusion. It declared that passengers would rather travel directly to regional airports, in a system known as "point-to-point". This theory prompted the smaller 787, which is being designed to be fuel-efficient.

But both companies' positions have subtly shifted to a middle ground in recent months, and Airbus and Boeing are now covering each other's strategic bets.

At Airbus, the tactic has been to go head-to-head against the Dreamliner with its A350.

At Boeing, designers are working on plans for a plane that would rival the A380. The 747 Advanced is a stretched version of it its successful jumbo. While it would have 450 seats as opposed to the A380's 550, the jet would be cheaper to develop because it is based on an existing design. What's more, internal Boeing estimates show that the plane would offer a 23 per cent reduction in journey costs when compared to the A380.

Boeing has yet to announce formally whether it will develop the 747 Advanced. But Mr Platt says: "The airlines we are talking to are pretty enthusiastic. Right now, it looks like this is a programme that is gaining momentum. However, a final proposal hasn't been formally presented to the board of directors. An announcement will follow discussion with the board. I can tell you that we have a board meeting fairly soon."

The problem for Boeing is that it has been, according to industry analysts, "dithering" for too long over the 747 Advanced. As a result, Airbus, with its A380, has already bagged most of the potential customers.

Of the major airlines, only BA and Cathay Pacific have yet to plump for the A380. A BA spokesman says: "We will be assessing our fleet options over the next five years and deciding whether it will be the stretch 747 or the A380. We are encouraged by the fact that Boeing wants to put its toe back in the water."

Airbus has hit some turbulence with its A380. Earlier this month, the company announced that the delivery of its giant jet would be delayed by up to six months. An official says: "While the delay is disappointing to our customers, in the wider scale of things, it is relatively small.

"It will be well worth the wait for the airlines because it is a good aircraft."

Virgin Atlantic, which has paced a $1.5bn order for six A380s, may take some convincing. On Tuesday, it received a letter from Airbus detailing the extent of the delay.

A spokesman for Virgin Atlantic says: "We are still digesting the news and we need to figure out how this will affect our expansion plans. We are looking at all options."

These options are thought to include making a compensation claim, reducing the order or cancelling the A380s altogether (though industry watchers believe this is a scare tactic to negotiate a better compensation deal).

So, as Airbus and Boeing arrive at the air show, both companies will have plenty of points to score against each other. And the rivalry is great news for the airlines, which are enjoying competitive pricing and plenty of new products.

But there is a danger that this rivalry will go too far now that it has spilled over into geopolitics. The last thing the industry needs is a trade war between Europe and America.

WHO'S THE DADDY NOW? THE TRIALS OF BOEING AND AIRBUS

On paper, Airbus is winning the battle with its American competitor. Formed in 1970 and for the best part of two decades regarded as an upstart by its grander rival, Airbus now makes more planes than Boeing: last year it delivered 320 compared to Boeing's 285, and it is expected to deliver more planes again this year. But there are signs that Boeing may actually land more orders.

Airbus's unwieldy structure could be its Achilles' heel. The company is 80 per cent owned by Franco-German defence group EADS and 20 per cent owned by Britain's BAE Systems. To maintain its spirit of European co-operation, the Toulouse-based Airbus manufactures its planes in factories in France, Germany, Britain and Spain.

But its pan-European structure has caused difficulties. Earlier this year, the French and German shareholders in EADS fell out over who should succeed Airbus chairman Noël Forgeard. It is rumoured that Airbus's number two, the German Gustav Humbert, will get the job. However, the announcement has been delayed to avoid the French being "humiliated" so soon after the European referendum.

Mr Humbert's first job will be defending the €3bn (£2bn) that the company has received in repayable aid from European governments since 1992.

Boeing, which for the best part of 85 years held the crown as the world's biggest aircraft maker, has recently lurched from one crisis to another.

There was the revelation that it had won a $23bn (£12.6bn) contract for air-to-air refuelling planes with the help of a senior Pentagon official, Darleen Druyun. Boeing was stripped of the contract and Ms Druyun is now in jail.

Then, the company was stung by allegations that it had stolen documents from rival Lockheed Martin.

And to cap it, the man brought in to clean up Boeing, Harry Stonecipher, was forced to resign in March after having an affair with a colleague.

Boeing is, however, in good health. It is still searching for a new chief executive to replace Mr Stonecipher, but it posted a $1.87bn net profit last year.

Airbus will complain that Boeing has been helped by the generous tax breaks it receives from Washington State. Since 1992, this has totalled $3.2bn.