The chair of the Federal Trade Commission, Lina Khan, is using the crisis facing aerospace giant Boeing to press her case that “national champions”—firms deemed too important to face antitrust enforcement—invariably behave badly because they are protected from competition. Whatever their source, Boeing’s massive problems are not due to a lack of competition, as Khan tried to argue in a recent, head-scratching speech that ignored the U.S. plane maker’s decades-long rivalry with Europe’s Airbus Industrie. Khan misconstrued other events and issues as well, including the 1997 Boeing-McDonnell Douglas merger, which is central to her story, and Europe’s history of subsidies in civil aviation. The economics of the commercial aircraft industry, which has traditionally limited the number of viable global producers to two, were nowhere addressed.

A question for career staff at the FTC: Is anyone vetting Chair Khan’s public remarks?

Khan’s Critique

In her March 13 speech at the Carnegie Endowment for International Peace, Khan lauded U.S. antitrust agencies’ past challenges to corporate titans like IBM and AT&T—challenges whose success she believes led to the explosion of technological innovations that Americans enjoy today (note that the evidence for this assertion is contested).  By contrast, she said the times when the U.S. government has protected its national champions from competition serve as a cautionary tale. According to Khan, Boeing represents “the single best example of why a national champion strategy can be catastrophic.”

Khan pointed to the 1997 Boeing-McDonnell Douglas merger—a merger the FTC approved—as the defining event because it made Boeing the sole commercial aircraft manufacturer in the United States. “[U.S.] policymakers wanted a national champion and so they got it [as a result of the merger],” she said.

According to Khan, once Boeing had “eliminated its domestic competition,” the company engaged in the same harmful behaviors that characterize other highly concentrated industries. First, Boeing slowed spending on innovation and reduced product quality, because “firms that face little competition have limited incentive to improve their products.” Second, Boeing executives began to treat their knowledgeable workforce as a cost rather than an asset, with tragic results. Third, Boeing became a too-big-to-fail point of leverage for foreign countries seeking to influence U.S. policymaking. Khan notes that, as it was buying McDonnell Douglas, Boeing convened its corporate board in Beijing and then lobbied Congress to end the annual review of China’s trading rights so that it could sell more planes there.

The Defects in Khan’s Critique

Khan’s assertion of bad behavior by Boeing is a clear reference to the string of crises that the company has faced since at least 2018-2019, when hundreds of people died in two similar crashes of its 737 MAX 8 plane. More recently, a door panel on an Alaska Airlines 737 MAX 9 blew out minutes after takeoff, leaving a gaping hole in the side of the plane and forcing the pilot to make an emergency landing. The ongoing investigations of these and other incidents have revealed serious problems with Boeing’s design and engineering process and its manufacturing quality control. The Department of Justice is investigating the Alaska Airlines incident, and the Federal Aviation Administration has given Boeing a deadline to present a course-correction plan.

Boeing’s problems have left many people wondering how a company revered for its engineering and manufacturing excellence could have stumbled so badly. A number of aviation experts trace the problem to a change in corporate culture that occurred following the merger with McDonnell Douglas, as McDonnell Douglas executives from the financial side of the industry replaced Boeing officials whose careers had been in engineering and production. This merger/culture-change theory is central to investigative reporter Peter Robison’s 2121 book, Flying Blind: The 737 MAX Tragedy and the Fall of Boeing.[1] Scores of popular media reports, including a recent segment of comedian John Oliver’s weekly television program, have touted this same theory.

The merger/culture-change theory of Boeing’s current crisis may well have merit. By contrast, Khan’s effort to assign the blame to the monopoly status that the merger ostensibly conferred on Boeing is not just flawed; it is bizarre.

First, Khan’s view that the 1997 merger allowed Boeing to eliminate its domestic competition is simply wrong. Although McDonnell Douglas had been a leader in aviation going back to the 1920s (the Douglas Company produced the first plane to circle the earth), by the time it merged with Boeing, McDonnell Douglas was a commercial has-been.[2] In the FTC’s review of the merger, four of five commissioners concluded that McDonnell Douglas no longer constituted a “meaningful competitive force” in the commercial aircraft market, and that “there is no economically plausible strategy … that would change that grim prospect. The FTC explicitly rejected the speculation that it was approving the merger to create a (commercial) “national champion.”

The Boeing-McDonnell Douglas merger was instead a response to national security considerations. In 1993, the Department of Defense (DOD) told defense contractors they needed to reduce their overhead, because post-Cold War conditions dictated that DOD buy smaller numbers of existing weapon systems while procuring the next generation of systems. DOD’s message, delivered at a Pentagon gathering later dubbed “The Last Supper,” set off a frenzy of mergers and consolidation among the defense firms. While Boeing stayed out of the initial fray, by 1997, McDonnell Douglas was reeling from several major reversals, including the cancelation of a weapon system contract and elimination from the competition to build the next-generation Joint Strike Fighter. Boeing was the logical partner for a failing McDonnell Douglas because the two companies’ defense businesses did not overlap and McDonnell Douglas’s commercial aircraft business was effectively dead. DOD supported the merger as a way to maintain McDonnell Douglas’s defense capabilities while providing a stronger competitive check on the recently merged Lockheed Martin. DOD also hoped Boeing could inject some commercial manufacturing know-how into a company that had become almost entirely defense-dependent.

In short, the Boeing-McDonnell Douglas merger was a defense-focused transaction that had a de minimis effect on the commercial landscape. Chair Khan’s assertions to the contrary reflect a misreading of U.S. aviation history.

Second, Khan’s argument that Boeing disinvested in innovation and product quality following the merger because of its newfound status as a monopolist (“firms that face little competition have limited incentive to improve their products”) is equally defective. Boeing and Airbus had competed since the 1970s, and by the time of the merger, that rivalry had become intense: in 1997, Airbus had fully a third of the global market—up from 16 percent a decade earlier—compared to Boeing’s 60 percent. In the over 20 years since the merger, the competitive pressure on Boeing has, if anything, increased, as it has steadily lost market share to Airbus.

In sum, while the merger may have led to disinvestment in innovation and product quality, lack of competition cannot be the explanation. Boeing was in the fight of its life with Airbus and that pressure has only intensified. Stated differently, Boeing’s performance decline has occurred in the face of a tougher competitive environment, rather than the reverse, as Khan’s argument implies.

Third, Chair Khan seems equally confused about the rivalry between the European Union and the U.S. government. Airbus exists because several European countries provided billions of dollars of direct support—state subsidies—for the development and production of large civil aircraft.  To be sure, U.S. commercial aircraft manufacturers historically benefited greatly from DOD’s large investments in aviation technology for the military—primarily through the spillover of DOD-funded R&D and the “life vest” that defense contracts provided during commercial downturns. But those benefits were indirect and did not meaningfully distort the dynamic of the commercial market. By contrast, Europe’s direct and massive subsidies incentivized Airbus to develop and produce aircraft that might not otherwise have been financially viable.

The development and production of large commercial aircraft is characterized by enormous fixed costs and economies of scale and scope; historically, it has been, in effect, a “natural duopoly.”[3]  Could Airbus have broken into the global market without significant state subsidies?  Probably not. But that does not mean the U.S. government should have welcomed the competition from a de jure national champion whose success had come at the expense of McDonnell Douglas.

The Clinton Administration made it a priority to combat what it viewed as unfair EU trade practices in civil aviation. While state aid was the major issue (a 1992 agreement reduced but did not eliminate the problem), it was not the only one.[4] For example, the EU issued a draft regulation to reduce aircraft engine noise that targeted U.S. manufacturer Pratt & Whitney while protecting Europe’s Rolls Royce. The EU withdrew the so-called “hushkit” regulation only after it sidetracked a heads-of-state summit. As another example, the EU agreed not to block the merger of two U.S. avionics firms if the U.S. government dropped its planned trade case against a heavily subsidized European avionics manufacturer (that deal was never made public).

The highest drama occurred in 1997, when the EU’s chief competition authority, a Belgian-socialist named Karl van Miert, publicly threatened to block the Boeing-McDonnell Douglas merger because of the potential harm to Airbus. (Unlike the United States, with its consumer-focused competition policy, the EU is allowed to consider the impact of a merger on domestic competitors.) A potential trade war was averted when DOD sent a decorated Air Force general to Brussels to explain why the merger was important to the U.S. military. 

Remarkably, in her recent speech, Chair Khan expressed sympathy for the EU’s threats to block the Boeing-McDonnell merger and disdain for the U.S. government’s response to such threats. “To override European objections to this merger, the White House reportedly threatened [trade] sanctions if the EU had challenged it,” Kahn said disapprovingly. (Note that this statement was not in Khan’s prepared remarks released by the FTC.)

In fact, the White House made no overt threats, although it did work with agencies to develop a set of potential retaliatory options. Perhaps Chair Khan would be consoled to know that the EU extracted several significant concessions from Boeing, including an agreement to cancel its exclusive supply contracts with three major airlines, and an agreement to license patents obtained under U.S. government-funded contracts so that non-U.S. companies would have access to them.

Khan’s criticism of Boeing for making itself a too-big-to-fail point of leverage for foreign countries further reflects her limited understanding of U.S. policymaking. Khan asserts that China would order Boeing planes contingent upon certain U.S. policies, such as holding off on sending warships into the Strait of Taiwan or lifting bans on the export of certain technologies. The United States does not set national security policy to facilitate commercial exports: While China may have made demands related to Taiwan, it is naïve to think the U.S. government would have agreed to them. As for Khan’s second example, “aerospace offsets”—the transfer of technology and/or production to gain access to foreign markets—is a longstanding issue for U.S. military and commercial aircraft producers alike.[5] China has taken the demand for technology and local production to a new level, but the practice is not confined to Boeing nor aircraft production.

As another example of Boeing’s privileged, too-big-to-fail status, Khan points to the $25 billion that Congress allocated to the company during the COVID-19 crisis. Inconveniently for Khan’s story, Boeing declined to accept the money, opting to raise capital privately. Another inconvenient fact is that, among many other targeted appropriations, Congress directed $50 billion in COVID-related financial assistance to 10 U.S. airlines, none of which was too big to fail. 

Conclusion

The term “national champion” typically refers to a company in a strategic sector that receives government support, including protection from domestic competition, in exchange for advancing national interests. Europe has long relied on a national-champion strategy, and Airbus is a prime example. China follows a similar approach as illustrated by the nascent state-owned aircraft production firm, COMAC, which has received $75 billion in subsidies so far. By contrast, the U.S. government has eschewed a national-champion strategy, which it sees as both inconsistent with this country’s capitalist tradition and of questionable effectiveness.

One of the perceived weaknesses of a national-champion strategy is the tendency for the sponsor government to involve itself in the enterprise’s decision-making on corporate strategy and other issues, in the process jeopardizing the enterprise’s ability to meet its objectives. Airbus’s improved performance over the last 25 years reflects in part a gradual withdrawal by its sponsor governments from heavy involvement in such decision-making.

Chair Khan uses the term “national champion” differently—largely in the context of an ongoing debate over whether the United States needs technology firms with scale to go up against foreign competitors, especially ones from China. Khan asserts that these U.S. firms should be subject to aggressive antitrust enforcement because their dominance in U.S. domestic markets threatens innovation. Khan’s critics dispute the innovation charge (where is the evidence, they ask?) and argue that antitrust action would reduce these firms’ ability to compete internationally. 

Whatever one thinks of Khan’s critique of national champions as she defines them, it is not served by her reliance on Boeing as a case study.  Boeing is a de facto national champion simply because it is the sole remaining U.S. producer of large commercial aircraft, and it enjoys few if any of the benefits that flow to a de jure national champion like Airbus. The U.S. government “advocates” for Boeing while sponsor governments actively intervene in markets on behalf of Airbus and, more recently, COMAC. This is a lightning-versus-lightning-bugs distinction that seems lost on Chair Khan.  

Khan may have chosen to focus on Boeing because of the topicality of the theory that the company’s current crisis can be traced to its merger with McDonnell Douglas (how often does John Oliver target a seemingly obscure merger in his weekly rant?).  But proponents of that theory have a plausible story as to how the merger may have caused harm—namely, through the replacement of Boeing’s traditional, safety-obsessed engineering culture with one focused on aggressive cost-cutting and stock buybacks.

By contrast, Khan’s “merger theory” of the Boeing crisis rests on assertions that are 180 degrees off: 1) that the Boeing-McDonnell Douglas merger allowed Boeing to eliminate its domestic competition: wrong—McDonnell Douglas was no longer a meaningful competitor; and 2) that Boeing cut spending on innovation and product quality following the merger because it faced little competition: wrong—Boeing faced fierce and growing competition from Airbus.

Khan’s critique of Boeing is defective in part because it ignores the basic economics of the commercial aircraft sector. The sector’s oligopolistic structure is a function of the enormous fixed costs and economies of scale and scope that characterize large aircraft production. Europe’s aggressive support for Airbus guaranteed that the United States would be left with a single producer. Thus, Khan’s pejorative reference to industry concentration as an explanation for Boeing’s poor performance is puzzling. Her seeming fixation on the lack of competition among U.S. domestic producers specifically is puzzling in another way. The market for large commercial aircraft is global. U.S. airlines have the luxury of choosing between Boeing and Airbus aircraft for their fleets, and most U.S. airline fleets contain both.

The FTC as an agency presumably has deep expertise in aerospace based on its role as the competition overseer for that sector. And in her recent speech, Chair Khan cited the importance of the FTC’s “ground-level view of how markets are structured.” It is disappointing that Khan’s critique of Boeing, billed as a poster child for why other coddled national champions need antitrust scrutiny, reflected so little sectoral expertise and understanding of markets.

Endnotes