Wed Jun 30, 2010 5:51pm EDT

* EU must eliminate prohibited export subsidies

* Boeing: ruling shows Airbus took market share illegally

* EU says will decide shortly whether to appeal ruling

* Airbus says it will still seek government loans for A350 (Adds market activity, U.S. lawmakers' demand)

By Jonathan Lynn

GENEVA, June 30 (Reuters) - World Trade Organization judges gave the European Union a stinging rebuke on Wednesday, saying the EU must axe prohibited export subsidies to plane-maker Airbus (EAD.PA) which had injured U.S. rival Boeing (BA.N).

The WTO panel concluded Airbus had been able to launch a series of passenger jets only thanks to subsidies from the EU and member states Britain, France, Germany and Spain, without which it would be a very different and much weaker company.

The ruling marks a big setback for Airbus, but is not the end of its battle -- the world's largest and costliest trade dispute -- with Boeing over subsidies in the market for large civil aircraft worth $3 trillion over the next 20 years.

"These subsidies have greatly harmed the United States, including causing Boeing to lose sales and market share. Today's ruling helps level the competitive playing field with Airbus," U.S. Trade Representative Ron Kirk said in a statement.

"President Obama and I are committed to enforcing our trade agreements and, when necessary, using the dispute settlement process that is consistent with the rules-based global trading system at the World Trade Organization."

If the ruling is upheld on appeal and the EU refuses to stop the offending practices, the United States could ask the WTO for permission to slap sanctions on EU goods.

The WTO panel found that British, German and Spanish aid to Airbus for its flagship 525-seat A380, the world's largest airliner, amounted to illegal export subsidies and must be corrected within 90 days. Boeing estimated the loans at $4 billion but Airbus declined to provide an estimate.

The WTO found that British, Spanish and German loans for the A380 contained illegal export aid but cleared a French loan.

AIRBUS: NO REQUIREMENT

Allan McArtor, chairman of Airbus Americas, said the company was not obligated to repay any subsidies found by the WTO panel or any outstanding government loans.

"There is no requirement to repay anything in the WTO process," McArtor said in an interview.

The ruling, which Airbus hopes the EU will appeal, only imposes a future obligation on European governments that provide launch aid, he said.

Boeing said Airbus must repay $4 billion in illegal aid for the A380 or "restructure the A380's financing to proven commercial terms.

The European Commission said it would decide shortly whether to appeal the 1,000-page Airbus ruling, and reiterated a call for negotiations.

"The EU remains committed to a negotiated outcome to the dispute with no pre-conditions on either side," EU Trade Commissioner Karel De Gucht said in a statement in Brussels.

The WTO said prohibited subsidies should be halted immediately and said this meant 90 days; but the legal process could mean months or years before this deadline is reached.

Boeing shares in New York closed down 0.5 percent on Wednesday at $62.75, outperforming a slightly weaker market.

In Europe, where markets closed shortly after the decision was released, shares in Airbus parents EADS ended 0.8 percent lower at 16.78 euros.

TANKER DISPUTE

Wednesday's report followed months of leaks and both sides rushed out their interpretations even before the 1,050-page documents were wheeled out on trolleys for reporters in Geneva.

A first confidential report in a countersuit brought by the EU against U.S. support for Boeing is expected on July 16.

Final resolution of the two cases may well shape the civil aviation market, where Airbus and Boeing have together nearly $1 trillion of aircraft on their order books, for years to come.

More immediately, it could fuel a row in the United States over one of the biggest defense deals in history.

Both Boeing and Airbus parent EADS are due to submit bids by July 9 for a contract worth up to $50 billion for new tankers for the U.S. Air Force, based on converted passenger jets.

The EADS offering is based on the Airbus A330 -- one of the planes found to have been unfairly subsidised -- and Boeing is already making much of this, although it remains to be seen to what extent this will sway the Pentagon.

A group of U.S. lawmakers on Wednesday renewed a demand that the Air Force factor the WTO ruling into their decision on the tanker competition.

Boeing said the ruling proved that Airbus had been able to take market share from Boeing -- nudging it out of number one place in the process -- only because of subsidies.

"It has struck at the heart of subsidies for Airbus, held that they are illegal, and must end forthwith," Boeing general counsel J. Michael Luttig told Reuters.

FOCUS ON AIRBUS A350

Airbus and France, where the company is based, said the funding system itself, which is based on government loans to be paid back as planes are sold, had not been faulted.

"Neither jobs nor any profits were lost as a result of reimbursable loans to Airbus," the company said.

The case did not cover Airbus's future A350 airliner, but Boeing said the ruling would prevent European governments from paying similar loans to develop that plane. Airbus denied this and said it would press ahead with talks on setting up loans.

U.S. trade officials said it would be very disappointing for European governments to provide launch aid loans for the A350 in light of the WTO's ruling.

But Airbus' McArtor said European government have already pledged they would make any new launch aid loans for Airbus comply with WTO rules.

"If the USTR is disappointed in that, I'm sorry. That's the way they do business in Europe and the panel found that such loans are perfectly compliant ... as long as they are under acceptable terms," McArtor said.

The United States could demand to see the terms of any loans for the A350 to ensure they do comply with the ruling, said Robert Novick, a partner at WilmerHale who has represented Boeing in the dispute.

Both sides have 30 days to appeal the ruling.

The report -- and its 90-day deadline to withdraw the subsidies -- does not come into effect until it is officially adopted by the WTO membership, after any appeal process. (Additional reporting by Charlie Dunmore, Tim Hepher, Doug Palmer, James Regan; editing by Stephanie Nebehay, Jon Hemming and Mohammad Zargham)

http://www.reuters.com/article/idUSLDE6531QZ20100630