Airbus SAS parent the European Aeronautic Defense and Space Company (EADS) said yesterday (Tuesday) that it intends to compete against The Boeing Co. (NYSE: BA) for a $35 billion U.S. military refueling tanker contract, continuing a ten-year battle recently plagued by protectionism claims.
This is the third act in a drama that Boeing Commercial Airplane CEO Jim Albaugh refers to as "the longest-running soap opera since 'Days of Our Lives.'"
EADS dropped out of the bidding six weeks ago when its partner in the deal, Northrop Grumman Corp. (NYSE: NOC), claimed the Pentagon's contract proposal had been drawn up to favor Boeing. But the Pentagon agreed to extend the bidding deadline from May 10 to July 9 after European officials claimed the situation reeked of trade protectionism.
EADS tried to find another U.S. company to pair with, but instead was forced to enter a solo bid with the help of American subcontractors. EADS said it felt compelled not to give up because its A330-based tanker is a better fit for the job than Boeing's 767-based tanker.
"We intend to win. We're not bidding just for the benefit of producing more paper. We think we've got a superior product," EADS North America Chief Executive Sean O'Keefe told Reuters.
The deal is likely to be the largest military contract awarded over the next several years. The Air Force will eventually replace several hundred more tankers at a cost of up to $100 billion. Winning this first deal would place EADS in the position to steal sizeable U.S. market share from Boeing.
Pentagon officials said they welcomed competition, which would alleviate fears of Boeing raising its price as the sole bidder.
EADS has nearly completed the tanker's development and is already working with suppliers to reduce the aircraft's maintenance costs. It also plans to build a plant in Alabama if handed the deal, creating tens of thousands of jobs and winning the support of Alabama lawmakers.
Boeing said its 767-based tanker would cost up to 20% less to make than EADS's A330-based tanker and is 24% more fuel-efficient. It also expressed concern that EADS would be able to handle more financial risk with the help of generous subsidies.
The World Trade Organization (WTO) decided last year that EADS received illegal European government subsidies for one of its jet planes. Boeing supporters in Congress think the Pentagon is being too nice after the WTO decision.
"It means we are bending over backwards to include a company that has broken the rules of fair play," Sen. Patty Murray, D-WA, told Reuters.
Political tensions flared last week when Chairman of the House Defense Appropriations subcommittee Rep. Norm Dicks, D-WA, said he hoped EADS would not find a U.S. company partner, which angered European leaders. Sen. Jeff Sessions, R-AL, accused Dicks of "political intimidation."
France, Britain and Germany have all criticized the U.S. government's behavior.
"What is shocking is that you have a government in Washington that never stops making speeches about free trade and anti-protectionism, and then when the choice comes down to the wire, it's their national interests that prevail," Bernard Carayon, a member of the French National Assembly's finance committee, told The Washington Post. "This is a crisis that will leave some traces."
The U.S. Air Force has been in the market to buy 179 planes since 2001. After funds were allocated to lease 100 Boeing 767s in 2002, Sen. John McCain, R-AZ, questioned the Air Force's deal with Boeing, referring to the situation as "corporate welfare." The deal was eventually thrown out when a Pentagon official called the Air Force's procurement process inappropriate.
EADS partnered with Northrop Grumman and then beat out a Boeing bid in 2008, but Boeing protested and the Government Accountability Office supported its claim that the acquisition process had "significant errors."
In September 2009, the Air Force released a draft of competition rules that Northrop said favored Boeing. Northrop eventually pulled out, leaving EADS to go it alone.
"I believe EADS management knows this will be a tough competition for them to win, but they've simply come too far and the prize is too big for them not to continue," Jason Adams, an analyst at Nomura International Plc in London, said in an e- mail to Bloomberg.
News and Related Story Links:
- The New York Times:
Airbus's Parent Gambles on Tanker Contract
EADS enters $50 billion U.S. tanker battle
Chronology: EADS jumps into U.S. tanker fray
EADS May Benefit From Tanker Bid Even If Entry Loses
- The Washington Post:
European nations allege U.S. protectionism in tanker deal
- Money Morning:
Buy, Sell or Hold: The Boeing Co. Is Flying High and Ready to Soar Even Higher