Tanker deal loss staggers Boeing; Airbus-based jet wins $35 billion contract

In a shocking move, the U.S. Air Force awarded a $35 billion contract to replace its aging fleet of aerial tankers to a consortium led by a France-based defense contractor rather than Boeing Co.
The Air Force decision is a stinging blow to Chicago-based Boeing, which had built most of the tankers in the Air Force fleet and was widely considered the front-runner for the contract, among the three largest ever awarded by the Pentagon.
Boeing had won an earlier version of the contest, only to be stripped of its prize amid an ethics scandal when the Air Force purchasing official who had overseen that process wound up on Boeing’s payroll.
That sordid episode played no role in the decision announced Friday, Pentagon officials insisted.
Rather, they were wowed by the newer and larger airplane, built to haul fuel and cargo, offered by Los Angeles-based Northrop Grumman Corp. and European Aeronautic Defense and Space Co., parent of Boeing rival Airbus SAS.

The winning proposal gives the military “more passengers, more cargo, more fuel to off-load, more availability, more flexibility, more dependability and it can carry more patients,” said Gen. Arthur Lichte, commander of the Air Force’s Air Mobility Command.

By landing the contest to supply the first 179 aerial tankers in the government’s fleet, Northrop and EADS are in a prime position to win two later contracts, potentially worth more than $100 billion, to replace all of the Air Force’s 600-odd Eisenhower-era tankers.

It is also the first major defense contract in the U.S. notched by EADS and should provide cash that the European aerospace and defense company badly needs to offset losses from delays to its A380 superjumbo jet and to fund a midsize competitor to Boeing’s 787 Dreamliner, analysts said.

Boeing said in a statement Friday that it hasn’t decided if it would protest the Air Force decision.

Boeing short in all areas

Air Force officials declined to say where Boeing’s proposal came up short. However, they rated the Northrop/EADS plane superior in every one of the five categories used to assess the tanker offerings.

“The fact that the Air Force thought there wasn’t a single measure where the Boeing proposal was ahead suggests their chances of an appeal aren’t good,” said Loren Thompson, defense analyst with the Lexington Institute, a public-policy think tank.

Boeing and its congressional supporters could pressure the Pentagon into splitting the contract between the two suppliers, although doing so would be far costlier for the government.

Boeing also may benefit from a congressional backlash over awarding such a large program to an overseas contractor, especially since Boeing estimated its proposal would create 44,000 jobs.

“I am very concerned that this decision means that the women and men in our military will not get the best tanker to meet our nation’s security needs,” said Rep. Rick Larsen (D-Wash.), whose district includes Boeing’s factory in Everett.

Lichte bristled at the suggestion that the program could face a political firestorm over outsourcing.

“This is an American tanker,” Lichte said. “It’s flown by American airmen. It has a big American flag on the tail, and every day it’ll be out there saving American lives.”

For Alabama, where the final assembly of the plane is to be completed, the surprise victory was “stunning,” said Sen. Richard Shelby (R-Ala.) The state stands to gain about 5,000 jobs. Airbus plans to build a factory in Mobile to assemble the new tankers and their commercial cousins, A330 freighters.

“We’re in a global economy,” said Shelby, who noted that Boeing and other aerospace companies contract work to other nations. “A lot of this work will be done in the good old U.S. of A.”

Protest discouraged

Still, the chance that political infighting could delay the program worries some high-ranking Air Force officials. Speaking the day before Friday’s announcement, Gen. T. Michael Moseley, the chief of the Air Force, implored the losing team not to protest.

“From a service chief’s perspective, I would ask them to think about the country and think about the people that fly the plane,” he said.

Mid-air refueling is crucial for U.S. military planners who must respond to crises around the globe at a moment’s notice. But with an average age that is approaching 50 years, the Air Force’s tanker fleet risks becoming a safety hazard, defense experts say.

Boeing, as an American company, was considered the heavy favorite to provide their replacements: modified Boeing 767 jetliners.

Northrop and EADS proposed retooling the Airbus A330, which could carry 25 percent more fuel than Boeing’s proposal and 20 percent more cargo, according to a report by Jefferies & Co.

Even so, Boeing was thought to hold the edge since its plane was close in size to the current tankers, modified Boeing 707 jetliners. Military planners would likely be forced to reinforce runways and rebuild hangar space to handle the Airbus aircraft, whose wingspan is 25 percent larger than Boeing’s offering.

While the Air Force said potentially outsourcing work to Europe did not figure in the calculation, jobs could figure heavily into efforts to overturn its decision.

“It’s not every day that we give potential $100 billion contracts to France,” noted Paul Nisbet, aerospace analyst with JSA Research Inc.

Julie Johnsson and Aamer Madhani Chicago Tribune – March 1, 2008