Commercial aviation is in a deep slump, so Boeing and Airbus are counting on military aircraft programs to plump up their bottom lines
With commercial aircraft sales in the doldrums and a new U.S. Administration shaking up defense spending, competition for military contracts worldwide is taking on added urgency at this year's Paris Air Show. From a $40 billion U.S. Air Force refueling tanker deal to sales of fighter jets and military cargo planes in such far-flung locales as Japan and India, "I've never seen more international competitions than we're seeing today," says Jim Albaugh, head of Boeing's defense division.
Boeing (BA) badly needs some new military business. U.S. Defense Secretary Robert Gates, taking a hatchet to some of its prized programs, has blocked future purchases of its C-17 transport plane and scrapped a costly Boeing-led project to develop high-tech, networked combat vehicles. At the same time, Boeing and its European rival Airbus face a deep slump in orders this year as airlines struggle in the global economic crisis.
These setbacks heighten the importance of military deals where Boeing still has a shot—such as a race for a $12 billion deal to supply fighter jets to India and sales of the C-17 to countries ranging from South Korea to the United Arab Emirates.
But none of these is as big as the Air Force tanker contract, in which Boeing is facing off against Northrop Grumman (NOC) and the European Aeronautics Defence & Space Co. (EAD.PA), the parent of Airbus. An initial Air Force award of the contract to Northrop and EADS was overturned last year after government auditors raised objections to the bidding process. The Air Force is expected to issue a request for new bids as early as next month.
Determined to Win
In a June 15 interview on the sidelines of the show, Albaugh underscored Boeing's determination to win the second go-round, saying the company this time will offer the Air Force a choice between a larger tanker, based on its 777 passenger plane, or a smaller version based on its 767 jet. The 767 was the only model offered by Boeing during the last round, and it was criticized because it has considerably less fuel capacity than the Northrop-EADS plane, based on Airbus' A330 widebody jet. Boeing's 777 is even bigger than the A330.
Northrop and EADS are equally determined. "Our top three priorities this year: tanker, tanker, tanker," Ralph Crosby, the head of EADS North American operations, told reporters at a June 14 briefing in Paris. Crosby predicted the Air Force could decide on a winner in less than a year. Not surprisingly, he predicted that Northrop-EADS would once again prevail.
Securing the deal would be a huge boost to EADS's ambition to grab a much bigger share of the $600 billion-plus U.S. defense budget—by far the world's richest. EADS's North American defense sales are currently about $1 billion.
While Boeing battles Northrop-EADS over the tanker, Lockheed Martin (LMT), the No. 1 U.S. defense contractor, faces a different kind of challenge. Defense Secretary Gates wants to halt U.S. procurement of its F-22 fighter jet, so Lockheed is scrambling to find more buyers for another plane, the Joint Strike Fighter, a stealth jet that it is developing for the U.S. with support from six other countries. "We've put together teams specifically charged with developing relationships" with potential buyers in other countries, says George Standridge, Lockheed's vice-president for aeronautics business development.
Just this month, Lockheed scored a major win when Norway's defense ministry agreed to buy as many as 56 Joint Strike Fighters. A plane offered by Sweden's Saab (SAABB.ST) aerospace unit lost the competition.
Negotiations with foreign air forces may lack the drama of the big commercial jet deals that typically dominate the news at major air shows. But for aerospace companies, they're more vital than ever this year.