Defense Secretary Gates wants a decision on the $40 billion Air Force refueling tanker by next year—and Boeing and an Airbus-Northrop venture are lobbying hard
The U.S. Air Force's effort to buy a new generation of refueling tankers has at times taken on the feel of a Tom Clancy novel. Its first deal, with Boeing (BA) back in 2004, was invalidated after an Air Force official was caught discussing a job at the aerospace firm while negotiating the contract—a transgression that ended with the officer going to jail. The military's subsequent award last year—to a partnership led by Airbus parent European Aeronautic, Defence & Space Co. and Northrop Grumman (NOC)—was later voided when Boeing convinced the General Accounting Office that the Air Force had acted inconsistently with the guidelines it had set at the start (a faux pas that prompted Defense Secretary Robert Gates to strip the Air Force of the final decision).
Adding to the drama: a preliminary ruling by the World Trade Organization this month that European governments had improperly subsidized the development of key Airbus models. Boeing's many supporters in Congress have since cited that ruling as a reason for steering the so-called KC-X tanker contract back its way.
But now it appears that the controversial tanker project could be nearing resolution: On Sept. 16, Gates told attendees at an Air Force conference that he was giving the new leaders he'd installed at the Air Force the final say in the $40 billion tanker deal. "I have confidence that the KC-X selection authority is in good hands," Gates said. And with Air Force officials signaling that the new specs for the final bids were "close to release," Gates made it clear that he was ready for the decision to be made by 2010. "[We] cannot afford the kind of letdowns, parochial squabbles, and corporate food fights that have bedeviled this effort over the last number of years," he said.
Boeing's Democratic and Union Muscle
Airbus and Boeing each have a lot riding on their ability to win the tanker deal. Both manufacturers are reeling from mass cancellations by airlines for commercial versions of their jets, and the $40 billion contract could provide a nice financial cushion over the next couple of decades. For EADS, the tanker contract would provide a foothold to expand its commercial business into the U.S.—a prospect Boeing is certain to fight at all costs.
It's not clear which of the aircraft rivals has the upper hand in the tanker lottery. On sheer politics, Boeing clearly has an edge over Airbus: The company has a big presence in such Democratic strongholds as Illinois, Connecticut, and the state of Washington and it can count on labor unions to work Congress on its behalf.
At the same time, Boeing's supporters in Congress are trying to use the WTO ruling in their favor—lobbying the Pentagon that it shouldn't choose an illegally subsidized European company at a time when American workers are suffering. "I urge you to take the strongest possible action to prevent further harm from being inflicted on the American aerospace industry," Senator Patty Murray (D-Wash.) said in a letter to President Barack Obama.
As a result, some aerospace analysts suspect the Pentagon will feel heavy political pressure to throw its lot with Boeing. "I think the Airbus product is very strong," notes Richard Aboulafia, vice-president of analysis for Teal Group, a Fairfax (Va.)-based aerospace consulting firm. "It should come down to what fits better with the Air Force, but I suspect it isn't going to."
By contrast, Airbus supporters in states such as Alabama, which would benefit from an EADS/Northrop win, are pleading with Administration officials to consider the bigger picture. They say that by punishing the Airbus consortium, the U.S. could trigger a trade war with Europe. In a letter to U.S. Trade Representative Ron Kirk, Senator Richard Shelby (R-Ala.) warned that linking the two "would be a grave mistake with severe consequences to both our economy and trade relations."
Boeing: No "Frankentanker" This Time
Airbus supporters note that the WTO dispute could take years to play out fully, given expected appeals by the Europeans—and WTO guidelines require governments not to impose penalties in the interim. What's more, they note that the WTO staff may in coming months also uphold the Europeans' counterclaim that Boeing also received government subsidies. If so, that means jingoistic lobbying by Murray and others could backfire. "The Boeing supporters are doing more harm than good to Boeing's case," argues Scott Hamilton, an aerospace industry consultant based in Issaquah, Wash.
If the lobbyists cancel each other out, analysts believe the Air Force could simply choose the winner on the merits of the designs. Air Force officials favored Airbus' original design—an adaptation of its civilian A330—but Boeing has worked feverishly to build a case for its alternate design. While critics ridiculed Boeing's earlier modifications for the tanker as a clunky, and overly expensive, "Frankentanker" patched together from different platforms, the Chicago-based manufacturer has promised the Air Force that its final design will be fresh and more versatile than anything Airbus can offer. "We're not doing the 'Frankentanker,'" Rick Lemaster, Boeing's tanker program director, told reporters Wednesday at the Air Force conference.
Whether those modifications will suffice depends on what the Air Force demands in the guidelines it will send to each bidder in coming weeks. If the military "just wants a tanker" that hauls the most fuel, Hamilton believes it augers well for Boeing—which claims its 777-based tanker can deliver 23% more fuel than the Airbus A330.
But if the Air Force is seeking a tanker that not only transports fuel but is versatile enough for other uses, Hamilton believes the EADS/Northrop team comes out ahead. Similarly, if the Pentagon stipulates that the winning tanker must be able to stop on the shorter, 7,000-foot runways found at some foreign military bases, or must be able to transport spare engines, those criteria could make Airbus the victor. But if the military uses 12,000-foot runways as the benchmark or allows the winning bidder to haul spare engines in other-sized aircraft, those metrics could keep Boeing in the game.
In the end, some analysts believe that the politics surrounding the decision may force the Pentagon to make a Solomon-like decision and split the contract in half. While Gates and some Air Force officials have opposed a "split" deal as inefficient, they may conclude that expediency demands a compromise. Let the games begin.