Boeing Defeats EADS for $35 Billion Air Force Tanker Program

Boeing Co., the sole supplier of aerial refueling tankers to the U.S. Air Force since 1948, beat European Aeronautic, Defence & Space Co. for a $35 billion program to build 179 new tankers, the Pentagon said today.

It was the Chicago-based company’s third try at the contract since Congress and the Air Force first proposed the tanker replacement program in late 2001.

“This competition favored no one, except the taxpayer and the war fighter,” Deputy Defense Secretary William Lynn said at a Pentagon news conference.

“This is certainly a disappointing turn of events, and we look forward to discussing with the Air Force how it arrived at this conclusion,” said EADS North America Chairman Ralph D. Crosby Jr.

EADS has the right to protest the decision within 10 days of being briefed by the Air Force, which may happen next week.

“We structured a competition that was fair, that was based on a variety of factors, including price and war-fighting capabilities, and Boeing was the clear winner of that process,” which “does not provide grounds for protest,” Lynn said.

Boeing will manufacture basic 767-model aircraft in Everett, Washington, and convert them into tankers in Wichita, Kansas, during the first stage of a three-part Air Force program stretching decades to replace its tanker fleet. Today’s initial contract was valued at $3.5 billion. The first phase covers 13 production lots through 2027. The Pratt & Whitney unit of United Technologies Corp. will provide the engines.

Source: Boeing

The victory was Boeing’s third attempt at the $35 billion tanker aircraft contract since 2001. Close

The victory was Boeing’s third attempt at the $35 billion tanker aircraft contract since 2001.

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Source: Boeing

The victory was Boeing’s third attempt at the $35 billion tanker aircraft contract since 2001.

50,000 Jobs

Boeing said the contract would support at least 50,000 jobs in the United States. Boeing jumped to $73.35 as of 6:41 p.m. after the close of trading on the New York Stock Exchange. Boeing rose 53 cents to $70.76 today in New York Stock Exchange composite trading.

The Air Force’s large tanker fleet consists mostly of 415 KC-135R aircraft that first entered service in 1956; the last was delivered in 1964. The new tanker is being designated the KC-46A, the Pentagon said.

Boeing and EADS were assessed on how well their respective aircraft met 372 mandatory war-fighting requirements in a “best value” evaluation that took account of the aircraft’s basic price as well as “total lifecycle cost,” including fuel efficiency, combat mission refueling effectiveness and military construction expenses.

“This was a spirited competition, with both offerers acquitting themselves well,” said Air Force Secretary Michael Donley.

Greater Capacity

EADS had been bullish about winning the order, saying its A330 airliner-based model offered greater capacity than Boeing’s 767 model because it was larger.

EADS’s Airbus unit has already beaten Boeing in bids to supply the U.K. and Australia with refueling planes. It also won aircraft contests in Saudi Arabia and the United Arab Emirates, while Boeing was selected in Japan and Italy.

The victory came amid moves by Boeing to redesign its 767 production line to cut costs in an attempt to outbid EADS, saying its aircraft would have lower overall production and maintenance expenses.

“Boeing’s victory was a major upset, and not at all what the industry was expecting,” said Richard Aboulafia, a military aircraft analyst with the Fairfax, Virginia-based Teal Group.

“The low ownership cost message clearly had its appeal in these budget constrained times,” he said. “But EADS’s supporters will do their best to try to stall this contract, and to make a split-buy an acceptable alternative.”

The consensus was that EADS would win, said Byron Callan, a defense analyst with Capital Alpha Partners LLC. “With the win, Boeing erases the market share it has lost in recent years to Airbus in global tankers,” he said.

Boeing as Underdog

Deutsche Bank aerospace analyst Myles Walton in a Feb. 22 note to clients said “Boeing seems to be presenting itself as the underdog, which is either managing expectations or they are the underdog and want to ensure political supporters are preparing to fight a loss.”

“In either case, we expect stock reaction could be a couple dollars upside on a win and a modest downside move on a loss,” Walton said.

Asked during a Dec. 1 interview about the relative value of the tanker program to Boeing’s defense business, Dennis Muilenburg, chief of Boeing’s Defense, Space and Security unit said, “in terms of our overall business base, it’s not a needle-mover for us. It’s important to us, but it’s not something we are dependent on.”

Contract Derailed

Boeing’s first attempt at the contract was derailed in 2004 by a scandal involving former top Air Force procurement official Darleen Druyun and then Boeing Chief Financial Officer Michael Sears.

Sears was sentenced to four months in prison for offering Druyun a job in October 2002 during the initial tanker negotiations. She was hired in January of 2003. Druyun was sentenced to nine months in prison.

The second attempt was postponed by Defense Secretary Robert Gates in September 2008 to review the competition’s criteria and leave the decision to the next administration.

Boeing successfully protested the tanker award that February to Northrop Grumman Corp. and EADS.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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