Will EADS Thrive On The American Plan?

The French-German giant is aiming for some big U.S. defense contracts

The symbolism was unmistakable: On May 5, the European Aeronautic Defence & Space Co. (EADS) unveiled the four finalists in its search for a site to assemble Air Force refueling tankers, a major step forward in its drive to crack the U.S. defense market. And who was the real estate consultant that the French-German company hired to help make the pick? None other than Roger Staubach, the legendary quarterback for the Naval Academy and the Dallas Cowboys -- "America's Team."

It was just one in a flurry of recent moves by EADS that include opening new U.S. plants, partnering with big American contractors, and enlisting retired military brass with enough medals to sink a battleship. On May 10, EADS announced it would join with Raytheon Co. (RTN ) to bid for the Army's $3 billion contract for a battlefield cargo aircraft. EADS also plans to bid for the Army's $2 billion light-utility helicopter contract.

Winning a piece of the huge U.S. military budget could provide EADS with a buffer if its Airbus commercial-jet unit, which accounts for two-thirds of EADS's $41 billion in annual sales, hits a snag. That's not an immediate worry: On May 9, EADS said Airbus deliveries spurred a tripling in first-quarter earnings, to $846 million. But Boeing Co. (BA ) has been snaring the lion's share of new airline orders lately. So EADS North America Chairman and Chief Executive Ralph D. Crosby Jr. wants to win defense business to boost U.S. sales to $1 billion by 2006, up from $648 million last year.

Will the Americanization of EADS fly? Washington still harbors ill will over Europe's resistance to the Iraq war. Tension over Airbus subsidies is ratcheting up. And Boeing, which wants to build the tankers, has heavyweight political support. Even so, some experts think EADS's approach might work. "Does it have a lot of headwinds? It sure does," says John J. Hamre, president of the Washington think tank Center for Strategic & International Studies and a former Deputy Defense Secretary. "But they've got a very plausible strategy."

EADS's blueprint for grabbing a slice of the Pentagon budget is the handiwork of Crosby, a West Point grad and former top Northrop Grumman Corp. (NOC ) executive. Its key selling point: the creation of new jobs. "Insourcing is our byword," he says. In the past seven months, the company has hired more than 100 workers at facilities in Columbus, Miss., and Mobile, Ala.

NEUTRALIZING RIVALS

That may not sound like much, but a whole lot more could be coming if EADS walks away with a chunk of the big prize: the refueling tanker deal. EADS is in talks with Northrop Grumman to launch a joint bid for an Air Force contract that could be worth $360 billion over two decades, including spare parts and maintenance, and could employ more than 1,000 U.S. workers. Crosby insists the site finalists were picked on "straightforward business criteria," including the need for a deepwater port. But he admits that EADS also looked for places that can "represent it meaningfully" -- in other words, states with political clout. The finalists include Florida, where President George W. Bush's brother, Jeb, is governor, and Mississippi, whose governor, Haley Barbour, once chaired the Republican National Committee. The other two -- South Carolina and Alabama -- are also solidly red.

Boeing, of course, still has plenty of supporters of its own, especially in Washington state, where it was headquartered for decades and employs more than 57,000 workers. But Boeing is struggling to overcome a spate of recent scandals. The most notable: its illegal offer of a job to an Air Force official who negotiated an earlier ill-fated tanker deal. That's why, on political points, Boeing and EADS may "neutralize each other," says Jacques S. Gansler, a former top Pentagon aide. That could help persuade the Air Force to split the contract, thus preserving competition and avoiding overreliance on one source. It makes sense. Like Roger Staubauch used to do so well, Crosby is leading his team toward the end zone.

By Stan Crock in Washington with Carol Matlack in Paris

— With assistance by Carol Matlack

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