Boeing's Tanker Challenges Mount

The rival Northrop/EADS alliance may also offer a different plane for the Air Force tanker contract, and EADS plans an aggressive campaign for more U.S. business

Faced with the prospect of a Pentagon-approved extension for Boeing (BA) to submit a revised bid in a long-delayed $35 billion aerial tanker contract—so that Boeing can design a larger plane that would carry more fuel and cargo—the opposing consortium of Northrop Grumman (NOC) and European Aeronautic Defence & Space (EAD.PA) is now contemplating offering the U.S. Air Force a different plane, as well.

Insiders at Northrop confirm the company may propose that the military purchase tankers based on the A330-200 freighter made by EADS subsidiary Airbus, rather than the A330 passenger aircraft—a move that could save the consortium time and money. The widebody, long-haul cargo freighter was introduced by Airbus last year, too late to be offered to the Air Force before now.

But Boeing has more to fear than losing the tanker deal. Employment ads by EADS North America reveal that the company already has embarked on an internal strategic shift aimed at gearing up to bid on future U.S. defense contracts, while underpricing Boeing on commercial deals in the U.S. market—just what some analysts and Boeing insiders fear.

"We are looking at all of the options available to us," Northrop spokesman Randy Belote told BusinessWeek on Aug. 28.

Getting Political

Followers of the seemingly never-ending dogfight between the aerospace giants over the lucrative tanker contract are well past wondering "Are we there yet?" Just when the competition seems to get resolved so that the U.S. military can finally replace antiquated Cold War-era flying gas stations, there's another twist.

The controversy and one-upmanship by the corporations has even figured in the politicking at the Democratic National Convention in Denver. Politicians and delegates there have discussed it, and both Boeing and Northrop have paid for high-visibility advertising in publications distributed at the convention.

The Defense Dept. this week put off plans to formally request new tanker bids from the contractors while a long list of top brass reviews the details of the request for proposals. Also, Pentagon acquisition chieftain John Young Jr.—the man overseeing the rebidding process—is finishing a business trip to Europe. Pentagon spokesmen declined to discuss Young's itinerary or the purpose for the trip.

Now many in the military and aviation contracting community expect the military's bid request to become public next week.

Changing Platforms?

In the latest twist in the tanker drama, Boeing has threatened to pull out (, 8/22/08) of the recompetition unless it gets an extension to prepare a bid that would involve a tanker based on a larger aircraft than the 767 that it originally proposed. That would leave the military with only one bidder—a prospect unlikely to prove palatable to Congress.

In the earlier contest, won by Northrop/EADS, Air Force officials under Young's direction in effect awarded Northrop extra points (, 6/25/08) for offering a larger plane capable of carrying more fuel and cargo. Boeing, arguing it had never been aware of the need for more fuel and cargo, protested the award as unfair—and won.

Northrop and its supporters argue that Boeing is now stalling—not just to design a tanker based on a larger commercial aircraft, but to gain a political edge. The longer things are delayed now, the more likely a decision won't be made until a new Administration and Congress take power next year.

Boeing spokesman Daniel Beck says that if Northrop is now considering a tanker based on a different plane, then it too must need extra time. "If they do intend to offer a different platform, they would benefit from the same kind of reasonable timeframe for development of proposals that we have requested," says Beck. "So why should they be so adamant that this be rushed?"

Military and Commercial Manufacturing

Still, walking away from the table could be a treacherous step for Boeing. It could lose the first of three anticipated lucrative tanker contracts it once thought it had sewn up, and could give EADS a foothold in the U.S. and a potentially formidable competitive edge. EADS would be able to assemble freighters at a plant it intends to build in Mobile, Ala., thus shifting production out of Europe and taking advantage of favorable exchange rates and lower labor costs. It could sell its commercial planes for less.

By combining production of a commercial freighter and a tanker based on the freighter, "they would achieve economies of scale that would make a commercial operation in Mobile even more attractive," says Lexington Institute defense analyst Loren Thompson. "The workforce, the overhead, and the supply challenge is diminished if you build planes for both military and commercial customers off the same airframe design."

Adds Thompson: "Boeing is at least as worried about their key commercial customers in the U.S. market as they are about the tanker franchise. Once EADS sets up a commercial operation in the U.S. market, Boeing loses a lot of its national advantage in terms of competing for congressional support, protests from the [U.S. Trade Representative], and so on."

"Looking Down the Road"

The tanker contract, while significant, represents only a small fraction of Boeing's $66 billion annual business when spread out over the life of the contract. "The tanker's not a major issue for them in terms of dollars," says Jacques Gansler, a former top U.S. military acquisition official. "They don't want to have a domestic competitor" for commercial aircraft.

Hints of what could lie ahead can be found in new positions at EADS North America. One job posted on its site says the company is looking for a business and development director for "tanker and derivative aircraft." Among the job's requirements: "Anticipate and provide analysis and marketing strategy for Airbus platforms which could compete for Air Force programs, such as E-4B, JSTARS, AWACS, and other C2ISR Platforms."

All are important military contracts in which Boeing could have a big interest.

"Yes, we've been making some changes," an EADS source tells BusinessWeek. "We're looking at potential business opportunities and therefore examining our business structures. It's part of our strategy. We're looking down the road."

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