Aircraft Builders Compete for Air Force Tanker Contract Again

Maybe the third time will be the charm. Today marks the closing date for bids to build a new refueling tanker for the US Air Force. Boeing Co. (NYSE: BA) submitted its 8,000 page bid on the deadline day, following a submission yesterday from the European Aeronautic, Defence & Space Co., known as EADS and makers of the Airbus family of planes. The bid from EADS did not include participation by its former partner, Northrup Grumman Corp. (NYSE: NOC).

The Pentagon’s first try at getting a new tanker began in 2000 and the contract was awarded to Boeing in 2004. The $35 billion award would have replaced 179 Boeing 707-based tankers built from the original contract awarded during the Eisenhower administration. A bribery scandal involving Boeing executives resulted in cancellation of the contract and a new round of bidding.

The contract was re-awarded in 2008, this time to Northrup, which had partnered with EADS to build the planes at the European maker’s Alabama plant on a modified version of the Airbus 330 passenger plane. That contract too was cancelled when the Government Accountability Office found irregularities in the way the decision was made.

The bidding was opened again last year, with a decision now due in November. A third bid, from U.S. Aerospace Inc. (OTC: USAE) and Ukranian partner Antonov Co., is also expected today.

There are 372 mandatory requirements in the Air Force request, and all three bidders indicate that they will meet every one of them. A major factor, though not included in the Air Force’s requirements, is almost certain to be political.

EADS has suffered a double setback in recent days as the World Trade Organization ruled that Airbus had been receiving illegal funding from the Europe’s governments. The European Union had countersued, arguing that the US government gives financial aid to Boeing. The decision on the countersuit was scheduled to be announced on July 16th, but the WTO has delayed the decision. Just for reference, it took the WTO six years to reach the decision on Airbus subsidies.

On top of the international politics, there are US politics. Airbus claims that it will employ 48,000 US citizens to build the tankers, while Boeing claims that its proposal would support 50,000 American jobs. The US Aerospace bid, if it materializes, would include most likely include final assembly in the US, with main manufacturing done in Ukraine.

There’s a lot at stake, even more than the $35 billion headline price tag. In reality, the cost will certainly rise and $50 billion for the initial 179 tankers is not an unreasonable estimate of what the program will cost. On top of that are the maintenance and upgrade contracts that could double the value of the original contract.

If national defense were not at issue here the antics of the companies and the politicians would be highly entertaining. But $35 billion is a lot to pay for a movie we’ve all seen before.

Paul Ausick