Monday, March 7, 2011

EADS concedes tanker loss to Boeing

Airbus parent EADS conceded defeat in an epic, decade-long contest to sell aerial tankers to the Pentagon and confirmed it would not protest the award of a USD$30 billion contract to Boeing.

EADS North America chairman Ralph Crosby expressed disappointment after Boeing won the deal on the third attempt, but said the US company beat EADS' bid by USD$2 billion, offering a "much lower" price than EADS would have done.

The decision -- and news that EADS' congressional backers would not try to reverse the contract legislatively -- capped a decade of wrangling that has ended political and military careers; sent former Boeing officials to prison for ethics violations, and sparked a massive wave of acquisition reforms.

"It's clear that there is no foundation for protest," he said. While EADS still had misgivings about the way the Air Force had structured the competition this time, Crosby said the service had followed the new ground rules scrupulously.

In the end, Crosby said EADS decided that it could not have undercut what he described as an "extremely lowball bid" submitted by Boeing to keep Airbus from securing a US production site for mid- to large-sized airliners.

"When you're in a fixed-price game and the other guy decides he's going to win at any cost, there's probably not a lot more that could be done," Crosby told reporters.

But he said he did not believe EADS made a mistake by competing on its own after its former partner Northrop Grumman pulled out of the running, and said the competition had saved about USD$16 billion from the initial 2001 tanker deal that the Air Force proposed with Boeing.

EADS confirmed its decision at a news conference after it was reported on Thursday that the company would likely refrain from a protest, focusing instead on other weapons contracts and acquisitions.

EADS North America chief executive Sean O'Keefe said the company was actively looking at possible acquisition targets and could make a move soon, although he declined to give any specific timetable or scope for a possible deal.


EADS' decision to skip a protest may ease trans-Atlantic tensions over defense contracts but disappointed many in Alabama where EADS planned to assemble its fleet.

Mobile, Alabama Mayor Sam Jones, who got the news from Crosby late on Thursday, said the competition had become a "straight up price shootout" that EADS felt it could not win.

EADS' backers in Congress vowed to keep close tabs on Boeing's performance on the contract. Representative Jo Bonner, of Alabama, said "Boeing simply bought the contract with a low-ball bid and I sincerely hope our military and taxpayers are not the ultimate losers if Boeing fails to deliver."

For Boeing, the move marks a double victory -- keeping its 767 production line running for a decade longer, and blocking Airbus from establishing a commercial plane manufacturing site in the United States on the back of the tanker deal.

Boeing welcomed the news and said it was ready to go to work on an initial USD$3.5 billion development contract for the first 18 planes that it signed with the Air Force last week.

EADS officials said Boeing's bid was riskier than their own, given that EADS is already building very similar tankers for Australia and other foreign countries, and said EADS would be ready to jump in if Boeing's performance faltered.

The new KC-46 planes will replace the Air Force's fleet of KC-135 tankers, which are about 50 years old on average.

The Air Force underscored that both competitors were "world-class companies" and said it expected to continue the long-standing relationships it had with both firms.


This is the Air Force's third bid to buy new refueling planes since 2001. The first deal collapsed amid a procurement scandal that sent two former Boeing officials to prison. The second attempt died in 2009 after government auditors upheld a Boeing protest.

The Pentagon awarded the contract last week, calling Boeing the "clear winner." Officials said EADS could challenge the decision, but they expected to prevail in any protest.

EADS said its own analysis showed that Boeing's proposed price was USD$21.4 billion against its own offer of USD$23.4 billion, making the EADS proposal more than 9 percent more expensive.

It said the Air Force's total evaluated price of the Boeing bid was USD$20.6 billion, a figure arrived at after subtracting an estimated USD$800 million from Boeing's bid for an estimated fuel usage advantage and USD$300 million for military construction.

EADS said its evaluated price was USD$22.6 billion, noting that the USD$800 million advantage earned by the company on a complicated fuel effectiveness model was effectively cancelled out by Boeing's advantage for fuel usage and construction.

EADS said its proposed engineering and development costs of USD$3.5 billion compared to USD$4.4 billion for Boeing.


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