Bloomberg December 03, 2004
EADS Proposes Split on U.S. Tanker Plane With Boeing
By Edmond Lococo and Rob Urban
Co., the parent of Airbus SAS, proposed splitting a contract to supply aerial refueling tankers to the U.S. Air Force with Boeing Co., said the company's chief executive for North America.
The Pentagon said last month it would open the award to new bidders after Congress withdrew an earlier proposal for 100 planes worth $23 billion to Boeing. Ralph Crosby, chairman and chief executive of EADS North America, told reporters at a conference in New York he has spoken to U.S. officials who support splitting the award. He declined to name the officials.
The U.S. may need as many as 400 new tankers worth as much as $100 billion over the next 30 years to replace planes in service for more than 40 years. Congress killed the agreement with Boeing after an Air Force procurement official and a Boeing executive were convicted of violating federal conflict-of-interest laws.
``Sole-source management has proved to be a bad technique,'' Crosby said. ``This is an approach I think deserves substantial consideration.''
EADS' shares rose 9 cents, or 0.4 percent, to 23.63 euros as of 9:06 a.m. in Paris. The shares have risen 25 percent this year compared with a 30 percent rise in the shares of Boeing.
One possibility would be to give Airbus and Boeing 30 percent each of the orders, and allow them to compete for the remaining 40 percent, Crosby said.
That approach would be affordable because both companies are planning to convert commercial aircraft for the tankers rather than design an entirely new aircraft only for use by the military. That means neither company would be totally reliant on government orders to support its production line, keeping production costs down, he said.
Competition's Benefits
Competition would lower the government's costs, even with the higher expenses to maintain a fleet of planes from two manufacturers, said Richard Aboulafia, vice president of Teal Group, a Fairfax, Virginia-based consulting company.
``If it goes ahead, then given the size of the requirement, the savings from competitive price pressure would more than compensate for the higher fleet costs,'' Aboulafia said in a phone interview. ``Politically, it would accomplish some great objectives. You'd provide the Europeans with an incentive to stop subsidizing Airbus.''
The U.S. government filed an initial World Trade Organization complaint on Oct. 6, claiming loans by European governments to Toulouse, France-based Airbus amount to illegal subsidies under global trade rules. EADS, based in Paris and Munich, owns 80 percent of Airbus.
Favorable Terms
Congress killed the agreement with Boeing after it was disclosed that Air Force negotiator Darleen Druyun was simultaneously discussing a job offer at Boeing. She said in her guilty plea that she had given the company favorable terms.
Congress eliminated the Boeing program and directed the Pentagon to complete as soon as possible a review of alternatives. Former Boeing Chief Financial Officer Michael Sears also pleaded guilty in the case.
The Air Force would have leased 20 aircraft and purchased 80 from Boeing under the terms of the agreement negotiated by Druyun.
On Oct. 11, Boeing Chief Executive Officer Harry Stonecipher said he expects Boeing to be chosen as the sole supplier of as many as 100 aerial-refueling tankers if the Pentagon decides to proceed with the program.
``If there is a contract for tankers, as I feel quite confident, Boeing will get it,'' he said on a conference call.
John Pike, an analyst at GlobalSecurity.org, an Alexandria, Virginia-based defense research group, also said there has been talk of a sharing arrangement.
`Brokered Deal'
``There's been some talk of a brokered deal where Boeing would get 80 percent and Airbus 20 percent to put the fear of the Lord into Boeing and preserve competition for large aircraft,'' Pike said.
Such a plan would be ``dead on arrival'' because the tanker program itself is ``entirely unnecessary,'' he said. Replacing the engines of the current fleet would be more cost-effective, he said.
To make its bid more attractive to the U.S., EADS would work in partnership with ``a major U.S. prime'' defense contractor, EADS Co-Chief Executive Philippe Camus said at the conference, without identifying the company. Lockheed Martin Corp. and Northrop Grumman Corp. have both said they would consider working with EADS.
EADS has also been working on new refuelling technology to make its plane more attractive to the Air Force. Camus flew to Washington last month to announce that EADS would spend $83 million to design the tube to transfer fuel from an Airbus A330 to fighter planes in flight.
EADS's pursuit of the tanker award is part of $40 billion in military contracts the company will compete for as it seeks to expand its defense business in North America, Camus said. He expects the company to win at least $10 billion of the total, he said. The company currently gets about $1 billion in annual sales from non-commercial aircraft businesses in the U.S., Camus said.
Edmond Lococo in Boston
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