A winner and a loser in tanker battle? It’s not so clear-cut

  • By Michelle Dunlop Herald Writer
  • Sunday, March 6, 2011 12:01am
  • BusinessEverett

The morning that the U.S. Air Force announced that the Boeing Co. was the winner in a $30 billion tanker competition, there was this snarky message on Twitter posted by @FakeAvJourno:

“You know who I think the winner of KC-X is going to be? Northrop Grumman.”

Of course Northrop wasn’t

even in the running, having bowed out last year. Its former partner, Europe’s EADS, was deemed the losing bidder.

But things aren’t that simple.

Boeing still could end up with egg on its face and a big dent in its checkbook if it fails to keep on budget and meet deadlines on the tanker project.

And EADS still has reason to be happy with its first attempt at landing a U.S. defense contract.

As for Northrop? It has already avoided an entire year of tanker turmoil.

Here are some positives and some negatives for both Boeing and EADS behind the Air Force’s tanker decision:

Why winning could be good for Boeing

1. It keeps EADS out of the U.S. defense business for the foreseeable future. EADS likely will have to wait until the next tanker round, dubbed KC-Y. Analysts previously suggested the winner of this contest would have a leg up for KC-Y with the Defense Department. Then again, when it comes to the Air Force and tankers, the analysts predictions have been all wrong.

2. Boeing will increase its technological edge. The award gives Boeing reason to pursue new advances in refueling technology, which doesn’t come cheaply.

3. Jobs, jobs and more jobs. Boeing has refused to distinguish between “jobs created” and “jobs supported.” In this economy, it doesn’t matter. Take one look around the 767 line in Everett and you’ll find plenty of people who are glad their jobs will saved by Boeing’s win,

4. Other contracts. The U.S. Air Force’s pick of Boeing’s tanker over EADS’ tanker should give the 767 a boost in competitions in other countries. Just ask Boeing’s Jim Albaugh, who late last year predicted: “Once we win this, we’ll build more. We’ll be building these for air forces around the world.”

5. 30 billion dollars. Boeing leaders have been adamant about turning a profit on this venture. As long as the company sticks to plan, the tanker should help Boeing recoup some of the cash it lost when the company dropped the ball on the 787.

Why winning could be bad for Boeing

1. Fixed cost. One of Northrop’s concerns about the contest was the Air Force’s decision to go with a fixed cost contract, which theoretically means Boeing won’t be able to come back and ask for more money if costs skyrocket.

2. Failure to execute on the first 18 tankers could put Boeing at the mercy of a Congress that has been growing increasingly impatient with cost overruns and tardiness in defense contracts.

3. Engineering drain. Boeing has a lot to balance in terms of engineering resources through the end of the decade. Work is still being done on the 787 and 747-8 programs, while the design of a new 737 and upgrades on the 777 are waiting to be completed.

Why losing could be good for EADS

1. Goodwill. The Air Force wanted a competition. By bidding even after its former partner, Northrop, dropped out, EADS helped the Air Force have its competition. “You have to know that they generated some goodwill with the Air Force,” said Scott Hamilton, analyst with Leeham Co, after the Air Force’s announcement.

2. Financial drain. Many industry observers thought EADS would have to cut its price so low on the tanker that the company wouldn’t come out ahead financially on the project. And EADS already has two money-sucking programs in the A380 and A400M.

3. EADS forged political allies in the South. Those allies won’t be afraid to hold Boeing’s feet to the flames if the company falls short on deadlines or cost.

Why losing could be bad for EADS

1. EADS gets goodwill with the U.S. Defense Department for competing, but it doesn’t get a foothold in the industry.

2. EADS and Airbus still lack a U.S. manufacturing base. Not only would a U.S. presence be a good strategic move, but it also would allow EADS to combat the troubles it faces by being on the losing end of the euro to dollar exchange.

3. If EADS was able to be profitable on the tanker, that money could offset losses on the A380 and A400M programs.

4. The loss could put EADS at a disadvantage in some international tanker contests.

5. For the Gulf Coast, EADS’ loss means the highly anticipated stream of jobs won’t arrive.

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