A decade of drama appeared to have come to an end Friday when EADS announced it would not challenge the Boeing Co.’s win of a lucrative Air Force tanker contract.
“We will not take any action that could further delay the already overdue replacement of the Air Force’s aging tanker fleet,” said
Ralph Crosby, EADS North America chairman.
EADS’ concession clears the way for Boeing to begin work on its contract to build 179 767-based tankers without the likelihood of delay. But it turns the pressure on Boeing not only to perform but also to keep its executives’ promise to shareholders that its tanker program will be profitable.
EADS’ Crosby fueled concerns over both, questioning Boeing’s “low ball” price and its time commitment to the Air Force.
“I’m of the view that what our competitor offered might have a single focus, which was to keep their competitor off the U.S. shores,” Crosby said.
The parent company of Toulouse, France-based Airbus, EADS had offered the Air Force an A330-based tanker, which it would have built in Mobile, Ala.
Oddly enough, industry observers had thought EADS would cut its price to the point it would sacrifice a profit in order to gain a manufacturing site on U.S. soil and a foothold in the defense market. Prior to the Air Force’s pick of Boeing’s tanker on Feb. 24, most analysts had predicted EADS would win.
“What determined the outcome here was one simple thing: It was the price,” Crosby said.
Boeing’s bid was $2 billion — roughly 10 percent — less than EADS. The Chicago-based aerospace company’s bid worked out to about $115 million per tanker, noted Scott Hamilton, an analyst with Issaquah-based Leeham Co., who was stunned by Boeing’s price.
“You have to wonder what their profit margin will be,” he said.
Boeing’s list price for its 767 commercial jets ranges from $144 million to $180 million, though it discounts those prices in sales to airlines. However, as a tanker, the 767 jet also would require millions of dollars more work in military applications.
Earlier this year, Boeing completed a renovation of its 767 production line in Everett. Company officials say the changes have made building the 767 at least 20 percent more efficient. On Friday, Boeing declined to comment about the profitability of its program.
“The fact that Boeing was able to submit the lower-price bid shows the value of having a skilled, dedicated and flexible union work force,” said Tom Wroblewski, president of Boeing’s local Machinists union.
Boeing has estimated its tanker program will support 11,000 jobs in Washington state. The company already has posted job openings for engineers and planners on its Web site.
Boeing committed to delivering 18 tankers to the Air Force by 2017 and will get $3.5 billion for the development phase. Assembly of the first of those will begin in 2014 with flight-testing and first delivery in 2015. The remaining deliveries are to be spaced out over more than a decade.
Crosby said EADS proposed to have its first A330 tanker in flight testing by 2013, emphasizing the company already is flying a tanker very similar to the one it offered the U.S. Air Force.
Boeing has not disclosed specifics about its 767-based tanker, but industry observers believe it to be similar to the four 767 tankers the company is providing Italy. Analyst Hamilton said he still has doubts about Boeing’s ability to meet the Air Force’s schedule, partly because of the trouble it had with the Italian tanker program. Boeing was several years late in delivering the first tanker to Italy.
“We stand ready to step in if they falter,” EADS’ Crosby said, who hopes the Air Force will hold Boeing to its commitments.
EADS’ friends in Congress, such as Sen. Jeff Sessions, R-Ala., will see to it.
“The winner must deliver on their promises,” he said.
Sessions vowed to “scrutinize” the Air Force’s pick of Boeing to make sure the contest was fair. Absent a filibuster in the Senate or an unforeseen event, Boeing’s contract has nothing left to block it, analyst Hamilton said.
Boeing has plenty of supporters in Congress to keep the contract and its funding on track. Rep. Norm Dicks, D-Wash., said he was encouraged by EADS’ decision to not to protest.
“This clears the way for the tanker acquisition process to move forward rapidly so that we can begin the replacement of the Eisenhower-era KC-135 tankers,” he said.
Rep. Rick Larson, D-Wash., said EADS’ concession showed that the Air Force made “the right decision” and that Boeing will build the “best tanker for our military at the best value for taxpayers.”
That value is due in part to years of competition with EADS, Crosby noted.
“The beneficiary here is the U.S. taxpayer,” he said.
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