Tanker-Contract Victor To Get Its Fill

Team Infidel

Forum Spin Doctor
Chicago Tribune
February 12, 2008 Boeing odds-on favorite over joint bid by rivals
By Julie Johnsson, Tribune Reporter
It's shaping up to be one of the largest military contracts of the next 25 years, and it's Boeing Co.'s to lose.
The Chicago-based aerospace giant is considered the heavy favorite to win a $40 billion contract to replace 179 Eisenhower-era tankers for the U.S. Air Force, a competition that pits it against a team led by Airbus parent European Aeronautic Defense and Space Co. and Northrop Grumman Corp.
The Air Force could announce its selection as early as Feb. 22,, when a panel that signs off on major programs for the Defense Department is slated to review the bids and approve initial funding.
The winner likely will wind up replacing all 530 tankers in the Air Force's fleet, a deal that could top $125 billion when parts and maintenance are included, estimated Loren Thompson, a defense analyst with the Lexington Institute, a public-policy think tank.
There's another benefit for the winner: a cushion that would protect either Boeing or rival Airbus SAS for decades in case of a downturn in the highly cyclical market for commercial aircraft.
Both proposals involve retooling jetliners late in their commercial life cycles, either the Boeing 767 or Airbus A330, into rugged freighters built to haul fuel and cargo around the globe.
$1.4 billion per year
That means the Air Force is poised to become the largest airplane customer for either Boeing or Airbus, keeping a production line running at full capacity into the foreseeable future that would otherwise be shuttered. The net gain to the winner: about $1.4 billion, after tax, per year, estimated aerospace analyst Howard Rubel of Jefferies & Co.
Boeing is "cautiously optimistic" about its chances, said Mark McGraw, vice president for tanker programs. "We've gotten good feedback from the Air Force," he said. "In the end, they were pleased with it."
Paul Meyer, a sector vice president with Northrop Grumman, relishes his team's underdog status. "I'd say we're very, very competitive," he said. "We've given them room for pause. It will be down to the wire."
A Boeing victory would offset the string of negative headlines that it has garnered, from the recent arrest of a former engineer on spy charges to the delay of its vaunted 787 Dreamliner. Still, Boeing's shares aren't expected to soar on the news, analysts said. It is such an overwhelming favorite that the contract win already is factored into its stock price, they said.
"The stakes are higher for Boeing than for Northrop," said David Strauss, U.S. aerospace and defense analyst for UBS Investment Research.
Others aren't counting out EADS, known for aggressive pricing, which with Northrop Grumman has run a spirited campaign. The European defense contractor says it will assemble the tanker at a plant it would build in Mobile, Ala., if it wins.
EADS even has shown off an A330, fresh off its assembly line in Toulouse, France, that it plans to convert into the first tanker once it gets the go-ahead.
"I would have to give Northrop and EADS high marks for coming up with every marketing tactic imaginable," said Thompson.
The Air Force's decision likely will come down to a determining whether the A330's larger capacity or the 767's greater versatility and efficiency best meet its needs, analysts say.
Boeing award canceled
Boeing won an earlier version of the program, but the contract subsequently was scrapped amid an ethics scandal. Analysts think Air Force planners likely favor the 767 because it is similar in size to the half-century-old KC-135 tankers, but with the latest technological advances.
"If bigger is better, the Air Force would've specified that in their request [for proposal] documents," said McGraw.
Because they are smaller and require less runway, Boeing's tankers could be deployed from air strips in Africa or Central Asia, while the EADS version likely would be based in Europe, analysts say. The Air Force likely would have to reinforce existing runways to handle the heavier A330 and redesign storage facilities to accommodate the jet's wider wingspan.
Boeing claims its jet, the KC-767, would save the Air Force $15 billion in fuel over the life of the program, while costing 22 percent less to repair and maintain.
Northrop agrees that its larger aircraft would cost more to operate but argues that economics work in its favor since its jet would require fewer missions to complete a task. Its offering, the KC-30, holds 250,000 pounds of fuel, 24 percent more than the Boeing jet; and 104,000 pounds of cargo, a 21 percent difference.
"We see cargo as an inherent advantage to us," Meyer said. "When it's not performing a tanker mission, we want to have the ability to rapidly turn and perform alternate missions."
The Northrop-EADS team also see an edge in "past performance," one of five criteria the Air Force will use to weigh its decision. They note that the first two Boeing tanker contracts, for the governments of Italy and Japan, are running years behind schedule. Boeing's response: The U.S. would benefit from "lessons learned" from the early versions.
Analysts expect the losing team to contest the Air Force decision, supported by members of Congress whose states stood to gain jobs. But, ultimately, they think Boeing, as the U.S.-based contestant, has the stronger political hand.
"It points to Boeing," said Rubel. "But everyone was favoring the Patriots too."
 
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