Stephen Foley: EADS should have won the Air Force deal before: it should appeal this time
Saturday 26 February 2011
US Outlook: The saga of the US Air Force's effort to replace its fleet of mid-air refuelling tankers has had all the drama, cliffhangers and improbable plot twists of a prime-time soap opera. Let's hope that wasn't the last episode.
Boeing secured the $30bn-plus contract late on Thursday, beating its European rival EADS, who everyone had thought was a shoo-in. It was a case of third-time lucky. A first contract unravelled in an ethics scandal, amid revelations of bed-hopping and job-swapping at Boeing and the Department of Defence. EADS, in partnership with Northrop Grumman, won in 2008, but Boeing created an election-year ballyhoo that got Congress involved. Inevitably, the Government Accountability Office found administrative and judgement errors in the minutiae of the sprawling procurement process, enough of them to conclude that Boeing had a "substantial chance" of winning the contract if the process had been perfect.
So the fact that EADS is not already making tankers for the Pentagon is an unjustice, the result of protectionist sentiment whipped up by "Buy American" politicians three years ago. And it makes Boeing's victory hard to stomach.
The disappointment in Mobile, Alabama, where EADS was going to build an assembly plant, was palpable on Thursday. The governors of three Southern states, where tens of thousands of jobs would have been created among EADS and its suppliers, had lobbied hard for a win, and local politicians were yesterday sniping that "Chicago politics" secured Boeing's triumph. (Boeing's headquarters are in Chicago, from where President Barack Obama and his chief lieutenants hail.)
In the end, it looks as though the US firm beat EADS on price, but only thanks to offering a lower-spec plane than its rival.
The stock market reaction to the decision underestimates its importance. Boeing shares quickly gave up most of their initial spike, as analysts fretted it may prove tough to make a margin on its low-ball bid and because, as a fixed-cost contract, the risks of cost overruns fall on its shoulders. But more likely, it will find savings over time, especially if the contract ends up being extended next decade. On top of that, Boeing has inflicted a very heavy blow on EADS's ambitions to challenge it in the US defence market.
For EADS, whose shares were down only about 1 per cent, it is a major setback. It still without the breakthrough that would turn it into a significant supplier to the Pentagon, and would then lead to economies of scale across its US operations. It will probably now be tempted into expensive acquisitions to achieve its goals.
And the Pentagon has missed an opportunity, too. By widening the circle of major contractors, it could promote competition for future projects, driving down costs to combat the looming budget squeeze.
EADS is awaiting a full debriefing on how the Pentagon calculated Boeing's 1 per cent cost advantage (it made an assumption-riddled calculation on the cost of operating a fleet of tankers over the next 40 years) but the mood music yesterday suggested the Europeans had no stomach for extending this drama further.
If the first procurement process was tainted by corruption, the second by incompetence, it is likely that this third round has been much tighter. Nonetheless, EADS has had the suspicion throughout that its part-ownership by the governments of France, Germany and Spain has put it at a disadvantage to Boeing, and that the process was skewed. It will have at least some powerful US politicians on its side in a climate where fighting for job creation is the No 1 vote-getter.
It should appeal. It's what Boeing would do.
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