Boeing Co., the sole supplier of aerial refueling tankers to the U.S. Air Force since 1948, beat European Aeronautic, Defence & Space Co. for a $35 billion program to build 179 new tankers, the Pentagon said yesterday.
It was the Chicago-based company’s third try at the contract since Congress and the Air Force first proposed the tanker replacement program in late 2001 -- a contest in which Boeing was viewed as an underdog, said an analyst.
“Boeing’s victory was a major upset, and not at all what the industry was expecting,” Richard Aboulafia, a military aircraft analyst with the Fairfax, Virginia-based Teal Group, said in an e-mail.
Boeing will manufacture basic 767-model aircraft in Everett, Washington, and convert them into tankers in Wichita, Kansas, during the first stage of a three-part Air Force program stretching decades to replace its tanker fleet.
The initial contract for the development phase was valued at $3.5 billion. The entire first phase covers 13 production lots through 2027. The Pratt & Whitney unit of United Technologies Corp. will provide the engines. Boeing says the win will create and sustain 50,000 jobs among 800 suppliers in 40 states.
“Boeing was the clear winner,” Deputy Defense Secretary William Lynn said yesterday at a Pentagon news conference. “This competition favored no one, except the taxpayer and the war fighter.”
The turn of events is “disappointing,” EADS North America Chairman Ralph D. Crosby Jr. said yesterday.
“We look forward to discussing with the Air Force how it arrived at this conclusion,” he said.
Right to Protest
EADS has the right to protest the decision within 10 days of being briefed by the Air Force. That briefing is scheduled for Feb. 28 at the Pentagon, said an industry official who was not authorized to publicly discuss the session and spoke on condition of anonymity.
“We structured a competition that was fair, that was based on a variety of factors, including price and war-fighting capabilities and Boeing was the clear winner of that process,” Lynn said. The process, he said, “does not provide grounds for protest.”
Boeing jumped to $73.25 as of 5:52 p.m. yesterday after the close of trading on the New York Stock Exchange. Boeing rose 53 cents to $70.76 yesterday in New York Stock Exchange composite trading.
Aging Fleet
The Air Force’s large tanker fleet consists mostly of 415 KC-135R aircraft that first entered service in 1956. The last was delivered in 1964.
The new tanker is being designated the KC-46A, the Pentagon said.
Boeing and EADS were assessed on how well their respective aircraft met 372 mandatory war-fighting requirements in a “best value” evaluation that took account of the aircraft’s basic price as well as “total life-cycle cost,” including fuel efficiency, combat mission refueling effectiveness and military construction expenses.
“This was a spirited competition, with both offerers acquitting themselves well,” said Air Force Secretary Michael Donley.
Dennis Muilenburg, chief of Boeing’s Defense, Space and Security unit, told reporters last night during a conference call that the bid leveraged the company’s production efficiencies and logistics support.
‘Efficient’ and ‘Reliable’
“If you look at the overall criteria, it was life-cycle costs, our ability to deliver long-term support, not only taking advantage of our efficient production capacity but also the fact that our 767-based airframe is very efficient, very reliable, very maintainable,” Muilenburg said.
“That results in advantages of overall” fuel consumption and lower military construction costs, he said.
Muilenburg declined to discuss the per-aircraft price except to say that “we submitted an aggressive but responsible bid that will allow us to execute the program while still creating value for our shareholders.”
“We think we found the right balance,” he said.
EADS had been bullish about winning the order, saying its A330 airliner-based model offered greater capacity than Boeing’s 767 model because it was larger.
EADS’s Airbus unit has beaten Boeing in bids to supply the U.K. and Australia with refueling planes. It also won aircraft contests in Saudi Arabia and the United Arab Emirates, while Boeing was selected in Japan and Italy.
Cost-Cutting Efforts
The victory came amid moves by Boeing to redesign its 767 production line to cut costs in an attempt to outbid EADS, saying its aircraft would have lower overall production and maintenance expenses.
“The low-ownership-cost message clearly had its appeal in these budget-constrained times,” the Teal Group’s Aboulafia said. “But EADS’s supporters will do their best to try to stall this contract and to make a split-buy an acceptable alternative.”
The consensus among industry analysts and Washington, D.C.- based research institute observers was that EADS would win, said Byron Callan, a defense analyst with Capital Alpha Partners LLC. “With the win, Boeing erases the market share it has lost in recent years to Airbus in global tankers,” he said.
Boeing as Underdog
In a Feb. 22 note to clients, Deutsche Bank aerospace analyst Myles Walton said: “Boeing seems to be presenting itself as the underdog, which is either managing expectations or they are the underdog and want to ensure political supporters are preparing to fight a loss.”
“In either case, we expect stock reaction could be a couple dollars upside on a win and a modest downside move on a loss,” Walton said.
Asked during a Dec. 1 interview about the relative value of the tanker program to Boeing’s defense business, Muilenburg said: “In terms of our overall business base, it’s not a needle-mover for us. It’s important to us, but it’s not something we are dependent on.”
Boeing’s first attempt at the contract was derailed in 2004 by a scandal involving former top Air Force procurement official Darleen Druyun and then-Boeing Chief Financial Officer Michael Sears.
Sears was sentenced to four months in prison for offering Druyun a job in October 2002, during the initial tanker negotiations. She was hired in January 2003. Druyun was sentenced to nine months in prison.
The second attempt was postponed by Defense Secretary Robert Gates in September 2008 to review the competition’s criteria and leave the decision to the next administration.
Boeing successfully protested the tanker award that February to Northrop Grumman Corp. and EADS.
To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net
Source : http://www.bloomberg.com/news/2011-02-25/boeing-wins-35-billion-air-force-tanker-program-on-third-try.html
